Is it over for transaction fees?
- By Dibya Sarkar
- Mar 04, 2001
Last spring, when California's Department of Motor Vehicles debuted an online
vehicle registration renewal program where people could pay by credit card,
thousands of people flocked to the Web site.
In June alone, about 22,000 vehicles were registered online. But on
July 1, the state began charging a $4 fee to cover the credit card payment
option. Traffic to the site (www.dmv.ca.gov) dipped to 17,000.
"The minute [the $4 fee] went into effect, the usage dropped," said
Arun Baheti, the state's director of e-government. "Clearly, it had an effect
on the usage."
State officials said the proportion of eligible users has declined from
5 percent to an average of 2.5 percent since the fee was imposed. The site
is averaging about 15,000 transactions monthly. Although Baheti said he
has heard that some lawmakers are interested in repealing the $4 fee, and
Gov. Gray Davis' administration opposed it, the state legislature has not
taken any action. However, the state is studying various models for financing
e-government online projects.
California is not alone in questioning whether convenience fees are
needed as technology helps governments become more efficient.
Some say their return on investment is so good that it doesn't make
sense to charge citizens extra fees. Some say convenience fees discourage
people from using online services. Others say it's not fair to charge online
users more than people who conduct business face to face.
Still, several e-government veterans say people don't mind paying a
little extra if it saves them time, gas and parking money. They say charging
convenience fees are the chief and sometimes the only way for smaller
governments to pay for technology and e-commerce. And they say they would
rather charge a fee than raise taxes.
"It's probably too early to know how [the issue's] going to work itself
out," Baheti said.
Turning People Off
Many state and local governments charge people some type of convenience
fee for e-government services, such as paying parking tickets, filing online
taxes, renewing driver's licenses or tags, applying for a fishing license
or renewing a professional license. Businesses also pay user fees, but often
they pay less than they paid before the online option was available.
State motor vehicle departments, which consistently deal with heavy
volumes of residents and businesses, have emerged as the most likely agencies
to be the first to provide interactive Web-based services. A few are also
leading the curve in how those services are changing.
There are basically two reasons why governments charge convenience fees.
First, companies that equip governments with technology levy a fee on transactions
to recoup their investment, so government agencies then charge fees to even
Second, governments, like merchants offering an online credit card payment
option, impose a fee to pay credit card company surcharges, or interchange
fees, typically 2 percent to 3 percent of the transaction amount.
A classic example is what happened when Arizona, in a partnership with
IBM Corp., posted one of the nation's first online transaction programs
IBM provided start-up and operational expenses for the state's Web-based
vehicle registration renewal (www.servicearizona.com). People were offered
instant renewals via the Internet or a telephone interactive voice response
system (IVR). To use the online or IVR system, residents had to ante up
$6.95 per transaction, which went to IBM. Usage was sluggish at best.
"What we saw was a lack of interest," Arizona CIO Art Ranney said.
In that first month, the system recorded about 2,500 transactions Internet and IVR combined. Over the next year, the system averaged about
4,700 transactions a month.
Gov. Jane Dee Hull thought it didn't make sense to charge online and IVR
customers more than residents who renewed at a Motor Vehicle Division office.
Legislators nixed the fee during the 1998 legislative session. The service
became fee-free in mid-October 1998.
The first month, Internet and IVR transactions jumped to 13,129. The
next month, it rose to 17,300. In December 1998, it climbed to 19,486. Since
then, usage has climbed steadily, and in December 2000, the MVD recorded
42,755 transactions more online than by phone.
Ranney said there's some real movement across the country to eliminate
convenience fees but that they're justified in some cases. For instance,
reserving a recreational park area online would be a convenience for a resident,
and because it's a low-volume use, he said charging an extra fee would
John Kelly, Arizona's former CIO and now Intel Corp.'s government affairs
manager, agreed. "I don't think convenience fees are bad or wrong on their
face," he said. "They're still appropriate for some enhanced service, but
you need to approach it very carefully, and you need a motivated audience."
For example, he said if an agency digitized older records that could
benefit lawyers, then it's appropriate to add a fee to recoup costs.
Jeremy Sharrard, an analyst with Forrester Research, said companies
doing Web-based business with governments might not mind paying extra fees
because those fees are still cheaper and save companies time compared to
getting the information other ways.
But he said "user-charged, citizen convenience fees are not long for
this world." Sharrard wrote a report titled "Sizing U.S. eGovernment," released
in August, that concluded that fees hinder use of state and local sites.
"Constituents won't pay extra to conduct marginally more convenient
transactions online," the study found. "As a result, Forrester believes
that governments will eliminate user-charged fees by 2002."
Sharrard said that if governments want site traffic, they're going to
have to eliminate fees.
'An Easy Call'
Virginia's DMV (www.dmv.state.va.us) is one of the few, if not the only,
state agency to offer a discount if residents renew their driver's licenses
or vehicle tags via the Internet, mail, fax or touch-tone phone. For license
renewal, it's a $1 discount for five years. For tag renewal, it's a $1 discount
for a year and $3 for two years.
Virginia DMV Commissioner Richard Holcomb said the services debuted
in 1999 for free, then the discounts came later. "At no point was there
a consideration to [add] a technology fee to our transactions,'' he said.
He said Virginia offered the discounts because it cost only $2 to process
a transaction online, by phone, by fax and by mail as opposed to $5 to process
a transaction face to face. "It was an easy call," he said.
From June 1999 to May 2000, when the Web systems went live for vehicle
renewal registrations, the site averaged about 6,700 transactions per month.
When the discount was offered in July 2000, it rose to 13,544 transactions.
Since then, Web usage has averaged nearly 16,000 transactions monthly.
Holcomb said the real benefit is to his department. "We're sort of talking
about a reverse paradigm," he said. "We provide a convenience discount because
it's more convenient for the DMV to process the transaction by doing it
over the Web. It's cheaper and easier for us doing it over the Internet."
With Virginia's population increasing, he said the online alternative
has also helped save money by helping the state avoid building new DMV
Randy Street, executive vice president of sales and marketing for the
Atlanta-based EzGov Inc., an e-government provider, said the company charges
convenience fees. But he said recently it has seen a "dramatic shift" from
the convenience fee-financing model to a software-licensing model.
With the software-licensing model, Street said governments pay money
to cover how much it costs to clear transactions and/or for a company to
store data on its servers. He said governments may be charged more if a
greater bandwidth is needed or for more floor space in a hosting facility
to store additional hardware. Those costs don't include licensing, hosting
and maintenance fees.
Street said Riverside County, Calif., and DeKalb County, Ga., used to
charge citizens convenience fees for online property taxes, but both counties
recently switched to the other model. He said Beaufort County, S.C., launched
its online vehicle tax payment with the new model as well.
Street said convenience fees made sense for governments interested in
experimenting with e-government at low or no cost. But past that stage,
he said the potential of e-government increases, and the convenience fee
model is a hindrance.
Chris Neff, senior director of marketing for Overland Park, Kan.-based
NIC, which built and operates 12 state portals, said there's no single funding
solution for government. "As far as the trend, our perspective is each government
approaches its business differently," he said. In most states, NIC charges
convenience fees, usually $1 to $2 per transaction.
He said in California and Arizona, officials "out priced" their services
and may have been out of touch with their constituencies. "It's in nobody's
best interest to out price a convenience fee in the marketplace," he said.
Neff said NIC encourages its government clients to form a governing
board which could include representatives from the private sector, government
agencies, or other associations and interest groups "to ensure oversight
and independence of the portal and to ensure interest. They own the portal
and set all policies."
The company also tracks satisfaction rates with online users, he said.
For example, an August 2000 online survey of people using Indiana's state
portal (www.accessindiana.com) revealed that an overwhelming majority didn't
mind being charged convenience fees.
"If NIC is out of touch, there's no way we could succeed," he said.
Paying to Play
Jaye Jordan, Public Technology Inc.'s director of electronic commerce,
said that beyond fees, he didn't see any other viable means for governments
to fund technology. PTI is the technology support arm for the National League
of Cities and other government organizations.
"Governments have to get funding somewhere," he said. "If you begin
to make it free, then you have to be prepared to fund it."
Or you can give customers options. Minnesota's Department of Public
Safety, which recently began offering a vehicle registration renewal program
developed by EzGov, charges 1.75 percent of the renewal price for people
who pay by credit card. EzGov gets the money.
But the site also offers another option: an electronic transfer of funds
from a checking or savings account. No fee is charged if people choose that
option slightly more popular than using a credit card.
Carolyn Purcell, executive director of Texas's Department of Information
Resources, said there is no flap about convenience fees in Texas. "We don't
hear it in Texas," she said. "And believe me, we care what our citizens
She cited a June 2000 University of Texas study (www.utexas.edu/research/tipi/reports/dir_final2.htm) that found that most people oppose both the use of general tax
funds and the sale of government-collected data on individuals to pay for
e-government services they would rather see advertising on screen or pay
directly for services. Furthermore, the study found, "e-government does
not seem to be in the category of something everyone should have and use,
like public education. Rather, it seems as if people perceive it as a value-added
service whose costs should be shouldered by its users."
Another recent Texas task force state study (www.dir.state.tx.us/egov/report/index.html)
found that although other states, such as Pennsylvania, Iowa, Florida and
Massachusetts, favor a tax-funded model and do not charge user fees, more
than 55 percent of Texans said using tax dollars to support e-government
Phil Barrett, director of e-government in Texas, said the state's model
is totally self-funding.
KPMG, he said, paid all upfront costs for the entire technology infrastructure,
as well as the development and maintenance of the state portal, Texas Online
(www.state.tx.us). To recoup its investment, KPMG charges convenience fees.
Barrett said the state allows the company to charge fees for some applications
but not others. He said the company hopes to break even in three years,
after which the company and state would split revenues in half.
In deciding to charge a convenience fee, Texas agencies work closely
with KPMG to determine whether it's needed and the amount. Then the state's
Electronic Government Task Force, representatives from state agencies and
governor's appointees from the business, municipal government and civic
sectors review it, Barrett said.
"That's sort of the check and balance to make sure the application going
on Texas Online is appropriate, for one, and, if there is a convenience
fee, it's at an appropriate level," Barrett said.
Over time governments can trim costs as Internet e-commerce increases,
but that hasn't happened yet, Purcell said. She said people are getting
hung up on convenience fees, forgetting people are getting a service they
"The people of Texas don't really care whether they register their vehicle
with the city, the county or the state. By presenting a sort of seamless
base or a seamless front end, it means that a citizen doesn't have to be
steeped in knowledge about bureaucratic boundaries," she said.
That said, Purcell wouldn't be surprised if the convenience fee situation
"In this business, you can almost guarantee it will change," she said.
"I fully expect it to morph to stay current with the technology. We'll keep
our ear to the ground to that end and provide information to the legislature."