Rising costs from credit card fees prompt city officials to act

The city board held a workshop on Tuesday night to discuss ways in which they can reduce the total annual expense that results from credit card fees, a cost that has increased in recent years.

The cause for concern came during the 2018 budget review process, when city officials noticed that about $123,000 was spent on credit card fees in 2016, and in 2017, this amount rose to $176,382, said City Administrator Phillip Patterson. Of the amount spent in 2017, $22,000 was a fixed cost that is for the software program needed to facilitate online bill payments. The remaining $154,382 is the issue at hand, as it was solely the result of processing fees charged by credit card companies.

A factor to consider, however, is the fact that there are two distinctly different types of credit cards that differ tremendously when it comes to the amount that is charged for the processing fee, Patterson said. The first is the standard credit card that many may recognize as a business card, while the second is what is known as a purchasing card, which are typically used by corporations or businesses.

Purchasing cards have the additional benefits of 1 percent cash back on purchases and they allow the account owner to be able to more closely monitor and regulate expenditures. While Patterson

acknowledged that the city itself uses purchasing cards for the primary reason of wanting to be able to keep close tabs on who is spending city money as well as what they are spending it on, he also said that due to a flat percentage rate for their processing fee, they are playing a major role in the expense increase.

“The struggle is when we are accepting payments with purchasing cards, we pay 2.7 percent of that transaction amount,” Patterson said. “So if you are a business, and you have a $40,000 bill with the city and you use a regular credit card, it might cost the city $1.50, but if you use a purchasing card, the city pays $1,080 on the collection of that $40,000 payment.

“One of the things that we found out in reviewing all of the credit card payments was that there were a handful of corporations in the city that are using purchasing cards for payments, and that 2.7 percent transaction fee is making up $65,000 of that $154,382.”

Patterson said that he believes that if nothing is done, it will lead to more corporations and large companies using purchasing cards on a more frequent basis. This, in combination with the inevitable occurrence of more people starting to use standard credit cards, will ultimately continue to increase the city’s expenses for processing fees. For that reason, members of the board considered the details, possible consequences and some pros and cons of four possible options, which are listed below.

Do nothing

• The city has the option of keeping things the way they are and to continue to pay all the fees.

• City staff believes these rates will increase as more users choose to pay with credit cards, and more corporations switch to purchasing cards.

• Credit card fees have not been calculated into the various rates for utilities or services, however this may have to be considered to account for future increases.

Set a spending cap

• An upper limit would prohibit credit card payments above the limit.

• The credit card user agreement prohibits the setting of upper limits, which could lend itself to legal disputes and thus, legal costs.

• The charge to customers would be $0.

• The estimated potential savings on processing fees is $50,000.

• The potential legal costs are unknown.

Flat-rate, convenience fee

• A flat fee could be established and it is permitted in the credit card user agreement.

• Per the agreement, the fee can only apply to utility bills, while other charges would not be assessed the fee.

• Because it is a flat rate, the fee is not proportional to the total amount of the charge, regardless of its amount.

• It is estimated that if a $3 charge to utility customers per transaction were imposed, the estimated savings on processing fees that would come from people who decide to use another method of payment is $21,300 and the fees collected would total $87,250. In addition, this approach would add a potential personnel cost of $50,000. In total, this would result in the potential savings of $58,550.

Using a third party — Information Network of Arkansas

• The INA allows citizens to pay property taxes online and is used by the Department of Revenue.

• State statutes prohibit cities from allowing the collection of revenue by nongovernment employees.

• INA was created by the state of Arkansas and is currently being used in cities such as North Little Rock, Little Rock and Conway.

• INA provides an even playing field for all customers.

• There is a charge of 3 percent plus $1 to all credit card customers, with the exception of transactions at the airport.

• Potential savings on processing fees are estimated to be $154,000.

• Would require a personnel cost of $50,000.

• The amount of revenue that could be lost is unknown.

• Using this approach, the potential savings are estimated at $104,000.

While there is a possibility of a loss of revenue, using the Information Network of Arkansas is the fairest and most equitable approach for all members of the community, according to a concluding powerpoint presentation presented during the meeting. Due to this, city staff has proposed determining the necessary arrangements with the INA in order to be able to implement this change in 2019. The necessary resources, personnel costs and other expenses needed for this transition will also be included in the 2019 budget.

“We think option four provides the parity that we believe ought to be there between users paying with credit cards and users paying by check or cash,” Patterson said. “In all of those other instances, if we raise the rates to account for credit card fees, if I pay by check or cash, I am subsidizing those who are paying by credit cards. If we instituted a flat fee, if I pay with a credit card and my bill is not great, I am subsidizing those who have a much higher bill, especially those that are paying with purchasing cards.”