If your customers go to your website to pay, and you use a third-party vendor to process the payment, whom 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 online payment to their websites, because 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.
See also: 7 Questions on Taking Online Payments
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 the company's behalf. As such, we were subject to all the same laws and regulations as the company was.
Imagine you regularly eat at a hot dog stand, and the city has a rule that the stand 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.
- Is there a written contract between us and the merchant receiving the payment?
- Does the merchant receiving the payment pay us any amount for any service?
- Do we pay the merchant any other amount?
