AGENDA #5i

BUDGET WORKING PAPER

TO:                  W. Calvin Horton, Town Manager

FROM:            Kay Johnson, Interim Finance Director

SUBJECT:       Acceptance of Credit Card Payments from Customers

DATE:             March 30, 2004

The Town of Chapel Hill currently accepts credit cards as a method of payment at the Parking Services office.  Citizens continue to request to pay by credit card for other Town transactions.  This report provides some detail on the additional costs that the Town of Chapel Hill would incur as a result of accepting additional credit card payments. 

BACKGROUND & DISCUSSION

Costs associated with accepting credit cards as a payment alternative include start-up and on-going costs.  Start-up costs include the purchase of terminals that read the credit cards.  On-going expenses include the cost of additional phone lines and bank charges for processing transactions.  Bank charges consist of: (1) VISA and Mastercard charges that are based on the dollar amount of the transaction and (2) service provider charges that are fixed per transaction.  

In the year of implementation, the fixed costs for the terminals and phone lines are approximately $1,200 per credit card terminal.  Eight terminals cost approximately $6,000 for the first month of service. Each additional month of service costs approximately $350.  The Town is considering the purchase of eight additional terminals for use at the following locations:  Finance (2), Parks and Recreation (3), Police (1), Library (1) and Public Works (1).

The Town of Chapel Hill can absorb the transaction costs or charge a fee to each credit card paying customer in order to cover these expenses.  Currently, the Town covers the bank fees associated with receiving payment by check or cash.  We think it is reasonable to absorb the cost of credit card transactions as well.  We surveyed the surrounding Towns that accept credit cards, including Raleigh, Cary and Hillsborough and learned that none of them charge a transaction fee.  (For legal reasons, counties, including Orange, which accept credit card payments for taxes may charge an additional fee.)

The bank fee rate system for credit card purchases includes a base fee and a percentage fee.  As a result, small charges are disproportionately costly to the town.  For example, parking enforcement receipts at an average of $45/charged item have a fee totaling approximately two percent.  Expenses that result from parking meters, where the average charge is $2.30, approximate seven percent.  Therefore, if we begin accepting credit card payments, we believe that we should establish an initial policy of only accepting credit card payments for fees of $10 or more.  If we assume that credit card expenses will approximate 2% and that 30% of all eligible payments will be paid by credit card, then approximately nine months of revenues will yield expenses of $6,000. 

RECOMMENDATION

We recommend that the cost of receiving credit card payments be absorbed by the Town in the same manner as we absorb the costs of receiving payments by check and by cash. Based on discussions with the police, library and parks departments, a ten dollar minimum would satisfy their needs while helping to reduce the credit card expenses incurred by the Town.