The trouble with credit cards in community association dues

Posted by Andrea Drennen, CMCA on January 10, 2014

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It's a modern world, and homeowners expect modern solutions to common problems. One of the most obvious is the acceptance of credit cards for community association dues. So why is it such a pain for community management companies to allow acceptance of credit cards? It helps to first understand how credit card fees work.

How Credit Card Fees Work

In order to process a credit card transaction, the payment transfer goes through a number of steps. Through each step, the processing party takes a percentage of the amount of the transaction. These fees can run up to as much as 5% of each transaction, depending on the credit card used and the amount of the transaction. These fees are non-negotiable. While some payment processors are able to reduce the amount of fees by processing a large bulk of transactions, the fees for Visa, Mastercard, Discover and a number of smaller credit cards are always a set percentage of the transaction. (There is a very good explanation of the fee structures here.)

Since the credit card companies want their cards to be treated the same as cash by consumers, they have very specific language in their contracts preventing merchants from passing on the processing percentages to the consumer. The credit card companies take a very dim view of any merchant that charges these fees back to the customer paying with a credit card against the terms of their contract. If a merchant is discovered to be performing such a practice, they can and will revoke that merchant's right to process payments on their cards. (I have seen this firsthand with Visa.)

Merchants are allowed to charge a flat 'convenience fee', but that fee must be the same for every transaction and every type of payment the merchant processes, and it is allowed only under very strict guidelines. Visa is particularly strict on this point, and since the largest number of consumers use Visa, this is problematic. 

Conflicts for Community Associations

The conflict with CAM dues being processed by credit card lies with the way that community association management dues work. Unlike a retail business, who can simply increase their prices to cover credit card processing fees, community association dues are fixed by the board of directors. Furthermore, most community associations have wording in their governing documents that requires that the community association receive 100% of the fees owed to them. If your HOA charges $100 in monthly dues, the payment from the owner must be exactly $100. Not $99.99 or $100.01.

If that weren't enough of an obstacle, many community documents also prevent the 'co-mingling of funds'. In essence, this means that the payments from a homeowner must be deposited directly into the community's bank account. This prevents management companies from arranging to accept credit cards directly for all of their association clients.

So the community cannot contract to accept credit card payments directly, because when the credit card transaction is processed, a percentage of the dues amount is taken by the credit card processors, and the association will not receive the full amount owed to them. And the management company cannot accept credit card payments on behalf of the community due to the potential co-mingling of funds.

How Communities Accept Credit Cards Now

To resolve these issues, most communities turn to a payment processor that specializes in processing payments for this industry. The merchant charges a fixed processing fee for all credit card transactions. The way this works is the processor determines the average amount of all transactions they process across their entire customer base, and then calculate the credit card company's fees based on that average. The resulting amount is the fixed fee that they charge for all credit card transactions they process.

Since some of these vendors also work with rental and commercial management companies (who charge significantly higher regular fees than the average HOA), this can work out to a large disparity in the fee. For example, if the processor's fee is $40 per transaction, and you have an HOA that charges only $30 per month, the fee is still $40. Not very convenient for the homeowner, unless they owe many months worth of dues.

And this is where a lot of smaller communities get stuck in the mud. So what are the alternatives?

Aternative payment processing options

One option is ACH transactions (e-checks). An e-check is essentially a direct transfer between the consumer (homeowner)'s bank account and the merchant (community)'s bank account. Since the association dues are fixed for an extended period of time, you can even schedule automatic payments by setting up ACH transactions for that amount at fixed intervals (when association dues are due). Check with your association's bank about the steps needed to arrange automated ACH transactions.

If the association is set on having their own merchant account, another option may be to limit which credit cards they are willing to accept. By limiting allowed cards to just Mastercard and American Express, you can apply a convenience fee under less strict guidelines. You might also look into Mastercard's municipal entities clause to see if the association can qualify. Many colleges and universities opt not to accept Visa for this very reason.

New Rules offer little relief

Last year, a major class-action lawsuit against Visa and Mastercard culminated in a change to the rules whereby merchants could begin to charge a 'checkout fee'. The rules surrounding this option are very complex and may require some help in staying in compliance. Further, this fee type is also prohibited in certain states, including CA, CO, CT, FL, KS, ME, MA, NY, OK and TX. Several other states have pending legislation that will also prohibit checkout fees.

Shop your options

If you are still looking for ways to process credit cards to accept payments online, contact your community association bank, your website provider, or an industry payment processor such as PayLease. It's smart to discuss your options with all three to determine which processing method is best for your association(s).

PS. One important item to note is that the restriction on the community association side only applies to dues payments. There is nothing preventing your management company from getting a merchant account to accept payment for miscelaneous charges, such as document processing. These charges would be processed using the credit card company's standard percentage based fee structure.


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