Washington, DC, June 15, 2010

Digital currency has the potential to dramatically transform government payments in the next five years, saving U.S. taxpayers hundreds of millions of dollars in the process, according to representatives from the government and private sector.

The positive impact of digital currency on all aspects of government payments and purchasing was highlighted at a briefing in Washington, D.C. today  hosted by THE HILL, the widely-read congressional newspaper, and sponsored by Visa. Speakers at the event, including Douglas Michelman, global head of Corporate Relations at Visa Inc., pointed to plans by state, local and federal government agencies to launch or expand electronic payment  programs to improve efficiency, accountability and transparency.

“We all know that governments at every level are struggling with their budgets in these tough economic times, and achieving savings, improved accountability and transparency are even more urgent,” said Michelman. “Switching from inefficient paper processes to digital currency can have a sizable long-term impact in terms of real dollars and cents.”  

Among the expected future savings cited at the event: 

• The U.S. Department of Treasury announced this week plans to switch to electronic payments, eliminating about 136 million paper checks, saving almost $50 million in postage costs and saving U.S. taxpayers about $300 million over the first five years and more beyond. 
• The U.S. Social Security Administration and U.S. Department of Veterans Affairs recently announced the completion of the switch to digital currency for benefits payments. The U.S. Treasury reported that while it costs about a dollar to print and mail a check, each digital currency payment cost the government 10 cents.

“It is encouraging that government agencies of all sizes are embracing digital currency as a way to deliver immediate and lasting benefits to U.S. taxpayers,” continued Michelman. “The benefits of electronic payments don’t just hit the bottom line: cardholders, particularly the financially underserved, benefit from lower check cashing fees and an empowering financial tool that can be used at millions of merchant locations and ATMs.”

• Currently, 39 U.S. states deliver benefits on Visa prepaid cards to recipients of 71 programs for child support, unemployment insurance and Temporary Assistance for Needy Families (TANF) disbursements. Some states have realized savings that have reduced the cost of distributing benefits dramatically.  Nebraska, for example, used to pay 59 cents to print and mail each check, but pays only about a penny to reload a prepaid card.  
• In addition, the U.S. General Services Administration’s SmartPay program provides purchase, travel, fleet and integrated payment card programs to more than 350 federal agencies and departments, saving these agencies $1.7 billion - up to $70 per purchase, according to the GAO.

Other speakers at the event included  Senator Mark Warner (D-VA), who was the keynote speaker, and  Glen B. Gainer III, West Virginia State Auditor.  Both men addressed the power of technology–including digital currency–to improve government efficiency, accountability and transparency. 

The government savings derived from shifting from paper to electronic payments echo the findings of a recent study authored by Moody’s Economy.com Chief Economist Mark Zandi. It concluded that the migration from paper to electronic payments - specifically debit and credit card usage - contributed $1.1 trillion to the global economy from 2003 through 2008. That represents on average a 0.5 percent increase in global GDP.

“Cards grease the economic engine, making transactions run more smoothly and creating efficiencies in commerce,” according to the report. “The results demonstrate that the migration from paper to electronic payments is a positive phenomenon, and the study supports the adoption of policies that encourage and accelerate this shift.”

When Visa launched their Tax Payment Program in November 2008, part of the new rules require payment processors and third party payment service providers to mandatorilyoffer an “incentive” $3.95 (or less) convenience fee on tax payments made with Visa debit cards, regardless of the size of the transaction.  If you or your vendor are assessing a “convenience fee” on tax payments made with credit or debit cards this is required both for online and over the counter (OTC) payments made in your offices.

We have setup dozens of cities and counties for tax payments with convenience fees, that just completed their annual tax collection period.  Visa debit cards exceeded all other forms of payment ranging from 50-70% of all transactions.

Clearly paying a $500 tax bill with a debit card at $3.95 vs. with a credit card for $12.50 or more (2.5%) is an important factor for your constituents that are choosing to use their cards for tax payments. 

You should consider not only the compliance issues but the trends in card usage by your customers if you or your vendor presently does not offer a Visa debit card solution for $3.95 or less.

Here we go…Massachusetts State Department Revenue data shows 158 communities posted tax collection rates of 97 percent or worse - with some Berkshire towns collecting as little as 70 to 72 percent of their tax levy. Statewide, the fiscal 2008 local collection rate was within DOR goals: 1.9 percent of the $10.9 billion real estate and property tax levy went uncollected.

Officials said the bad economy is making tax collection more difficult. Local aid was slashed by $724 million last year and could be cut again by about $200 million in next year’s state budget.

“Increasing the rate of collections will just help on the margins,” said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. “Even if they change their collection rate, it does not change the fundamental reality that they rely so heavily on local aid.”

The city reporting the lowest collection rate was Springfield at 95 percent, DOR figures show.

Because of new credit card company (Visa, MasterCard & AMEX) rules, Massachusetts municipalities can accept credit card, debit card, echeck and other types of payment (e.g. BillMeLater) for tax payments in their offices (IN-PERSON) and in their offices (OVER THE PHONE & IN THE MAIL) and have the fee assessed back to the citizen that chooses to use their card or other method of payment.

This means these municipalities can accept these forms of payment at no charge to them.  This could substantially increase the collection rate for all MA municipalities.

This is also happening in:

New Jersey

San Diego

Clark County/Las Vegas

Kansas

Jim

I figured I would let most of you get through your 09 tax collection season and 2010 budgets before I started posting again.  Coincidently, I was faced with the challenge of my life,  staying with and caring for my Mom who was diagnosed with pancreatic cancer just before the holidays (we will probably loose her  this month).

One of the most interesting developments in the last quarter of 2009 was the emergence of ONLINE debit payments for Property taxes with a Visa branded debit card, where the payment is processed NOT over the Visa network but over the Interbank Network associated with the card (NYCE, Star, Pulse etc.)

Many cities and counties have accepted “PIN Debit” in their offices because the transaction fees are substantially lower than those assessed by Visa and MasterCard.  These fees are assessed by the Interbank Network associated with the card and required a PIN to be entered at the point of sale other the transaction is processed over Visa/Mastercard’s networks.

Now an online “PIN-less” debit is being offered by many of the Interbank networks that connect ATM machines and point of sale electronic funds tranfer at retail locations and member banks.  Previously a pin was needed to process over these networks, otherwise the transaction would be processed either as a Visa or MasterCard transaction when the card was swiped.  While more costly than the ACH, PIN-debit transactions usually cost merchants considerably less to accept than credit card or signature-based debit card transactions.

Many Third Parties are now offering “Online PIN-less Debit” for tax and other payments.  Meaning that if you have a Visa branded debit card and you use these third parties, your transaction will be processed over the Interbank Network associated with the card instead of Visa’s network.  This also means the third party that is collecting your fees pays a much smaller transaction.

It also means that Visa does not get this transaction revenue.  Presently this appears to be a violation of Visa’s Tax Payment Program Rules.  However, I have yet to get an opinion from Visa on this.

If in fact your Third Party is offering this and assessing the fee back to your citizen, you should be aware that the third parties transaction fees have decreased substantially and this should be passed along to the public.

I would appreciate comments….which I will respond to, while we wait to see see how this issue plays out with Visa.

Jim

We have seen, albeit occasionally, RFP’s for credit card processing that require the vendor to be responsible for chargebacks.  Unless you are accepting payments to guarantee a return court appearance, this is an unnecessary requirement for most government entities as chargebacks on government payments are almost non existent.

A chargeback occurs when a cardholder disputes the credit charges appearing on their monthly or online statement. The top four reasons for chargebacks are stolen cards (24.7%), counterfeit cards (23.1%), MOTO fraud (mail order/telephone order), Internet fraud (20.8%) and lost cards (14.9%). Skimming (theft of credit card numbers during a legitimate transaction) and identity theft account for most counterfeit cards, so the major reasons for all chargebacks are fraud.

Other reasons include customer dissatisfaction with the product or service and transaction errors.

In governments, the chance that someone will use a stolen card to pay their property taxes or re-register their vehicle is slim to non, yet the impact of “chargeback” protection is substantial on governments and their citizens.  While most credit card processing vendors charge “convenience fees” in the 2.5 - 3% range, those that offer “chargeback protection” have convenience fees in the range of 3.5 - 6% - or as much as $30,000 on every million dollars of transactions.

Most vendors would gladly implement 4 or 5% convenience fees to cover the risk of fraudulent transactions in governments.  I know we would, but we don’t recommend it to our clients

1) Can I accept Visa?

2) I am accepting Tax Payments.  Do you submit and process the convenience fee as separate transaction from our tax payment with two receipts (online and in-office) and two signature lines for face to face transactions as required by Visa? Also do you automatically identify a Visa consumer debit card when it is swiped in my office or keyed in by a citizen online and assess a fee not to exceed $3.95 as required by Visa? (See Section 5.2.E.2.d page 280 & 5.2.E.2.c page 279)

3) Can I void transactions immediately in my office without having to contact you? You will absolutely want to be able to do this

4) Are my funds directly deposited to my account without being handled by you?

5) Is all of my equipment, setup and support provided at no cost?

The single biggest mistake you can make in preparing a new RFP is to combine your other banking services with your merchant services.  This used to be the standard way of doing things as most banks offer credit card processing along with all their other depository services.  However, now, a year after MasterCard, American Express and Visa have changed their rules for in-office, card present transactions, very few banks have respondedto offer compliant solutions for cities and counties that want to implement a “convenience fee program.

So first and foremost separate your merchant services (credit card processing) RFP from your other banking services RFP.  Also be aware of new Visa rules that REQUIRE 1) that you have a separate merchant account, 2) the convenience fee be processed as a separate transaction from the fees you are collecting and 3) that Visa debit card transactions have an “incentive” convenience fee of $3.95 or less.  Finally make sure your that your service provider 1) demonstrates they are a Level 1 PCI - DSS compliant service provider 2) confirms that they have registered you with MasterCards Convenience Fee Program and Visas Tax Payment Program and 3) assists you in completing a Self Assessment Questionnaire for each physical location.

Any cties or counties intending to prepare an RFP and that have questions or need examples should feel free to contact me directly at jplunkett@govpay.com

You may have read my previous email regarding Visa’s New Rules and  7 Counties in Florida that have chosen not to accept Visa in their offices.    Some of those counties chose not to accept Visa because because their vendor was making them sign a merchant agreement that was “outrageous” as described in detail in this Palm Beach Post article.

As Visa’s and MasterCard’s rules have changed, many vendors haven’t.  Non-government friendly “merchant agreements” are traditional merchant agreements designed for retailers (merchants) and include components that allow the payment processor to 1) hold your funds in a reserve account and 2) put a lien on those funds and 3) place all of the financial liability related to the transactions on the merchant (in this case the county).

While Visa now requires a separate merchant account in their New Tax Payment Program rules, payment processors are the ones that set the terms of these agreements.

Having been involved in this government in-office convenience fee market since it’s inception, we listened to cities and counties and have developed a government friendly contract merchant agreement that addresses issues that are not palatable to governments. We also have developed a solution that allows you to accept credit cards in your office, online, over the phone, even integrated into to your software, at absolutely no cost andwhich is compliant with all aspects of the Visa Tax Payment Program.

So…the bottom line is you do have a choice. Make sure at the very least, before you sign an agreement, there is no termination penalty.

If you would like more information from us please contact me directly.

No less than a half a dozen tax collectors in Florida have announced they will no longer accept Visa  since May. Their credit card processor has told them Visa will no longer allow them to accept credit cards and assess a fee back to their citizens.  Visa DOES allow a convenience fee to be assessed back but has specific regulations for both online and in-office transactions.

For ONLINE transactions, that are not tax payments, Visa CAN be accepted with a convenience fe assessed back to the citizen as long as it is a fixed fee regardless of the transaction amount and it is assessed by the city or county …not a third party.  This of course negates about 98% of the online payment scenarios in place because they are run by third parties. Since the convenience fee also must be a FIXED fee and the transaction costs assessed by MasterCard and Visa are percentage based, having a fixed fee is only feasible when you have a good handle on the average transaction amount…like utility bills.

For in office tax payments, Visa can also be accepted with a convenience fee assesed to the citizen, however, certain conditions must be met.  First, the convenience fee must be submitted and processed as a separate transaction and secondly, Visa consumer debit cards must have a “different” incentive convenience fee.  To do this automatically requires an investment in technology that most companies have not and may not be wiling to take.

To add to this conundrum, Tax Collectors in Florida often collect DMV payments in their offices and Visa presently does not allow a convenience fee to be assessed on these payments.

The bottom line is Visa does allow a convenience fee under certain conditions.  these conditions may require special technology from uour solutions provider…make sure you ask.

There is much information and misinformation circulating regarding Visa’s New Tax Payment Program that I would like to comment on:

The new Tax Payment Program effective October 4, 2008 replaces the old Visa Tax pilot program which has concluded.

Registration in the new program is REQUIRED if you or your third party provider is assessing a fee back to citizens on Tax Payments made with a Visa Card.

The Program applies to Online as well as In-Office, Over the Phone and In the Mail transactions.

Variable (percentage based) fees are allowed Except on Visa Debit cards where a fixed fee ONLY must be applied and must not be greater than $3.95 (Visa has established a new interchange rate of $2.50 for payment processors).

The convenience fee transaction and the County/City Fee transaction MUST be submitted as separate transactions.

Most if not all Third Party Service Providers DO NOT comply with these rules. Make sure when you are considering implementing a Tax Payment Program that you ask your solutions provider about the above requirements.

IF YOU WANT A COPY Of Visa’s new Tax Payment Program rules please Click Here