September 01, 2020 The Finance Issue

Accepting Credit Cards to Improve Accounts Receivable

In the wake of a global pandemic, law firms make better use of credit card processing systems.

Dave S. Christensen
A stack of credit cards sits on a blue table.

A stack of credit cards sits on a blue table.

via Zhonghui Bao / iStock / Getty Images Plus

For many law firms, accepting credit cards is usually a distant third choice behind wire transfers and checks—if they are accepted at all. Often the reason given by firms is that they do not want to give up the processing fee (typically about 3 percent), and therefore it becomes a payment of last resort. Other firms haven’t set up a credit card program due to the perceived learning curve in establishing a relationship with the processors and teaching staff how to process the transactions.

However, in the wake of the global pandemic, and the economic uncertainties that it has created, having the ability to receive funds securely and reliably within a day may outweigh the processing fees. We asked Jeff Shavitz, the co-founder of LexCharge LLC and now strategic consultant to the company (now part of Rocket Matter), in Boca Raton, Florida, to share his insights into how law firms can make better use of credit card processing systems. Shavitz has been involved in the credit card industry for 20 years, has founded and sold several payment processing companies, and has advised payment companies, associations and private equity companies on investing and developing partnerships in this industry.

Jeff, it’s not really clear how the credit card industry operates. Don’t you just contact Mastercard or Visa and sign up?

Unfortunately, no. There are a number of layers within this system. At the top you have what are known as the associations/card types—Mastercard, Visa, American Express and Discover, for example. But merchants, in this case law firms, cannot directly contract with the card types. Even large national box stores that accept billions in dollars in transactions can’t work directly with the card types. Between the card types and the end merchants, there are several different intermediaries that act as a conduit to the card types.

The intermediary that the merchant (in this case, the law firm) works with is referred to as an independent sales operator (ISO). An example of an ISO is a bank or another organization, such as attorney-focused processors like LexCharge, LawPay, Headnote, LawCharge or PaySimple. The ISO provides the merchant with the equipment (card readers) and the electronic connections for processing the transactions. Another intermediary is referred to as a gateway, which is a type of service that basically allows for the processing of transactions through computers over the internet. There are many gateways available in the marketplace.

In addition, there are processors, which are companies like First Data, TSYS or Elavon, which are the technology platforms that process the transactions and help drive the payments to the law firm’s bank account.

Law firms typically have well-established relationships with their banks; why wouldn’t they just contact them?

You could certainly do that. Most banks are set up to create credit card programs and process those transactions. However, they may not provide the lowest rates or the best service. In credit card processing, there can be up to 500 different fees that apply to a transaction. To read through an agreement is confusing even to me. You can visit the internet, type in Mastercard/Visa Interchange Rates, and see rates that are as low as 1.5 percent. However, depending on how you set up your credit card program, your actual realized rate may be as high as 5 percent. Unless you have clients coming into your office and swiping their card, you will almost never pay 1.5 percent.

Unfortunately, credit card sales personnel are paid on commission, so there is little incentive for them to explain this to you. I find that most CFOs and partners in law firms are too busy with their practice to delve deeply into their credit card statements. It is a lot like looking at your cellphone bill—you know you can save money if you took the time, but most people don’t. Fortunately, changing ISOs is easy and can be done in less than an hour.

There is, however, a way around this. In all states it is now legal to pass on credit card processing fees to clients. In some cases, the firms we work with apply a 3 percent surcharge, which is the typical processing fee. In other cases, the firm applies a 1.5 percent surcharge, basically splitting the cost of the processing fee with the client.

What should a law firm look for in an ISO, whether it be their bank or another company?

Law firms have unique operating requirements that are unlike any other merchant I’ve worked with, such as the requirement of having both a trust account and an operating account. You need to ensure that the processor cannot withdraw funds from the firm’s trust account. So, you need to work carefully with your ISO to make sure this doesn’t happen and carefully monitor your accounts to make sure they don’t make a mistake. Alternatively, you can work with an ISO that specializes in law firms. There are a number of ISOs, like LexCharge, LawPay and others, that have the separation of the trust and operating accounts built into their programs.

Are there risks the firm should address in its credit card program?

Absolutely. There is a lot of fraud in the credit card processing industry, and firms should have good controls in place to prevent it. Criminals are smarter than us and continuously find ways to trick the system. The firm should have controls in place that prevent one person from changing the accounts. We had a situation a few years ago where two partners both had signatory authority on the account. One partner went away for a month, and the other partner sent in an account change form switching the account from the firm account to his personal account. In the end, he managed to siphon about a million dollars before the theft was discovered.

Further, there are ways to steal money from the account by voiding back the amount prior to settling the transaction. So, you need to have trustworthy people handling your credit card transactions.

Are there any best practices you would suggest?

If you have had a credit card program for some time, you probably have an antiquated product terminal, sometimes called a PCI. It is important for the merchant to have their terminals and computer systems in compliance. Rather than having a PCI terminal, we recommend using a gateway system that utilizes your computer or mobile phone. In these systems, the processing is done by the computer rather than a terminal. The computer software is continuously being updated and kept secure. These PCI terminals are out of date the following month. Cards can be swiped with the computer system, but the device is just a reader. This can be a USB device or a device that plugs into a mobile phone’s headphone jack. The important thing is that all of the work is done in software. Typically, a monthly fee is paid for these gateway services, but it is worth the extra security. If the fraud occurs within the law firm, the firm is responsible for the theft. About 99 percent of our law firms are using a computer gateway system for their credit card transactions.

Thank you for sharing your experiences with us, Jeff. In the current economic environment, law firms may need a variety of tools to provide clients with both payment options and help reduce accounts receivable. 

Dave S. Christensen

Partner

Dave S. Christensen is a partner at Cantor Colburn LLP in Hartford, Connecticut, and is the chair of the firm’s Additive Manufacturing Practice Group. He is a member of the editorial board of Law Practice. dchristensen@cantorcolburn.com

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