Managing the rising costs of payment acceptance with service fees

How service fees help governments and public universities expand payment options while offsetting costs.

Changes in payment preferences have accelerated in the past two years as consumers – especially Millennials and GenZ – pivoted to convenient digital and remote transactions. Government agencies and public universities must be prepared to accept any method of payment presented in person or digitally, while carefully managing acceptance costs and delivering an outstanding customer experience.

Online and other card-not-present acceptance methods typically carry a higher risk of fraud, so the card brands establish higher interchange rates for those transactions. Higher payment acceptance costs can present a challenge for financial controllers at government agencies and public universities on fixed budgets whose goal is to expand card acceptance environments while containing accompanying expenses. One effective way to accomplish this is to implement service fees to help offset the cost of accepting payments.

Why service fees work

Government agencies don’t have to search for ways to cut corners or limit services in the face of rising payment acceptance costs. Implementing service fees provides eligible entities with substantial cost savings that can be used to shore up against budget shortfalls. The costs savings can also help fund other services or programs for citizens and students.

A service fee is a flat or percentage-based fee on transactions paid with methods other than cash or check, which can be collected with a payment in both card present and card-not-present environments. Service fees are authorized by the various card brands and have been around for more than 10 years, and consumers have become accustomed to paying service fees for certain services in exchange for the ease – and reward points – of using their preferred payment method. According to our 2021 Government Payments Insight Report, 60% of consumers say they willing to pay a service fee for the ease and benefit of using a credit card, debit card or digital payment method.

Implementing a compliant service fee program

Service fees can be time-consuming and confusing to implement. There are specific card brand rules governing the collection of service fees. However, a successful program can be revenue neutral, allowing allocation of funds to important programs and services without levying new taxes or fees.

One place where government agencies under tight budget controls have been able to achieve success by offsetting costs through service fees is the Department of Motor Vehicles (DMV).

Case study: How service fees helped a DMV save money and improve the payment experience

One of the most active DMV agencies in the country – employing over 8,000 people and serving millions of residents – received a mandate to start accepting credit cards in all their field offices within a year, without increasing their existing operating budget.

The DMV decided to implement a managed service fee program tailored to their unique needs, requiring the program to seamlessly integrate with the multiple information technology partners that work with the agency.

The service fee program was an immediate and welcome success, modernizing the department and its field offices. The DMV now affordably accepts payments made online or at any facility via credit cards, debit cards and digital wallets. Residents pay when, how and where they want, while enjoying shorter queues, which has led to higher customer satisfaction levels. DMV employees enjoy the operational efficiencies of streamlined processes, less paperwork and simpler reconciliation.

An unexpected benefit was realized when the COVID-19 pandemic resulted in the closure of all offices for three months in 2020. Online, IVR and kiosks replaced in-person payments, allowing customers to continue paying for the services they needed. Once the field offices reopened, customers were able to then pay via safe contactless methods by tapping a card, phone or wearable.

The DMV is happy with their decision to implement a managed service fee program and is operating much more efficiently without breaking their budget.

Interested in learning more about how service fees and other solutions can help optimize costs while offering consumers the ability to pay any way they prefer? Here are a few resources to help:

Read our Government Payments Insight Report

Read the PDF of the full DMV case study

Read about the latest payment trends in higher education