The Inconvenient Truth About Convenience Fees

A Strategic Guide for Government and Utility Financial Leaders

Executive Summary

Let’s be honest: payment processing fees don’t typically command attention in budget discussions. But they should. Federal relief is gone. Revenue growth is constrained. And every card transaction carries a cost that’s quietly adding up. The distinction between convenience fees and service fees might sound like technical fine print—until you realize it could be costing your agency six figures a year.

Here’s what changes that math: As of October 2025, Visa now allows utilities qualifying for Merchant Category Code (MCC) 4900 to charge service fees on card payments across all payment channels—a card brand shift that opens new cost-recovery options for water, electric, gas, and water distribution and treatment service providers.

The Budget Reality Facing Government and Utilities in 2025

Local government finances are under pressure from multiple directions. American Rescue Plan Act (ARPA) funding has ended, and many agencies used those one-time funds for recurring expenses—creating structural deficits that now need addressing. Federal grant programs face uncertainty. Property tax growth is capped in many states. Meanwhile, infrastructure costs keep climbing, cybersecurity requirements are expanding, and constituents expect the same seamless digital payment experience they get from Amazon and Netflix.

According to the National Association of Counties, shifts in federal and state funding are threatening to destabilize traditional revenue streams across local governments. The Government Finance Officers Association reports that agencies offering multiple payment channels collect revenue an average of 15 days faster than those with limited options—but those channels come with processing costs that need to be managed strategically.

Payment processing fees might seem like a minor line item compared to capital expenditures or personnel costs, but they add up. With credit card acceptance now approaching 97% among utilities, and digital payment adoption accelerating, the cumulative cost of processing can reach into hundreds of thousands of dollars annually for mid-sized agencies. The question isn’t whether to accept cards—it’s how to structure your fee program to recover costs fairly and compliantly.

Understanding Convenience Fees and Service Fees

One of the most common points of confusion when setting up payment processing is the difference between convenience fees and service fees. Most agencies don’t realize they’re confusing the two, but the distinction matters. Getting it wrong can result in card network fines, mandated process changes, or even termination of your ability to accept Visa and Mastercard. Getting it right can actually save you money on every transaction.

Convenience Fees: The Traditional Approach

A convenience fee is what you charge customers for using an alternative payment channel—typically online or phone payments—instead of your standard payment method. Visa defines this as providing a “bona fide convenience to the cardholder.” In practical terms, if someone pays their utility bill online instead of mailing a check or visiting your office, you can charge a convenience fee for that alternative channel.

The catch: Convenience fees come with strict rules that limit their flexibility:

• Fixed amount only: You must charge a flat dollar amount (like $2.95), not a percentage. This creates problems when processing large payments where the actual cost far exceeds your fixed fee.
• Uniform across payment types: If you charge $2.95 for credit card payments online, you must charge the same $2.95 for eCheck payments in that channel—even though eCheck processing typically costs a fraction of card processing.
• No recurring transactions: You cannot charge convenience fees on auto-pay or recurring billing arrangements. If a customer sets up automatic monthly payments for their property tax installment, convenience fees don’t apply.
• Utility program exclusion: Utilities participating in the Visa Utility Interchange Rate Program (MCC 4900) cannot charge convenience fees. You have to choose one or the other.

Service Fees: Greater Flexibility for Eligible Organizations

Service fees are a different animal entirely. They’re available only to specific merchant categories—primarily government and education—but they offer significantly more flexibility in how you structure and apply them.

Who qualifies for service fees? Eligibility is determined by your Merchant Category Code (MCC):

Government Merchants:

• MCC 9311 – Tax payments
• MCC 9222 – Fines
• MCC 9211 – Court costs (including alimony and child support)
• MCC 9399 – Miscellaneous government services
• MCC 4900 – Utilities (electric, gas, water, sanitation) – NEW as of October 2025

Higher Education:

• MCC 8220 – Colleges, universities, professional schools, junior colleges
• MCC 8244 – Business and secretarial schools
• MCC 8249 – Trade and vocational schools

The key advantages of service fees:

• Fixed OR variable: You can charge a flat fee, a percentage (like 2.5%), or a combination (2% with a minimum of $1.50). This lets you scale cost recovery with transaction size.
• Flexible by payment method: You can charge 2.5% for credit cards while offering eCheck payments at no fee—encouraging adoption of lower-cost payment methods.
• All channels eligible: Unlike convenience fees, service fees can apply across all payment channels—online, phone, in-person, kiosk, and mobile.
• Recurring transactions allowed: Auto-pay and installment plans can include service fees, supporting more flexible billing arrangements.

Side-by-Side Comparison

The Premium Rewards Card Problem

Here’s something the basic fee comparison doesn’t capture: the type of card your constituents use matters enormously for your costs. Premium rewards cards—the ones that offer airline miles, hotel points, and cash back—carry significantly higher interchange fees than standard cards. And these cards are becoming increasingly common for government and utility payments.

Consider the 2025 Visa interchange rates for card-not-present transactions (which applies to most online payments):

Here’s the math that matters: About 82% of U.S. credit cardholders now have at least one rewards card, and industry estimates suggest over 60% of online credit card transaction volume runs on rewards-based cards. For business and government payments—especially large property tax or utility payments—the usage of premium cards is even higher as business owners and affluent customers optimize for rewards on recurring expenses.

If your agency relies on a flat $2.95 convenience fee while processing a $5,000 property tax payment on a premium rewards card at 2.5% interchange, you’re absorbing roughly $122 in processing costs while recovering less than $3. That’s a $119 gap—on a single transaction.

The ACH Alternative: A Cost Comparison

Smart fee structuring isn’t just about recovering credit card costs—it’s about steering constituents toward more cost-effective payment methods when appropriate. ACH (Automated Clearing House) payments offer dramatically lower processing costs:

With a service fee program, you can structure your fees to encourage ACH adoption: charge a percentage-based service fee for credit cards while offering eCheck payments at no fee or a minimal flat fee. This approach benefits everyone—constituents who prefer lower-cost options can avoid fees entirely, while those who value the convenience or rewards of credit cards pay the actual cost of that choice.

Compliance Requirements and Risk Management

Non-compliance with card network rules isn’t just about potential fines—though those can reach $5,000 to $100,000 per month depending on severity and duration. The real risks include:

• Mandated process changes: Visa or Mastercard can require you to modify your payment procedures, potentially disrupting operations.
• Increased scrutiny: Past violations can trigger enhanced monitoring and more frequent compliance audits.
• Card acceptance termination: In severe cases, your ability to accept Visa or Mastercard can be revoked—a significant disruption for any public agency.
• PCI DSS exposure: Fee structure violations often correlate with broader compliance issues. Government agencies face the same PCI requirements as private sector merchants, with fines that can reach hundreds of thousands of dollars for data breaches involving non-compliant systems.

The good news: working with a payment processor that understands government-specific requirements significantly reduces compliance risk. Purpose-built solutions handle fee calculations, disclosures, and transaction processing according to network rules automatically.

Strategic Recommendations for Finance Leaders

Based on our experience serving thousands of government and utility clients since 2004, here are the steps we recommend:

1. Audit your current payment mix and costs. What percentage of payments come via credit card versus ACH? What’s your effective rate across all card types? What’s your current cost recovery rate?
2. Evaluate service fee program eligibility. If you’re a government entity or utility, you likely qualify for service fee programs that offer more flexibility than convenience fees.
3. Model different fee structures. Calculate the impact of percentage-based service fees versus flat convenience fees across your actual transaction volume and mix.
4. Consider payment method incentives. Can you encourage ACH adoption through differential fee structures? What’s the projected cost savings?
5. Review state and local regulations. Fee programs must comply with applicable state laws in addition to card network rules. Some states have specific disclosure requirements or limitations.
6. Partner with a specialized processor. Government and utility payment processing has unique compliance requirements, integration needs, and fee optimization opportunities that generalist processors often miss.

Why IntelliPay?

Since 2004, IntelliPay has served as the payment processing partner for thousands of government agencies, utilities, and educational institutions nationwide. Our platform is purpose-built for the public sector, offering:

• Full service fee program support: We handle compliance with Visa, Mastercard, and state regulations, including the new October 2025 utility service fee provisions.
• Patented single-dip EMV technology: Our U.S. Patents enable single card insertion for service fee transactions, eliminating the friction of two-dip processing and reducing wait times at the counter.
• Transparent interchange-plus pricing: No hidden fees or bundled rates that obscure your true costs.
• Omni-channel integration: Unified reporting across online, in-person, phone, kiosk, and mobile payments.
• PCI DSS Level 1 compliance: The highest level of payment security certification, reducing your compliance burden.
• Integration with 200+ government software providers: Seamless connectivity with your existing financial and property management systems.
• U.S.-based support: Real people who understand government operations, available when you need them.

Take the Next Step

Understanding convenience and service fees is a strategic move that can directly impact your agency’s bottom line and your constituents’ satisfaction. The rules may seem complex, but they’re actually a roadmap to smarter payment practices—and we’re here to help you navigate them.

Ready to explore how service fee programs can work for your organization? Our government payment specialists can provide a no-obligation analysis of your current payment costs and model the potential savings from optimized fee structures.

Contact IntelliPay:
855-872-6632 x132 | sales@intellipay.com | intellipay.com

About This Guide: This resource was developed for government finance directors, CFOs, controllers, and utility accounting leaders managing payment processing operations. All data reflects 2024-2025 industry research and current card network programs. This guide is for informational purposes only and does not constitute legal, financial, or regulatory advice. Card network rules and state regulations vary and change periodically. Consult with qualified legal and compliance professionals before implementing fee programs.