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Charge It?

State and local governments are wrestling with those pesky credit card fees and constituents' fears of online transactions.

When state and local governments began their quest in the early to mid-90s to encourage constituents to use electronic government services online, officials soon came up against an obstacle.

Allowing citizens to renew vehicle registrations and pay parking tickets or other fees online would benefit both the public and government, but who should pay that pesky credit card fee?

In response, some state and local officials attempted to foster the introduction of legislation that would prohibit credit card companies from charging state and local governments a merchant fee for government transactions.
The results were predictable.

"The banking lobby came in and beat it to pieces," said Jack Christian, Virginia Department of Motor Vehicles' controller.

"We pleaded a case for them to reconsider," said John Radford, Oregon state controller. "We said, 'How about if we make a distinction between business transaction, such as buying a book or a fishing license, and a government transaction like paying a parking ticket?' They didn't want anything to do with that."

Pay To Save?
State and local governments then faced a decision between passing the fee to their constituents and absorbing it themselves. Other solutions, such as e-checks and debit cards, could ultimately move constituents away from using credit cards, but those solutions have not yet displaced credit cards.

Officials in DeKalb County, Ga., elected not to offer the ability to pay property taxes online via credit card. The reasoning was that the credit card fee on such a large transaction could negate the potential savings of paying online.

"I've come 180 degrees on it," said Christian, who said Virginia accepts credit card payments for a wide range of services and transactions and absorbs the credit card fees - based on the conviction that it's far cheaper to pay the fee than service a line of people at the DMV.

"What we're trying to do is encourage people to use our online services more and more; that's where there is a payoff," he said. "We have done some studies and found that it's a lot cheaper for customers to do this work online that it is to stand in line and have that face-to-face-transaction. We've done it for [driver's license] renewals and there's a difference of from $5 to two or three [dollars]."

The Arkansas Office of Motor Vehicles gladly absorbs the credit card fee and considers it a business decision.

"It's cost effective for anyone we can move to an online-type transaction where it's basically a self-service process," said Fred Porter, administrator of the Arkansas Office of Motor Vehicles. "To then charge them extra for that, to me, seems self-defeating. Why shoot yourself in the foot?"

In Arkansas, about 75 percent of vehicle registration renewals are performed online, and Porter anticipates that number will climb as more people get used to doing business over the Internet.

"E-Bay and Amazon.com are breaking people in to the idea of shopping over the Internet, and, as that becomes more commonplace, we see more growth in our Internet renewal process," he said.

Jerry McClure, Minnesota's income tax director, doesn't mind passing the cost of the fees on to the taxpayer for those who want to pay by credit card.

"I'm amazed at the number of people who use the credit card and pay the fee as they do," he said.

McClure said he would rather see constituents pay through direct deposit. That way, he said, constituents can authorize the state to take out the funds from their bank account on April 15. It's easy for both parties, and the taxpayer even gets his refunds quicker that way.

"If you use a credit card you have to do something, you have to take action to make that payment on April 15," McClure said. "But with direct withdrawal you don't have to do anything."

But there are those who will never be inclined to do business online because they don't consider it a secure transaction.

"That's something the e-business world is going to have to address," said Virginia's Christian. "The credit card companies are working hard to come up with the best security they can put in."

Arkansas has an e-check program in place for that segment of the population that will never do business online, though officials said the number of people using the e-check system isn't significant.

Virginia officials said they are hoping to have one set up within a year to 18 months.

"We already have a debit system set up for our commercial customers, and so all we have to do is change the screen on our Web site," Christian said. The state hopes the debit system will cut down on the number of customers using credit cards, eliminating some of the fees.

Register at Wal-Mart
Arkansas is taking another tack in a pilot program involving Wal-Mart.

The program provides constituents the opportunity to register their vehicles at the local Wal-Mart, giving those that are squeamish about making purchases online a handy way of buying their tags.

Five Wal-Mart stores in Arkansas are equipped with touch-screen kiosks where drivers, armed with their renewal notice, can register their vehicles. The kiosk retrieves their records then prints out an invoice. The customer takes the invoice and pays the registration fee at the cash register along with any other products purchased at the store.

"They write one check to Wal-Mart or put it on their credit card or their Wal-Mart card," said Arkansas' Porter. "It's just another product they paid for through the store."

That's one answer to the credit card fee dilemma.

The National Automated Clearinghouse Association (NACHA) is working on another.

Project Action
The credit card fee issue is not as important to the NACHA as is the portion of the population that is simply unwilling to make a payment online. The organization is developing a plan called Project Action, which could alleviate the fears of those who are concerned with providing an account number online.

The project would work by delivering automated-clearinghouse credit payments to the government agency directly from the customer's bank without requiring the customer to provide an account number online.

A customer accesses a government Web site to pay a tax payment, for example. In going through the transaction procedure, the customer is given an option to select "Action." In doing so, the customer routes this information to his or her bank, and authorizes the bank to pay the agency a specified amount of money for the payment.

The bank then routes the information back to the agency, saying, in effect, "We have identified who this person is; they are who they say they are; and the funds are available in this person's account."

The payment is then guaranteed.

It's very similar to a direct deposit, said Mike Herd, public relations director for NACHA.

"Because the payment being sent is a credit payment, it can't be revoked or returned for any reason," Herd said. "It's not a real-time payment but it's a payment guarantee."

It's a concept in which government agencies have expressed interest.

"We're watching it very closely," said Oregon's Radford. "From a state and local government standpoint, as we move into the e-government arena, particularly as we launch e-commerce projects, the hit to our revenues of that one and a half to 3 percent mode is a killer, and we'd like to do as much as possible to eliminate it."

A yearlong feasibility study concluded there is a market for such a service. Now, the NACHA has put out a Request for Information to prospective vendors and banks on what it would take to build the infrastructure for the project.
What's not known at this time is how much of a fee would have to be paid by the agency to the bank.

The agency would have to pay a fee because it's receiving a guaranteed payment and it wouldn't have the responsibility of identifying the person making the payment. It's the bank's responsibility to certify a person's identity and build the appropriate information systems to do so.

Though no details are available about how much the fee might be, it's expected to be minimal because payments to government agencies are considered lower risk for fraud.

"There are advantages over a lot of different debit models; there are advantages over making payments offline; there are some advantages over credit card payments," Herd said. "It's really going to come down to a market-type decision, what the consumer chooses."

It's possibly another choice for state and local government agencies working to encourage constituents to conduct government transactions online.