Accepting credit cards for payment is a business practice some lawyers avoid because they are fearful of the ethical implications. The process can be intimidating, unless you know the answers to some common questions. Here is a quick refresher course:
Q: Can I establish a credit card merchant account with my bank?
A: Yes. However, carefully review OSB Legal Ethics Opinion No. 2005-172. If the bank requires that you designate a single merchant account for all credit card transactions and you accept credit card payments for earned and unearned fees, your merchant account should be a trust account.
Q. If credit card payments for earned fees are deposited into my trust account, how do I avoid commingling?
A: Promptly transfer those funds into your business account (once the credit card transaction has cleared the bank).
Q: Who pays the credit card merchant fee?
A: There is no ethical barrier to passing on the merchant fee, or crediting the client for the net amount of the transaction only, if the client agrees. Therefore, the first step toward charging clients merchant fees would require updating your written fee agreement to include this cost. If you wish to modify existing agreements, remember that any modification in the lawyer’s favor “… requires client consent based on an explanation of the reason for the change and its effect on the client…. In addition, the modification must be objectively fair.” OSB Legal Ethics Opinion 2005-97.
The real obstacle in passing on merchant fees is a little something called the Truth in Lending Act (TILA). As noted by the Oregon State Bar in OSB Legal Ethics Opinion No. 2005-172:
Passing the merchant fee on to the client or crediting the client for the net amount of the transaction only … may implicate Regulation Z of the Truth in Lending Act, 12 CFR §226. As a result, you may be compelled to offer cash discounts to all clients and make specified disclosures to your clients who pay by credit card. See CONSUMER LAW IN OREGON ch 14 (Oregon CLE 1996 & Supp 2000).
For more information, see Just Say No to Charging Clients Merchant Fees.
Q: Can I designate my business account as my merchant account if I accept credit card payments for earned fees only?
A: Yes. This is a good approach if you want to spare yourself the extra bookkeeping involved in transferring funds and covering bank fees. See the answer to the next question for another alternative.
Q: Are there any other choices? I don’t want merchant fees taken out of my lawyer trust account and I don’t want the hassle of reimbursing them either.
A: Yes and No. In all likelihood, your bank will not be able to offer an agreeable alternative. Most are unyielding in terms when it comes to merchant accounts. The solution is to give your credit card business to a private processor who can offer more flexibility. One option is to use a processor specializing in lawyer merchant services. Check out this post for a comparison of four such providers.
Generally speaking, a credit card processor specializing in lawyer merchant services will debit your general account, not the lawyer trust account, for all fees. The payments you receive from clients can be deposited into either account at your direction. As always, practitioners should conduct their own research when selecting a credit card processor. This post is not an endorsement of the services compared here.
Q: What about Using PayPal or Square?
A: The Lawyerist post comparing four processors specializing in lawyer merchant services also includes a discussion of PayPal and Square. I strongly encourage anyone with an interest in PayPal to carefully read PayPal: Lawyer’s Friend or Foe? If you are smitten by Square, please review My Experience with Square.
Q: What happens if a client disputes a fee paid by credit card?
A: If a client disputes a fee paid by credit card, the credit card company will “charge back” the payment against the account to which it was originally credited. This means the disputed funds will be deducted from the your account and given back to the client. If the charge back is against the trust account and you have already withdrawn the credit card payment as an earned fee, other clients’ money may be at risk. You are ethically bound to ensure that any charge backs which jeopardize other client funds in trust are promptly covered with your own funds. OSB Legal Ethics Opinion No. 2005-172.
Q: Can I enter into a written fee agreement that allows me to charge the client’s credit card for the balance due?
A: Yes. Your agreement should carefully spell out the conditions under which you are authorized to charge the client’s credit card. For example, your agreement may permit you to charge the client’s credit card for the full amount invoiced as soon as a bill is rendered or only if payment by check is not received within a certain time period.
Q: Are there any other steps I should take before processing the client’s credit card for payment?
A: If you’re swiping the client’s card on a mobile device in the client’s presence, provide the client with a receipt by text or e-mail. Remember to credit the client’s account and reflect the activity on the client’s bill.
Using the client’s credit card information to process a payment without the credit card present is a trickier proposition. First, be sure you know the terms imposed by your processor for “card not present” transactions. Some processors may withhold funds for “card not present” or “card absent” transactions for up to 30 days. Second, research any legal requirements that may apply to credit card transactions, such as the PCI (Payment Card Industry) e-commerce guidelines. For recurring payments on account, these include:
“You must follow the terms of your merchant agreement. Most merchant agreements require you to have original signed standing authorizations from credit card holders. This bit of signed paper will help you if the customer challenges your charges.
It is best practice to encrypt credit card numbers. This is a mandatory requirement in the PCI guidelines.
Limit the term of the recurring payment to no more than one year, particularly if you have “Card holder not present” (CNP) transactions.
Expunge the credit card details as soon as the agreement is finished.
The problem with encryption is that you must be able to decrypt the data later on in the business process. When choosing a method to store cards in an encrypted form, remember there is no reason why the front-end web server needs to be able to decrypt them. Database-layer column or table level encryption is considered best practice.”
For help with these issues, contact your credit card processor. Visa offers an 81 page PDF with guidelines for its merchants, including how to handle “card absent” transactions.
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