Higher Education’s limited set of choices in card acceptance calls for a new approach. Institutions appear to face trade-offs between their economic interests on the one hand and their students’ satisfaction on the other: while the use of credit and debit cards provides convenience for students and collectability for the school, it creates transaction costs that can be allocated only in a limited number of ways. Our guest bloggers from Noble are beginning a conversation about a new approach that aligns these interests.
Today’s Two Common Models of Card Acceptance
A payment with a card costs on average 2-3% to process, much of which goes to the bank that issues the card and funds rewards for cardholders. Different costs are associated with different card types: for example, debit cards cost significantly less to accept than cards with robust rewards.
1. Your School Pays the Fees
One common approach is for schools to pay these fees. After all, electronic payments, especially those made online, reduce other costs, such as the time and expense of handling mailed checks or in-person payments.
Nonetheless, tuition and related payments are often sizable, meaning that, all things being equal, a cardholder may incline towards choosing the card that offers the best rewards—which often is the card that the school pays most to accept. As a result, some institutions decide that processing costs are prohibitive and decline to give students the option of using cards at all.
2. Your Students Pay the Fees
The second common approach is for institutions to pass on a fee for processing—called a “service fee” (also known as a “convenience fee”)—when students make payments by card. Indeed, these fees are ubiquitous among institutions that accept cards: a CreditCards.com survey found that 81% of institutions that accept cards charge a service fee.
What is equally common is for this service fee to be assessed as a single, flat-percentage rate, such as 2.75%, for all credit cards and debit cards. The amount of the fee is typically set by the third-party service provider that processes payments on behalf of the institution.
While this approach meets important economic interests for the school, it also produces student affordability concerns. When a student absorbs an additional service fee, she effectively pays more for her education.
And a flat rate service fee forces a student with a low-cost card to subsidize a student with a more costly rewards card. We’ve seen one leading university use language on its payment page to urge its students not to use debit cards because, if they do, they will pay the standard 2.75% service fee, despite most debit cards costing less than 1% to process.
Our Approach: Intelligent Rate
Noble’s goal in launching our technology company was to improve on these common models of card acceptance, especially in view of the fact that different cards have different costs.
Our patent-pending solution, called “Intelligent Rate,” calculates the cost of the card the student chooses in real time, as the student types her card information within the payment portal itself. Instead of charging a flat rate, Intelligent Rate automatically adjusts the amount of the service fee in proportion to what each transaction will actually cost.
In other words, before the transaction is processed, Intelligent Rate determines the cost of a given card from its card number alone. Those cardholders that present a higher cost rewards card will be educated on lower cost payment alternatives. Therefore, even if they still decide to use a higher cost card, they do so with complete information and transparency. The result is that students with low-cost cards, such as debit cards, absorb a lower fee.
Recent regulatory activity underscores the need for transparency and fairness in student financial transactions. Intelligent Rate’s transparent service fee pricing helps institutions get ahead of these important trends. Intelligent Rate gives the student real-time information about savings, enabling her to reduce her service fee by choosing a lower-cost form of payment.
We’re proud to add Intelligent Rate to your institution’s set of choices in card acceptance. Each of the two traditional models we considered above is characterized as either “good for the students” or “good for the school”—but not both. Technological innovation gives us a way to reframe this conversation and advance an option that meets both of these important interests.
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