Credit card processing has become a vital tool for many small businesses. The ability to swipe a credit card and accept payment on site allows businesses to improve their bookkeeping and owners to avoid the headaches and time commitment associated with collections. The collections process is often the most difficult and tedious process for business owners and professional services because often clients do not have the funds available or the work has already been performed. Credit card processing can streamline collections, but for the legal industry a different issue arises when trust accounts are involved.
This is based upon South Carolina rules so please consult your local jurisdiction’s rules before considering whether or not to accept credit cards. In South Carolina the Bar association is clear that funds which are to be held in trust must be deposited directly into the IOLTA account, and attorneys should not allow third parties the ability to remove funds from the trust account. This presents two problems from a credit card processing standpoint first is separating deposits and fees between accounts and second is chargebacks.
Separating fees and deposits is not necessarily an easy thing to accomplish. The law firm must find a processor who is willing to deposit money directly to the IOLTA account and remove fees from the operating account. Immediately the credit card companies do not like the arrangement because they want to make sure they have the ability to remove fees as quickly as possible. The terms net and gross are used to describe the types of deposits which can be made by a credit card company. Net refers to the total amount of the transaction minus the processing fees while gross refers to the total amount of the transaction. For instance if a $1,000 retainer fee is run on a card a gross deposit would mean $1,000 goes into the IOLTA account where a net deposit may be the $1,000 minus a transaction fee say $22 leave $978 to be deposited into the IOLTA account. The only acceptable transaction for the lawyer is the gross deposit.
Some businesses charge a transaction fee for credit card processing. Adding a transaction fee for credit cards and advertising it as such is considered wrong by the credit card processors and if they see such an advertisement they can take action against the firm. For an attorney who has not yet earned the transaction fee it is not appropriate to deduct it prior to deposit in the IOLTA account. The only deposit scenario which is permissible is one in which gross deposits are made directly to the IOLTA account and transaction fees are deducted from the operating account. This may sound simple, but credit card companies are not always willing to agree to these terms especially when chargebacks are considered.
Chargebacks occur when a person contests a transaction with their credit card company. In such a scenario for a law firm a client may be dissatisfied with a result or believe they did not receive the benefit they were promised for their money. Whatever the reason, the client wishes to undo the credit card transaction with the firm. When a chargeback occurs the firm will be notified by the credit card company that a transaction is being contested. The credit card company first hears the story of the cardholder and then asks the vendor for their version. There is no back and forth and the credit card company acts as the arbitrator making a final decision as to whether the transaction stands.
If a chargeback is going to take place the credit card company is going to reach back into an account of the vendor’s in order to reimburse the funds. For an attorney this could mean the credit card company is going to reach back into the trust account in order to remove funds. If the trust money is not available for the chargeback then the attorney could find themselves in trouble over their trust balances. Preventing the credit card companies from charging back an account is very difficult even if the agreement is to chargeback the operating account the typical credit card contract gives the processors the right to reach into any account to which they have access even if it is supposed to be deposit only.
In a perfect world no chargebacks would ever occur and the credit card companies would adhere to the terms dictated by vendors. However, this is not likely to happen so the law firm must do its best to protect against issues. Some things to keep in mind are 1) credit card companies will agree to deposit gross into the IOLTA and remove fees from the operating account. If a processor says this is not possible then call another processor. 2) Chargebacks are typically only permitted up to six months (consult the contract for exact terms) so after six months attorneys can rest assured the money cannot be touched by a processor for chargebacks. 3) An attorney should have notification of a contested transaction prior to a chargeback and can take action to coordinate the transaction with the credit card company so the chargeback is drawn against the operating account. There is not an easy answer when it comes to processing credit cards in the legal industry, so consult the local rules and find a credit card processor who will work with the firm to structure things properly.