GPSolo Magazine - April/May 2005
Accepting Credit Card Payments: A Primer
Your clients are consumers, and consumer expectations surrounding the acceptance of credit cards are at an all-time high. Today one can use plastic to purchase everything from a cheeseburger to an SUV. Why not pay a lawyer the same way? Clients’ rationales for paying with a credit card range widely. They may want to defer payment—they can charge your firm’s bill in full and then pay off the credit card over time. Or they may want to earn reward points from the credit card issuer. Debit cards and “signature debit” have also fueled the growth in cashless commerce. Establishing a “merchant account” to accept credit and debit cards may be the easiest way for you to ensure your clients’ ability to pay—and to actually receive that payment quickly and with minimal administrative costs.
Billing vs. Collecting
It is one thing to earn your attorney fees and yet another to collect them. Traditional billing cycles can exceed 90 days. Why wait for clients to pay other bills before they fulfill their obligations to you? If financial constraints force a client to choose between paying the electric bill and paying you, we all know who will be left waiting. Establish a merchant account, and the funds will be deposited automatically into your designated banking account in just two banking days—and with less paperwork than in your current system. Compare for a moment the time and manpower—and therefore money—you currently expend on your billing and fee-collection process to the small discount rate paid to move funds via a merchant account. The price associated with the merchant account is minimal in comparison.
Small firms and sole practitioners have a compelling reason to establish a merchant account: cash flow. Small firms enjoy many perks, including the independence and freedom associated with limited size. This small size, however, means that all the financial burdens of running a law firm are born by the limited number of lawyers in the firm—and if you’re a solo, it’s just you . Promoting your firm’s ability to accept credit cards can have a real impact on your accounts receivable. With a merchant account, large bills can be paid quickly and in full. This method of “speeding the plow” will greatly increase a small firm’s cash flow and therefore reduce stresses and burdens carried by the firm’s members.
Clients with regular and ongoing legal needs provide a considerable portion of the revenue for any law firm, and small firms particularly value such clients. As a convenience to these valued clients, you can offer them the option of “recurring payments” via their preferred credit card. You will obtain their written authorization to charge the specified card for fees incurred. The benefit to the firm, of course, is that rather than sending a billing statement and awaiting payment, you can send the statement with receipt of payment already confirmed. This one feature of a merchant account alone can reduce the overall billing cycle of the sole practitioner or small firm dramatically.
Not only can you accept payments via all credit cards, including Visa, MasterCard, American Express, and Discover, but you also can accept debit transactions secured by a personal identification number (PIN) at greatly reduced rates. Even personal checks can be accepted and converted electronically, with funds generally available in two banking days, the same period as for most credit and debit cards.
The extraordinary popularity of debit cards provides every business with the opportunity to reduce costs by processing them directly via the PIN-secured debit networks. When your client is using a debit card and enters the PIN, the transaction does not utilize the credit card networks, and therefore the credit card fees do not apply. Cost reduction can be remarkable.
Establishing a Merchant Account
There are two types of entities offering merchant account services: direct processors and resellers (the latter are also called independent sales organizations, or ISOs). Processors offer a direct conduit for cashless commerce; they are members of the Visa/MasterCard associations. Processors establish and house the merchant account, authorize your transactions, and settle the funds into your business checking account. Processors offer full 24/7 service, from swipe to settlement. Resellers/ISOs contract with a processor to provide all the account functions and thus pay the processor accordingly. Price structures can actually be similar between direct processors and resellers/ISOs; ongoing service is often the distinction. There are approximately 88 direct Visa/MasterCard processors in the United States and countless ISOs.
When establishing a merchant account, you choose among different “methods of acceptance”: web-based payment processing, PC-based software, or stand-alone equipment. Web-based payments entail adding a “pay button” to your firm’s website. After the client clicks the button and initiates payment, the firm is notified of the payment electronically. Web-based payment services also allow you to log onto the processor’s secure website to initiate a payment yourself. Web-based processing can be a simple solution for a firm that foresees credit card usage primarily from clients paying existing bills. If you believe that you will rarely have a card in hand to swipe through a terminal, this may be the easiest method of acceptance.
Software that resides in one of your firm’s PCs is also available. You may acquire this software and add a peripheral card reader and other hardware to your PC, enabling you to accept credit and debit cards. For the tech-savvy practitioner who is comfortable installing software and attaching peripherals, this may be a solution that works.
The simplest and most traditional method of acceptance is the stand-alone terminal. These units generally use your existing analog phone lines to communicate with the processor. High-speed connections via DSL and cable modems are growing in popularity, as well; if your office uses high-speed Internet access, perhaps a terminal that does the same would be a good fit. With these stand-alone terminals, your firm can accept almost every possible form of cashless commerce and enjoy the best possible rates across the board. When the client is in your office, you simply swipe the credit or debit card for approval. If they are not present, you may key the necessary info into the terminal. Terminals may also utilize advanced check-conversion service to guaranty the check and deposit it automatically.
ABA Ethics Opinion 00-419 addresses the ethical dilemmas surrounding credit card acceptance for earned fees as well as for retainers. In particular, it addresses the perceived mingling of funds when collecting payments via a Visa/MasterCard merchant account. Normally, a single merchant account accesses a single bank account both for deposits and any needed withdrawals. Providing a processor or reseller/ISO access to an “interest on lawyer trust account” (IOLTA) seems abhorrent on the surface. In reality 00-419 details that this account access is generally necessary unless the firm wishes to establish two merchant accounts, one for retainers and the other for fees; if that proves unfeasible and a single merchant account is to be used, it should be the firm’s trust account to which funds are deposited. Either way, the law firm determines where the payment processor deposits funds.
Visa/MasterCard regulations expressly prohibit acceptance of credit cards in payment for bad debt. Therefore, do not accept credit card payments in bankruptcy cases or for collections. If a firm performs collection services for clients (e.g., collecting debt from a third party on behalf of a client), the firm should not collect this debt via credit cards.
The risks associated with accepting credit cards include fraudulent cards, unauthorized use of a card, and unresolved service disputes. All of these can result in a “chargeback”—monies reverting back to the card-issuing bank and/or its customer, the cardholder. Chargebacks may be arbitrated by the card associations. Understand that the primary allegiance of card issuers and their agents is to the cardholder. Although the processor may attempt to protect the merchant or business, no business should accept a credit card payment without the due diligence required by Visa/MasterCard regulations.
It is important to realize that the established merchant account, and its associated depository banking account, creates a two-way street for funds movement. Ninety-nine percent of the time the processor is depositing your funds into this account in full, but if the need ever arises (e.g., for a chargeback or a service fee), the processor is authorized to retrieve funds as well.
A merchant account is a relationship of shared responsibility between the payment processor and the business accepting payments. The transactions and funds are accepted and deposited weeks before cardholders pay their credit card bills. You, the merchant account holder, share responsibility for this transaction with the processor. Nevertheless, the payment processor is the necessary conduit sponsoring the merchant into the system. If an unscrupulous merchant attempts to steal monies via the merchant account system and fly to Rio, the processor holds ultimate liability; the processor will pursue the merchant, but in the interim the processor must make restitution for the fraudulent activity. Processors therefore seek as much information about the merchant account holder as possible. As in any banking relationship, processors are required to “know the client” and therefore collect all pertinent business and personal data of the responsible parties. This data is full and complete and includes federal tax ID numbers, Social Security numbers, dates of birth, and even personal guarantors. I often joke about securing “firstborn” as collateral when collecting this information, because the process is so complete.
The merchant account holder also must work to reduce risk. Numerous security features exist to help the merchant confirm that the card is valid and that the cardholder is in fact the authorized user. Features include Address Verification System (AVS)/Card Verification (CV) via security codes printed on the signature line on the back of a card, and PINs in the case of debit cards. Merchants even can contact the is-suing banks and the processor if they are concerned in any way about accepting a specific card. Thieves are clever, and everyone should exercise caution if a situation seems unusual. In the payments industry, entire departments are devoted to risk management. Frankly, it is in everyone’s interest to be vigilant.
Dan Hudson has served the payments industry since 1998. He is an accomplished sales trainer, writer, and sales executive. For assistance, he can be reached at firstname.lastname@example.org or 703/615-7107.