Credit Cards and Other Non-Traditional Payment Methods: Issues to Consider

In the past two decades, the methods by which lawyers will accept cash payments have evolved significantly. This article addresses some of the issues lawyers should consider when determining whether to accept credit cards or other non-traditional payment methods.1 For the purposes of this article, “non-traditional payment methods” refer to the different methods whereby an exchange of cash for work performed is effected. For example, cash, check, EFT, credit card, PayPal, or any other method by which a cash transfer can take place. This article does not address the many issues involving alternate fee agreements such as stock options or other barter and incentive type arrangements.

As recently as a decade ago, most lawyers accepted only cash or payment methods processed through a bank such as a check, wire, or EFT. In the past two decades, the methods by which people have become accustomed to paying for goods and services have expanded exponentially. For example, PayPal grew from a boutique product created to pay for items purchased via a specific online auction website into a common method of transferring funds to pay for goods and services, donate to a charitable cause, and even just send money to a friend. Apple, Inc. has just introduced its own payment system that may revolutionize payment systems once again. Technology is always developing and the future common payment methods are only limited by imagination, reliability, and consumer confidence.

The ABA 2020 initiative addresses evolving technology as it relates to the rules of professional conduct for lawyers. The main theme of the ABA 2020 recommendations is validating the principles underlying the rules of professional conduct. Most of the specific recommendations made were clarifying and expanding the existing model rules. A lawyer must know the principles because technology develops faster than rules are changed or created.2 While tomorrow’s payment methods are unknown, the guiding principles of how the lawyer should handle those funds are well established.

The rules of professional conduct do not prohibit accepting credit card, PayPal, or other non-traditional payment methods into an IOLTA account. The method by which a lawyer elects to be paid is a business decision to be made by the lawyer. The two main principles of the rules of professional conduct regarding all trust funds are (1) the protection of client funds and (2) maintaining proper trust account records.

Chargebacks

A lawyer that makes the business decision to accept a non-traditional form of payment, such as a credit card, must address the chargeback issue. Under the traditional payment model, a fee dispute is handled through the traditional fee arbitration process. When a lawyer accepts a credit card payment, however, he/she subjects him/herself to the credit card chargeback policy. Consider this scenario: a lawyer accepts a $5,000.00 retainer via credit card. The lawyer does $5,000.00 worth of work and withdraws the earned fee. Months later, the client disputes the fee directly with the credit card company. The credit card company, authorized by the credit card agreement, withdraws the $5,000.00 directly from the IOLTA account. As a result of this action, one of two things has happened: (1) the lawyer’s IOLTA account balance went negative or (2) the lawyer has misused another client’s funds to cover the chargeback. The solution to this problem is ensuring that the credit card agreement authorizes the company to withdraw chargebacks ONLY from the lawyer’s operating account.3 A lawyer should NEVER authorize another party to withdraw funds from his/her IOLTA account without his/her knowledge for any reason.

Transaction fees

A lawyer that makes the business decision to accept credit cards as a form of payment must also address the transaction fee issue. Many states (e.g. California) prohibit charging more for a credit card versus cash transaction. In these states the lawyer must take the transaction processing fee from their legal fee; the cost of the transaction processing cannot be passed on to the client. If the lawyer works in a state without this law and expects the client to pay the processing fees, the fee agreement must expressly state that the client is responsible for those fees. Keep in mind that credit card processing fees are substantial (typically 2.5%-4%). Currently, the rules are unclear whether simply stating that the lawyer is entitled to reimbursement for expenses in the fee agreement covers credit card processing fees. Credit card processing fees can possibly be considered a convenience cost, rather than a cost associated with handling the case. The best practice, however, is to avoid confusion and expressly state who is responsible for the processing fee in the fee agreement or subtract the processing fee from the legal fee. ‬‬

The rules of professional conduct allow a lawyer to maintain a small amount of funds in an IOLTA account to pay maintenance fees and expenses associated with maintaining the IOLTA account. For example: expenses such as wire fees, stop payment fees, new checks, and negative balance fees. This de minimis amount of funds held for bank fees is an exception to the rules against commingling. Currently, the law is unclear whether credit card processing fees are considered bank fees associated with maintaining the account.

Often the credit card company withdraws its processing fee before the funds are deposited into the IOLTA account. In this area, the fee rule and safekeeping property rules intersect. Under this scenario, a lawyer must keep two ledgers to conform to both the fee rule and the safekeeping property rule.4 A lawyer collecting a $5,000.00 retainer via credit card minus a 2.5% transaction fee will only receive $4,875.00 in the IOLTA account. The lawyer is responsible for keeping a ledger for all trust funds handled by the lawyer for each individual client matter. In this example, the $4,875.00 deposit. A lawyer must also keep track of all funds received and expenses paid for each client matter. In this example, the $5,000.00 deposit and $125.00 transaction expense.

Lawyers decide to accept non-traditional payment methods to remain competitive. While these payment methods offer a degree of convenience and comfort for the client, the lawyer must be aware of the issues created in utilizing these payment methods.

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¹ The article will discuss credit cards, but the issues are common to all different types of non-traditional payment methods. Other non-traditional payment methods include, for example, PayPal.
² For example, here are two recommended changes.
Model Rule 1.1 Competence: “... including the benefits and risks associated with relevant technology...”
Model Rule 1.6 Confidentiality of Information: “(c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.”
³ Note that some payment methods, such as PayPal, link to a bank account.
⁴ The fee rule requires a lawyer to keep track of all funds received and disbursed for a client matter, whether they be trust funds or not. The fee rule also requires a lawyer to give a client a complete accounting upon the conclusion of a case. Regardless of the express language of the rules, in a fee dispute, a lawyer will be required to produce an accounting showing all funds received and disbursed. Lawyers are encouraged to compare the rules of professional conduct regarding fees and safekeeping property / trust account records in their jurisdiction.