If you have concluded, as we believe you should, that your law firm should take credit and debit cards, you still must choose which kind of processing you would need. There are two general types of processing available in the market; we will refer to these as “conventional” or “standard” processing and “flat-rate” processing. This distinction is really historic more than anything else. Variations of standard processing have long been available (although they are constantly improving). Flat-rate processing is more of a recent innovation and was primarily designed for very small or occasional businesses, although it is often marketed (wrongly, in our opinion) to other businesses.
Particularly within the standard processing option there are meaningful distinctions between the providers and plans, but it is not particularly difficult or time-consuming to understand what you need to understand in order to find the right processing from these options. We recommend that law firms use the “conventional” or “standard” processing and would regard using the flat-rate services, in general, as a mistake.
The Flat-Rate Providers
You may be tempted to try PayPal or the Square (or similar services, to which we will refer, collectively as “flat-rate providers”) because of their apparently low “commitment” requirements. As you will see below, however, the flat rate providers have significant drawbacks in all significant criteria, and we do not hesitate in recommending other alternatives for most firms.
Some people default to the flat-rate providers because of their apparent simplicity – choosing one can seem so easy and automatic. It is easy to understand the dollar cost of the service you choose, requires no cash outlay for equipment, and requires no commitment to a specific duration. They are, in other words, an easy choice for people who would rather not spend time thinking about the choice.
That is simply not a good way to run a business when the decision can have such long-range consequences. If you are hesitant because of concerns about the price, need for equipment, lengthy commitments or any of the other straw men most credit processing sales people like show you, these concerns are obsolete if you are reasonably careful or appropriately advised.
If you need to obtain credit processing for your firm for the first time, reaching an informed and safe decision should not take you very much time. If you already have some type of merchant processing, chances are you could upgrade your service and save money – also without spending a lot of time.
Why Not to Use Flat-Rate Providers
The flat-rate providers market themselves largely on convenience, speed, and simplicity. They point out that anybody can use a handy device on his or her phone and accept payments in a flash – with only a “low” flat rate fee. The devices are easy to use, convenient, and fast, but the flat-rate fee is not low, and there are significant disadvantages to the flat rate providers that are even more important.
Prestige
Ironically, one disadvantage of the flat rate systems is their “easiness.” As is well known, anybody can get them, and many people have – hobbyists, individuals, babysitters… It’s great for people who only occasionally need to accept payment electronically. Obviously, there’s a price to be paid for this in prestige – truly successful firms do not (in general) use these low common denominator services. It is not appreciably more difficult to set up and use conventional processing services, but there is perceived stability and prestige in using them. It is far more professional to accept electronic payments yourself rather than to use the flat-rate providers.
Price
Flat-rate processors charge a single rate for their processing regardless of the type of card or whether the card is present. You do not have to understand (or even listen to) anything about the “mind-boggling” array of charges conventional processing will have. As a lawyer, you could understand these fees of course, but you would rather practice law, and as a business person you may already be swamped by arcane business matters. This is the appeal of the flat-rate providers, but it significantly overstates the complexity of the problem and leads to an ineffective solution.
Here is what you need to know at the highest level: the flat-rate providers do not generally offer a better price for the payment processing needed by most law firms.
If you expect to take payments by credit or debit cards of under $500 per month purely as a convenience to the occasional client, the flat-rate, “simple” payment systems might well suit you. Most law firms that accept electronic payments find that it soon constitutes a considerable and growing part of their payments. The price advantage of the flat-rate systems disappears at around $1,000 monthly volume, and this is because the flat rate is a high rate which, beyond a certain “break-even” point negates the cost advantages of having the costs which standard processing passes through to the merchant. By the time your firm is averaging twelve to fifteen hundred dollars in volume per month, the price advantage is clearly with standard processing, and that advantage grows significantly as volume does.
Price matters, of course, but there are other reasons standard processing highly advantageous for most law firms.
Other Services
Probably the most significant advantages the standard processing has over the flat rate services is in the “other services” areas, most notably in recurrent charging and electronic check capability. Of particular importance to law firms is that some standard processing is able to handle payments to trust accounts, whereas the flat rate services in general cannot. We will discuss these services briefly.
Recurrent Charges
Recurrent charges are charges made repeatedly on a single “authorization.” These make it possible for gyms (for example) to charge monthly memberships. They make it possible, also, for law firms to charge monthly (or other periodic) retainers. You should not underestimate the importance of this fact – and yet, if you have not seen the impact it can have, you almost certainly will underestimate it. You can obtain stable, reliable, automatic cash flow if you set up your clients to pay their retainers automatically by electronic means. If you are in a small firm, this one thing can revolutionize your practice.
Electronic Checks
It is possible to accept checks electronically. You can – automatically – verify and deposit them from the comfort of your office, and you can also insure them against insufficient funds. You can, in other words, convert checks to credit card payments in all the best ways. This allows you to accept checks if your practice still relies upon them in general, and yet protects you from bounced checks.
Trust Accounts
The flat-rate services are not designed to apply to trust accounts, and this largely at least (if not completely) makes them ethically unacceptable for accepting “unearned” retainers. Since a large advantage of using credit processing in the first place is that it makes clients more able to pay money “up front,” the inability to accept unearned fees for deposit in your trust account is extremely significant. Accepting payments only after the fee is earned requires the client to cooperate after the client no longer has an urgent need for your services. At a minimum this subjects you to the additional transaction costs of additional client communication about a potentially uncomfortable subject, but this will also all-too-often translate into unpaid accounts receivable.
Other financial services
There are other financial services available with standard processing (and not the flat fee processing) that will occasionally make a difference as well.
Conclusion
On the whole, we do not suggest the flat-fee services to law firms. We do recommend certain standard processing. The decision is not without its hazards, but it is easy if you have the appropriate advice.