If your customers go to your website to pay, and you use a third-party vendor to process the payment, who are they paying: You or the vendor?
The answer to this deceptively simple question can determine whether your business handles online payments smoothly or runs afoul of state laws, landing you in legal hot water.
It turns out that, at least in some states, the answer is far from straightforward. In fact, it may even depend on how you ask the question.
As the head of a company that helps other businesses process online payments easily, I saw this up close in New York state as we navigated the complicated legal guidance on behalf of our partners.
It’s an instructive story for businesses that may be thinking of adding this capability to their websites, since it illustrates the pitfalls you could face if you hire the wrong people.
It all began on June 19, 2007, when I received an advisory opinion that had been published by the New York Insurance Department responding to a question I had asked:
“May an entity that provides a service to insurance companies that permits policyholders to pay their insurance premiums by credit card charge those policyholders an additional fee to cover credit card and other service expenses?”
The answer? No. The department said that vendors such as my current company, Simply Easier Payments, may not charge policyholders paying insurance premiums with a credit card an additional fee.
The document ends with this statement:
“Because an insurer may not impose a credit card surcharge on a policyholder, anyone acting on an insurer’s behalf, such as the Company, is similarly prohibited from imposing a surcharge on the policyholder.”
I then asked a slightly different question, and received a very different answer just a few months later.
See if you can spot the difference in the second question:
“May an entity that provides a service to insurance policyholders that enables them to pay their insurance premiums electronically by credit card charge those policyholders a fee to cover credit card and other service expenses”?
The answer? Yes. In a Feb. 25, 2008 response, the department said that nothing in New York insurance law and regulations bars a vendor that “provides a service to insurance policyholders that enables them to pay their insurance premiums electronically” from charging a fee.
If you find that confusing, you’re not alone. But it turns out there’s a world of difference between the two questions.
Who are your customers paying?
The regulators in New York were kind enough to meet with me for a discussion about our business model before they reached the second opinion. They were very clear in our meeting about the difference between the two answers.
In the first question, we were considered to be a legal representative of the insurance company. We were acting on their behalf. As such, we were subject to all the same laws and regulations as they were.
Imagine you regularly eat at a hot dog stand, and the city has a rule that they can’t charge you extra for condiments. The owner can’t just hire a lawyer to stand nearby and demand payment instead; it’s all the same hot dog stand.
But in the second question, we were not representing the insurance company, we were helping the policyholder. That meant we had a separate business relationship.
In this example, you’re not going to a hot dog stand. You’re giving money to a friend who’s going to bring you back a hot dog and maybe run some other errands for you. If he demands an extra dollar for the trouble of getting mustard and relish, there’s nothing stopping him.
Define your pre-existing business relationship.
The Department used three criteria for determining if an existing business relationship existed between us as a vendor and the insurance carrier or agency.
1. Is there a written contract between us and the merchant receiving the payment?
2. Does the merchant receiving the payment pay us any amount for any service?
3. Do we pay the merchant any other amount?
If the answer to any of these was yes, then the Department would consider us to be the representative of the carrier or agency and therefore subject to all the same laws and regulations.
In addition, one other criteria was noted in the permission granted in February 25, 2008:
“The Payment System does not at any time hold the premium payment on behalf of the customer or any insurance company.”
The final conclusion reads:
“Thus, an insurer (or anyone acting on the insurer’s behalf) may not impose a credit card surcharge on a policyholder. Your client, by contrast, is not selling insurance and is not acting on any insurer’s behalf. Rather, it is providing (and charging for) a distinct service, i.e. the making of secure payment via electronic means.”
What does this mean for your business?
The moral of the story is not what you should do if you’re running an insurance agency – or even a hot dog stand – in New York. It’s that you need to be aware of the complexity of these laws before you hire any company to help process payments for your business. The wrong decision could prove costly.
The laws on credit card surcharges vary from state to state, and not all of them are as tricky as the scenario we ran into in New York.
But in general, states now agree on those criteria for establishing a separate business relationship.
As a result of that back-and-forth in New York, we at Simply Easier Payments stripped our business model down as much as possible to avoid any legal complications.
We do not have a contract with merchants. We do not charge merchants for any service, e.g. no monthly fees, no charge-back fees, no integration fees, etc. We do not pay merchants. And we never hold the premium payment in any way.
This helps us avoid any situation in which we might be considered a legal representative of the businesses we work with. The goal, as our name says, is to make things easier.
By Duke Williams, Founder of Simply Easier Payments
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