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Online Convenience Fees Remain a Major Pain Point.

There has been many advancements in private sector with regards to online and phone payment systems. That is there are normally variety of ways to make payments with online e-commerce websites ranging from VISA, MasterCard, Amex, Discover, Debit Cards, Prepaid cards, Bank ACH. Private Sector has made the decision to incorporate the transaction cost of Electronic payments in the price of the product or service. However Government sector still heavily relies on Checks, ACH, and Debit Transactions.

This is the case for various government institutions ranging from IRS, Sheriffs, City Governments, County Tax Assessors, Vehicle Registrations and various other government entities. That’s because most if not all vendors require 2%-4% fee for electronic payments. Some of that fee goes toward the Card Payment Processor (such as Visa, Mastercard, Amex, Discover, PayPal) and some it goes to the payment solution software that government entity uses. That’s why you often see a $3-$5 convenience fee whenever you try to make a nominal payment toward a local government for purposes such as parking violation, Moving Violations and various other citations.

The question arises why don’t governments just do what the private sector does? That is why not incorporate the convenience fee in the cost of the service! Well the issue is not that simple. By Law Government entities need to capture the exact Amount they are empowered by legislators to collect. That’s because these are revenues that government relies to do budgeting and some situations budgets need to be exactly balanced.

Government can at least reduce the transaction cost by cutting the middle man and go directly to card processors. Certainly Governments have enough scale to negotiate advantageous terms for the contract. That’s not practical because there are far more details than just the payment to be made. At the very minimum there is an Account Number, a Cause Number, and Citation Number that needs to be associated with the payment. There is often the need to calculate late fees, installments, interest and thus going directly to payment processors is not really feasible. Governments are also not able to have exclusivity agreements with a single card processor so their ability to capture discounts is limited (similar to Costco). This is all not to mention that making a Tax payment of $5000 with 1% transaction cost still results in a $50 convenience fee.

But The Question that gets raised is the cost of having employees exclusively dedicated to process checks, money orders could be expensive as well. So Why not reduce Headcount and instead offer Automated Electronic payments to process payments. That’s all true but imagine a County that Collects property taxes on 300,000 homes. Let’s assume the mean (average) Tax payment is $1500. Well Accepting Electronic payments for all these homes with 1% transaction cost will result in $4.5 Million revenue loss. A County Clerk can easily process 1000 checks per day. That essentially means that 2400 Man-Hours of a clerk can essentially process the incoming payments. Assuming a 100 dolor per hour cost for the county per clerk (given pension, recruiting, FICA, Unemployment, …) That will only result in $240,000 worth of overhead cost. Let’s assume the technology these folks use also costs the county another 240,000 dollars; we are still at less than Half a Million dollars to collect payments. Perhaps the only realistic solution is and EFTPS like system for all local government to be able to collect payment plus metadata associated to those payments with very little cost.

For having a general idea look at:

IRS Convenience Fees


California Convenience Fees