Analyzing the costs of credit cards.

• Author: Michel, R. Gregory
• Position: Money Management Matters

Many governments are thinking of accepting credit cards or expanding the acceptance of credit cards but are concerned about absorbing credit card transaction fees. This article will explore four options a government may wish to consider when looking at a credit card acceptance program.

In the past 10 years, government acceptance of credit card payments has grown dramatically. Based on a Public Investor survey conducted in 1993, 30 percent of the state and local governments in the U.S. accept credit cards for payments of user fees, parking tickets, utility bills, and taxes. These governments that accept credit cards payments realize that credit cards can provide significant benefits to governments and taxpayers. For governments, credit cards reduce cash and check processing costs, reduce bad check collection fees, improve the availability of revenue, and provide a potential for increased collections. For citizens, credit cards provide a convenient way of paying government fees, bills, and taxes.

Background

Despite the promises of credit card use, a controversy arose in 1993 between local governments and two credit card companies concerning credit card transaction fees. Whenever a customer makes a purchase using a credit card, a transaction fee is charged to the merchant accepting the card. Instead of passing this transaction fee directly to the customer who uses the credit card, merchants typically hide this fee in the price of their goods or services. Thus, all customers bear the burden of the fee.

Because of the nature of their "business," state and local governments would like to pass these credit card transaction fees directly onto credit card users. Whereas merchants can absorb credit card transaction fees by increasing the price of their products, governments are restricted by statute to collect 100 percent of that which is owed. For example, governments cannot collect 98 percent of a tax that is owed to them, while forfeiting 2 percent to pay a transaction fee. Moreover, if governments did absorb the fees, then citizens who did not use credit cards ultimately would have to share in the expense of the transaction fees of credit card users. This is an issue in government because citizens make involuntary payments.

When state and local governments began to accept credit cards, many of these governments passed along the transaction fee to credit card users. Sometime later, Visa and MasterCard became aware that this had become a widespread practice. Then, in 1993, Visa and MasterCard began enforcing their bylaws which prohibit passing along transaction fees to cardholders. To enforce this policy, Visa and MasterCard ordered their member banks to cut off service to those governments passing along the transaction fee.

Following these actions by Visa and MasterCard, GFOA and other proponents of state and local governments...