FAQ About Credit Cards and ACH Payments


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The ins and outs of accepting credit card payments and processing ACH transactions for law firms

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FAQ About Credit Cards and ACH Payments

  1. 1. Published in:Legal Management NewsSpring 2013FAQ About Credit Cards and ACH PaymentsBy Beverly MichaelisAlternative payment methods – similar to the trend with alternative fee arrangements –are becoming increasingly attractive to law firms. Motivated to improve cash flow,accommodate client desires, or “go green,” firms are closely scrutinizing their options.The main contenders for attention: accepting credit cards and sending/receiving ACHpayments through the Automated Cleaning House (ACH) Network.Credit CardsOregon lawyers have been expressly permitted to accept credit cards from clients for anumber of years, yet processing of credit card payments (and the associated fees)continues to raise ethical questions.Must the Merchant Account Be a Trust Account?If the law firm is using a bank to process credit cards and the bank insists on a singlemerchant account for all credit card transactions, then the merchant account must be atrust account if the firm accepts credit cards for earned and unearned fees. See OSBFormal Opinion No. 2005-172 (http://www.osbar.org/_docs/ethics/2005-172.pdf).Isn’t it Commingling to Deposit Earned Fees into Trust?“It is not a violation of Oregon RPC 1.15-1 to deposit all credit card transactions into atrust account, if the portion representing earned fees is promptly transferred to thelawyer’s business account.” OSB Formal Opinion No. 2005-172(http://www.osbar.org/_docs/ethics/2005-172.pdf).Can We Designate the General Operating Account as the Merchant Account if WeAccept Credit Card Payments for Earned Fees Only?Yes. This is a good approach if you want to simplify the accounting process.What Happens if a Client Disputes a Fee Paid by Credit Card?One risk of taking credit cards is the possibility of a chargeback. An Oregon ethicsopinion explains as follows: “Credit card issuers generally allow the customer to disputea credit card payment for some period of time after it appears on the billing statement.On being notified of the dispute, the credit card company ‘charges back’ the paymentagainst the account to which it was originally credited. This practice can put the funds ofother clients at risk if the credit card payment has already been earned and withdrawn
  2. 2. before the lawyer learns of the chargeback. One solution is to have the bank deduct allchargebacks from the lawyer’s business account. If the bank is unwilling or unable todebit a separate account, the lawyer should try to arrange for an interaccount transferprocess by which funds from the lawyer’s business account will be transferredimmediately to cover any chargeback to the trust account. However it is ultimatelyhandled, the lawyer is ethically bound to ensure that any chargebacks that jeopardizeother client funds in trust are promptly covered with the lawyer’s own funds.”OSB Formal Opinion No. 2005-172 (http://www.osbar.org/_docs/ethics/2005-172.pdf).Can We Charge Clients for Merchant Fees?Yes – but only if two conditions are met. First, the client must agree. Second, the firmmust comply with the disclosures required by Regulation Z of the Truth in Lending Act,12 CFR §226, and offer cash discounts to all clients. See CONSUMER LAW INOREGON ch 14 (Oregon CLE 1996 & Supp 2000).If these conditions are not met, then merchant fees are a cost of doing business. Theclient must receive full credit for the payment made, and the firm must deposit ortransfer sufficient funds into trust to cover the merchant fees.Is It Permissible to Use a Private Credit Card Processor?Absolutely! Giving your credit card business to a private processor is often far better thanusing a bank. Private credit card processors offer more flexibility in terms and generallycharge less. Look for processors who offer custom credit card acceptance for lawyers, likeLawPay, https://www.lawpay.com. LawPay merchant services are offered as a memberbenefit by over 60 bar associations, including the Multnomah Bar Association(http://www.mbabar.org/Membership/LawPayCreditCardProcessingforAttorneys.html).However, membership in one of the listed bar associations is not required to use LawPay.How does LawPay work? Fees are deducted exclusively from the general operating account (i.e., no clientmoney is ever taken). Funds are never commingled between the general operating and trust accounts. The lawyer or law firm remains in control at all times. Are you accepting a retainervia credit card? Instruct LawPay to deposit the funds in the law firm trust account.Is the client using a credit card to pay fees that are already earned? Tell LawPay todeposit the proceeds into the general operating account. You “direct traffic” toensure that funds are always deposited into the proper account. Transactions can be processed traditionally, using a Web-based terminal, or on-the-go with LawPay’s ePayment mobile app.There are many private credit card processing companies. Firms should conduct theirown research when selecting a private credit card processor, especially those limited tomobile services only (i.e., credit card swiping using Smartphones or tablets). While
  3. 3. mobile apps can seem impressive, the devil is in the details. Read the terms of servicecarefully. In most cases, mobile-only credit card processors enforce limitations that justwon’t work for the average lawyer or law firm, including: No partial refunds at any time. Full refunds available only for a limited time following the transaction. No payments offline. No payments through the Web on a desktop computer. Mobile app links to one bank account only. Limited or nonexistent “card-not-present” processing. (In the case of one mobileapp, if you process more than $1,000 in card-not-present payments during anytrailing seven day period, the app may hold the excess over $1,000 for 30 daysbefore remitting payment.)ACH PaymentsACH payments are electronic payments made from one account to another through theAutomated Clearing House (ACH) Network. The Electronic Payments Network (EPN) isthe only private sector ACH operator in the United States. The remainder ofcommercial interbank ACH transactions are processed by the Federal Reserve Banks.(For more information on the ACH Network, refer to the Wikipedia entryhttp://en.wikipedia.org/wiki/Automated_Clearing_House).Law firms use ACH payments for outbound and inbound transactions: paying vendorsor suppliers and receiving funds from clients. Why are electronic payments soappealing? First, ACH payments are received more quickly and reliably. Consider thetypical paper transaction: law firm generates a bill and mails it to client. Client receivesthe bill, writes a check, and places it in the mail to the firm. When the paper checkarrives in the mail, staff must open, process, and deposit the payment, then wait forfunds to be collected. With electronic payments, many (or all) of these steps areeliminated.Second, ACH payments support law firm sustainability efforts since fewer resources areconsumed in electronic processing versus traditional checks (paper, ink, fuel fortransportation, etc.) Additionally, clients like the convenience and cost savings – nomore printing paper checks and getting them into the mail on time.Do ACH Payments Pose Ethical Concerns?ACH payments are simply a means to an end (i.e., a different vehicle for the funds) and,as such, are ethically neutral. The biggest trap lies in forgetting that all the usual trustaccounting rules still apply. For example: A large institutional client sends funds to its law firm via ACH payments. Law firmaccounting staff may or may not know the funds are coming. The institutional clienthas multiple open matters with the firm. It can be difficult to discern to which matter
  4. 4. the payment should be applied, as the client frequently “rounds up.” Whether thefunds are fully earned or not, the client habitually directs the ACH payments to thelaw firm’s general operating account.This scenario raises a number of issues – some practical, some ethical:1. Law firm staff may not know the funds are coming. Based on complaints I’ve heard,this is a real phenomenon. The best cure is enforcement of existing accountingprocedures and leadership by example from law firm management. Lawyers mustcommunicate promptly and in writing to the accounting department regardingexpected delivery and disposition of client funds. The most persuasive argumentmay be that the individual lawyer, not the firm or accounting department, is ethicallyaccountable for proper handling of the client’s money. If the ACH payment is notprocessed correctly, bar discipline will look to the responsible lawyer for answers. Iflaw firm management treats this responsibility seriously, individual lawyers are morelikely to comply.2. The client with multiple open matters is often challenging, no matter how payment isreceived. Ideally, the client would clearly indicate how to apply its payment. But ifnot, the responsible lawyer should confer with the client immediately and confirm theclient’s directions in writing.3. What happens when the client “rounds up” or overpays? Go back to trustaccounting fundamentals. If the client overpays its bill, the portion representing theoverpayment belongs to the client, not to the firm. When funds belong in whole orpart to a client, they must be deposited into the lawyer trust account. If the clientremits an ACH payment in the amount of $10,100 toward a billing with anoutstanding balance of $10,024, the payment should be received in the lawyer trustaccount. The firm can then pay itself $10,024 – the amount owed – and seekdirection from the client about how to refund or apply the overpayment of $76presently being held in trust.Keep in mind that no amount of money is too small to be deposited in the lawyertrust account if it belongs to the client. And when funds belong in part to the firm andin part to the client – always the case in an overpayment scenario – they must behandled in the same manner as settlement proceeds. Deposit or receive the fundsinto trust, wait for them to clear (if applicable), pay the firm, then obtain clientconsent to process the overpayment. This is true even if there is work-in-progress(WIP) and the overpayment would be earned in the next billing cycle. Fees are notearned until the work is done and the client is billed. Keeping client money on thepremise that the work is “done” even though the client has not been invoiced isunethical and deprives the client of its right to dispute the firm’s fee.4. The client habitually directs ACH payments to the firm’s general operating account,whether the funds are earned or not. The key here is the word “habitually.” In thecase of a one-time event, it is understandable that a firm may need to transfer funds
  5. 5. out of the general operating account and into trust to correct a client’s mistakenpayment. However, if a client is repeatedly transferring trust account funds into thelaw firm’s general operating account, the lawyer and firm are responsible forredirecting the client and working out a better payment scheme. If a client persistsdespite the firm’s best efforts, it may be easier to change the fee arrangement orbilling procedure so payments received are always earned. [Author’s note: earnedupon receipt billing arrangements and/or modification of existing fee arrangementsraise additional ethical issues and should be approached cautiously.]Next, consider this scenario involving a vendor: A law firm remits litigation costs to a court reporting firm via ACH payment on aclient’s behalf. The ACH payment is sent from the law firm general operatingaccount into the account designated by the court reporting firm. As the result of anaccounting adjustment by the court reporting firm, a portion of the law firm’s paymentis later refunded to the firm.To whom does the refund belong? Return again to trust accounting fundamentals andfocus on the details surrounding the firm’s payment and billing to the client. Twooutcomes are possible: If the firm advanced the court reporter’s fee from the generaloperating account as a litigation cost and the client had not yet reimbursed the firmwhen the refund was received, the refund belongs to the firm. Deposit the refund in thelaw firm general operating account and adjust the client’s billing statement accordingly.However, if the firm billed the client and was reimbursed for the original amount chargedby the court reporter, the refund belongs to the client. Deposit the refund in the lawyertrust account and process it in the same manner as an overpayment from the client.Avoid problems by talking to your vendors now to ensure that refunds or otheraccounting adjustments are handled properly. Ask vendors to contact you beforeissuing a check or initiating an ACH payment – especially those with whom you incurclient costs. If the vendor coordinates with accounting staff before the refund isprocessed, the law firm can ensure that the client is credited (if necessary) and fundsare received into the proper account.Beverly Michaelis 2013The author is a Practice Management Advisor with the Professional Liability Fund,www.osbplf.org. She blogs at http://oregonlawpracticemanagement.com/ and can be reachedat beverlym@osbplf.org or by phone, 503-639-6911 or 800-452-1639 (Toll-Free within Oregon).