Agenda Report
Fullerton City Council
MEETING DATE: February 21, 2023
TO: CITY COUNCIL / SUCCESSOR AGENCY
SUBMITTED BY: Ellis chang, director of administrative services PREPARED BY: ELLIS CHANG, DIRECTOR OF ADMINISTRATIVE SERVICES SUBJECT: Credit Card fee Structure
SUMMARY
City Council consideration of revising the City’s current absorbed credit card fee structure.
RECOMMENDATION
Provide direction regarding an absorbed or pass-through model for credit card and eCheck fees:
Option 1: City passes-through credit card and eCheck fees to customers.
Option 2: Blended Structure
City absorbs utility credit card and eCheck fees, and
City passes-through non-utility credit card and eCheck fees to customers.
Option 3: City absorbs credit card and eCheck fees.
Option 4: City absorbs credit card and eCheck fees with City Council direction to incorporate non-utility credit card and eCheck fees in future Fees and Charges Schedules.
CITY MANAGER REMARKS
The City Manager recommends that City Council consider approving either Option 1 or Option 2.
PRIORITY POLICY STATEMENT
This item matches the following Priority Policy Statement:
Fiscal and Organizational Stability.
FISCAL IMPACT
The fiscal impact will vary depending on City Council direction. The City absorbs approximately $395,000 in annual credit card fees. The amount the City pays in credit card fees varies each year based on credit card payment transaction amounts and volume.
Option 1 would result in $395,000 annual credit card fee savings.
Option 2 would reduce the fiscal impact from $395,000 to about $255,000 for an estimated $140,000 annual savings.
Fiscal impact with Option 3 remains the same as the City would continue to absorb the $395,000 annual credit card fees.
Option 4 could, with time, reduce the net impact to the City based on City Council approval of future Fees and Charges Schedule revisions with non-utility credit card and eCheck fees incorporated
DISCUSSION
City is implementing new accounts receivable / general billing, utility billing and cashiering software applications and evaluating the existing credit card fee structure and cost of accepting credit card payments. The City paid approximately $395,000 in credit card fees in calendar year 2022 with approximately $315,000 comprising credit card company fees and $80,000 for merchant and gateway services. The cost of credit card fees will fluctuate given the credit card transaction amounts and volume.
The City accepts cash, check (including money orders and certified check) and credit card payments. Cash and checks (including customer online payments) do not incur fees. The City does incur fees to accept credit card payments. The City will add eCheck as a payment option which will also carry a fee. eChecks differ from checks in that the merchant and gateway providers pull the money from a customer account rather than a customer pushing out payment from the customer online bank payment portal.
Generally, credit card fees have two components: fees charged by the credit card company and fees charged by the merchant and gateway providers. Accepting credit card payments requires both a merchant and gateway provider. The gateway provider essentially acts as a toll or pipeline securely moving information between the customer credit card company and the business merchant services provider. The merchant services provider verifies information and collects funds from the customer credit card company and remits it to the business.
The merchant services provider will pass through (sometimes with and sometimes without a markup) the fees assessed by the credit card companies. The fees assessed by the credit card companies are not negotiable and vary depending on the type of credit card used by the customer.
The City currently contracts with a merchant services company and a few gateway providers. The City contracts with more than one gateway provider because some software applications only interface with certain gateway providers.
Example of Passed Credit Card Fees compared with eCheck Fees Note: The following rates are for illustrative purposes only.
Example
Customer Transaction Amount
Credit Card Processing Charge
Minimum Credit Card Processing Fee
Amount Paid by Customer
A
$100.00
3.25%
$2.50
$3.25
B
$20.00
3.25%
$2.50
$2.50
Example A:
$100.00 Customer Credit Card transaction amount.
Customer charged 3.25% of the transaction amount or a $2.50 minimum fee.
Customer pays $3.25 for this credit card transaction ($100 * 3.25% = $3.25).
Example B:
$20.00 Customer Credit Card transaction amount.
Customer charged 3.25% of the transaction amount or a $2.50 minimum fee.
Customer pays $2.50 for this credit card transaction ($20 * 3.25% = $0.65 which is less than the minimum fee of $2.50).
Example of eCheck Fees
Note: The following rates are for illustrative purposes only. eCheck charges are flat fees. For example, if the eCheck fee totals $1.95, this amount is assessed on every eCheck transaction regardless of transaction amount. $100.00 Customer eCheck transaction amount.
eCheck fee would total $1.95.
$20.00 Customer eCheck transaction amount.
eCheck fee would total $1.95.
The following table presents the total number of credit card transactions, total transaction amount and average per transaction amount for calendar year 2022.
Utility transactions represent the largest volume of credit card transactions. Credit card companies extend discounted rates to utility entities if the entity fully absorbs utility credit card fees. Credit card companies apply regular rates for all non-utility transactions with varying rates depending on the type of credit card under the absorbed or passed model.
The City has the option to change the fee structure. The following outlines the fiscal impacts of the options:
Option 1: City passes all credit card and eCheck fees to customers Estimated $395,000 annual savings
While this would result in a full immediate savings to the City, credit card rates passed to customers for utility payments would charge to customers at the regular rate rather than the discounted rate.
Option 2: Blended Structure - City absorbs utility credit card and eCheck fees and passes-through non-utility credit card and eCheck fees to customers City continues absorbing utility credit card and eCheck fees at an ongoing approximate $255,000 annual cost City passes on non-utility credit card and eCheck fees to customers for an estimated $140,000 annual savings.
Option 3: City absorbs credit card and eCheck fees
City continues to absorb credit card and eCheck fees at an ongoing approximately $395,000 annual cost.
Option 4: City absorbs credit card and eCheck fees with City Council direction to incorporate non-utility credit card fees in future Fees and Charges Schedule.
City continues to absorb credit card fees, but departments will incorporate the credit card and eCheck fees into the various fees and charges. Staff submits Future Fees and Charges Schedules to City Council for approval. City Council approval of future revisions with incorporated credit card and eCheck fees would generate cost recovery of these fees over time, possibly resulting in $140,000 annual savings.
Next Steps
Staff plans to submit an agenda item on March 7, 2023 to recommend new merchant service and gateway providers based on City Council direction. These agreements will incorporate the City Council directed credit card fee structure option.
Attachment:
Attachement 1 - Credit Card Fee Structure Presentation
cc: City Manager Eric J. Levitt
Credit Card Fee Structure
February 21, 2023 - Page 2