Seven Things to Consider Before Accepting Credit Cards
by Karen Kishbaugh
Important issues to carefully consider are: client confidentiality; your client agreement or engagement letter; commingling of funds; conflicts of interest and professional independence; processing fees; PCI compliance; and new Internal Revenue Service requirements.
A lawyer may not reveal any information relating to the representation without the client’s informed consent 2 and must consult with the client before accepting credit card payment. Disclosure of certain information, including the representation itself, is necessary for such payment, so in situations requiring heightened confidentiality, payment by credit card should be avoided. If the merchant services company requires a description of the services, it is best to limit such description to something general such as "fees and expenses" or "services and expenses." 3
Agreement or Engagement Letter
The client agreement or engagement letter should detail how credit cards will be used. Clients should sign an authorization to charge their cards or, if you have an online system, they can enter the data and make payment themselves.
To further avoid the risk of disclosing client information, the attorney and client may agree that no dispute with the law firm will be raised with or adjudicated by the credit card company, if the credit card company will agree to this. The client should be advised that this means that the charge cannot be reversed (refunded to the client) by the credit card company, and that any dispute over fees paid by credit card would be settled between the lawyer and the client, governed by the Colorado Rules of Professional Conduct. The agreement should further provide that the client waives confidentiality if the client disputes payments with a credit card company.
Commingling of Client and Attorney Funds
Commingling of the attorney’s operating funds with client funds (which include retainers, flat fees, advance fees, and any other unearned funds) is prohibited by Colo. RPC 1.15(a), Colo. RPC 1.5(f), and by the Colorado Supreme Court, which require that such property be kept in a separate trust account until earned.4 If an attorney accepts credit card payments only for services already rendered and not for retainers or other unearned funds, credit card payments may be deposited into the attorney’s operating account. Associated fees and chargebacks are taken from this same account, which holds funds that are already the attorney’s property. The problem of commingling unearned funds and earned funds is thus avoided.
However, most attorneys who accept credit cards also want to have the option of collecting retainers via credit card. This presents several issues.
First, many merchant service providers will deposit funds into only one account — either the attorney’s operating account or the trust account — so that both earned and unearned funds are initially deposited into the same account (thus commingling funds).
Second, service fees often are automatically taken from the account into which funds are deposited, so if client funds are deposited into the trust account, the attorney must deposit his or her own funds into the trust account to cover those fees (thus commingling funds). If only client funds are deposited into the trust account, the attorney may be able to negotiate that service fees will be paid from a separate account.
Third, if a client disputes a bill, the credit card company charges back the disputed amount, generally to the account to which it was originally credited. If the funds were initially deposited into the trust account and the attorney has transferred the funds to its operating account, another client’s funds may be used to pay the chargeback or there may be insufficient funds in the trust account.
The solution that is simplest, that mitigates risks, and that is most advisable is to maintain two separate merchant service accounts, where earned funds are deposited into the attorney’s operating account and unearned funds are deposited into the attorney’s trust account. It is best to negotiate that the merchant service provider will deduct all fees for both the operating and trust accounts from only the operating account (see below for a discussion regarding credit card fees). Credit card processor LawPay, a member benefit of the CBA, offers a law firm merchant account that is specifically structured to address these concerns. In addition to offering dual accounts and deducting all fees from the operating account, if a client initiates a payment dispute, LawPay will work with the attorney to resolve the issue, and chargebacks will be deducted from the operating account.
Attorneys that have existing contracts with merchant service providers that do not provide these options must vigilantly take additional precautions. The Colorado Supreme Court Office of Attorney Regulation Counsel takes the position that, as a matter of public policy, unearned funds may be deposited initially into either the operating account or the trust account when the attorney is accepting payment by credit card. If deposited initially into the operating account, the funds must be immediately transferred to the trust account. If deposited initially into the trust account, funds must be transferred to the operating account as they are earned according to the fee agreement.5 It is acceptable to put a nominal amount of operating funds into the trust account to cover fees if the merchant service provider will not deduct fees from a separate account, but the attorney must clearly identify such funds in its trust account records.6 It also is advisable to negotiate a provision with the provider that chargebacks will be made to an account other than the trust account.
Conflicts of Interest and Professional Independence
The lawyer must keep in mind Colo. RPC 1.7 and 1.8, which address conflicts of interest with current clients. These rules may arise in cases where the lawyer may charge the client’s credit card for delinquent payments.
A lawyer must understand the terms of the contract with his or her credit card company. Some require that the services be performed before the charge is submitted, which would prohibit use of a credit card for a retainer.7
Credit card fees are a cost of doing business. Charging your client for those fees is illegal in Colorado.8 Whether an attorney may offer a discount for non-credit card payments is questionable, although the statute provides that a discount offered "for the purpose of inducing payment by cash, check, or other means not involving the use of a seller or lender credit card shall not constitute a finance charge if such discount is offered to all prospective buyers and its availability is disclosed to all prospective buyers clearly and conspicuously in accordance with regulations of the administrator." 9 Although the prohibition does not apply to debit cards, it is inadvisable to treat debit and credit cards differently for this purpose.
PCI Compliance, which seeks to secure user credit card data, is now mandatory for all merchants accepting credit cards — and that includes attorneys. As attorneys, we are ethically required to safeguard our client’s property and confidential information, so PCI compliance is also a professional and ethical obligation. Although the details of PCI compliance are beyond the scope of this article, more detail can be found on the website of the Payment Card Industry Security Standards Council (PCI SSC), pcisecuritystandards.org, which manages the Payment Card Industry Data Security Standard (PCI DSS).
The PCI SSC (founded by five of the world’s largest credit card companies) created the PCI DSS, which requires companies that process, store, or transmit credit card information to maintain a secure environment. Under these standards, merchants accepting credit cards must implement certain security protections and annually verify their implementation. Failure to do so can result in fees and the loss of ability to process credit cards.
Choosing a merchant service provider that will actively assist you to implement the standards and become and maintain certified is advised.
Section 6050W was added to the tax code by Section 3091(a) of the Housing Assistance Tax Act of 2008. Two requirements of this section may impact attorneys accepting credit cards.
First, credit card processors are required to report gross credit card transactions to the IRS on an informational 1099-K form.
Second, processors are required to verify and match each merchant’s federal tax identification number and legal name with those on file with the IRS. Beginning in January, if there is not an exact match, the IRS will impose a 28 percent withholding penalty on all credit card transactions, including deposits into a trust account. It is not known at this time if and how an attorney will be able to reclaim those funds. If client funds are withheld due to an attorney’s failure to ensure that the information matches, the attorney could be in violation of Colo. RCP 1.5(f) and 1.15 (Safekeeping Property).
Accepting credit cards can be an effective way for attorneys to increase business and reliable payment and to service clients who could not otherwise afford legal services. The inherent risks can be minimized by taking the time to put safeguards into place, considering each client situation, and steadfastly implementing protective measures to address each of the above concerns. D
Karen Kishbaugh is a Denver-based sole practitioner as well as a council member at large of the Colorado Bar Association’s Solo-Small Firm Section Council. She may be reached at firstname.lastname@example.org.
1 Colorado Bar Association Formal Ethics Comm. Op. 99 (1997) (hereinafter, Colo. Op. 99).
2 Id; Colo. RPC 1.6.
4 In re Sather, 3 P.3d 403 (Colo. 2000).
5 Telephone interview with Colorado Supreme Court Office of Attorney Regulation Counsel Chief Deputy Regulation Counsel James Sudler (Jan. 28, 2013).
6 Colo. RPC 1.15(g).
7 Colo. Op. 99.
8 C.R.S. § 5-2-212.
9 C.R.S. § 5-2-212(2).