Can You Pass Payment Processing Fees onto Insurance Policyholders?
Credit card processing fees can eat into your profits – but what if you could use them to generate revenue instead? It’s possible when you allow a fee for elected outbound digital payments to insureds. You benefit from fee collection, while your policyholders benefit from convenient payment options.
Credit Card Processing Isn’t Free
Credit card transactions come with fees. The amount varies depending on the card network as well as other factors. According to ValuePenguin, average processing fees for Visa range from 1.43% to 2.4%, while average processing fees for American Express range from 2.5% to 3.5%.
Insurance companies often eat these costs without the policyholder even realizing they exist. As a result, the insurer’s profits shrink – and the policyholders don’t even appreciate what’s happening.
There’s a better way. Insurers can pass certain payment costs onto policyholders. Typically, the fee is for a more rapid payment method that insureds elect to utilize. This method, initiated by payment providers, lets insurers reduce costs and even generate additional income – all while giving consumers the payment options they want.
Is it legal?
Insurance companies should always make sure their policies, including their payment collection practices, are fully compliant with state and federal laws. The good news is that, yes, passing payment processing costs onto policyholders can be done legally.
To understand what is and is not allowed, it’s important to know the difference between a surcharge and a convenience fee. A surcharge is just a fee that’s added to credit card purchases. A convenience fee, on the other hand, is a fee that’s added when consumer choose to use a nonstandard payment method. For example, if an insurance company’s customers usually pay by check or ACH, a convenience fee may be added to payments made using a credit card online or over the phone. According to Investopedia, surcharges are illegal in ten states, but convenience fees are different.
When charging payment fees, insurers should make sure they are staying compliant:
- Communicate your policies and fees clearly.
- Do not charge excessive fees – fees often cap out at around 4%.
- Provide policyholders with alterative payment options that do not include fees.
- Understand any contractual restrictions with card networks regarding fees.
- Adhere to state laws regarding surcharges and convenience fees. Also keep up with legislative changes. For example, Lexology reports that state bans on surcharges have been challenged in recent years.
How common is it?
A 2% fee may not sound like much, but for a business operating on thin profit margins, it can become a serious revenue killer. Many businesses have adopted surcharges and convenience fees to cope.
While surcharges are sometimes seen in retail settings, Experian says that convenience fees are often found when paying for things like tuition, taxes, utilities and peer-to-peer payments.
According to WalletHub, many major car insurers accept credit card payments – and convenience fees of 1.5% to 4% are also common.
How do consumers feel about it?
If you ask people whether they enjoy paying fees, you can bet they’ll say no. However, this doesn’t mean that payment processing fees have to lead to unhappy customers. Even though people don’t love fees, they DO love convenience, and they’re often willing to pay for it.
According to NRF’s Winter 2020 Consumer View, 52% of consumers say that at least half of their purchases are influenced by convenience, and 97% have backed out of a purchase because it was inconvenient.
Whether it’s a grocery purchase or an insurance payment, consumers crave convenience – and many are willing to pay a little extra for it.
Of course, some consumers may not be happy paying a fee. However, as long as they have another payment option available, they can avoid the fee. Providing alternative payment options can help with both legal compliance and customer satisfaction.
Think about what happens when a policyholder is given the option of paying by credit card or paying by ACH. If there are no extra costs involved, the policyholder might choose the credit card option without even thinking about the fees that the insurer will have to pay. On the other hand, if the credit card option comes with a fee, the policyholder now has a choice: either pay the fee for the convenience of using a credit card or use the ACH method (without a fee) to save money. The customer gets to pick the option that makes them happy.
Protect Your Bottom Line
We’re not talking about mere pennies here. If your customers pay $25 million of premium by credit card, and you pay a 2% transaction fee, you’re losing $500,000 in payment processing fees.
Credit card fees are a significant expense. If you would rather not pay half a million dollars in payment processing fees, it’s time to explore convenience fees.