The methods by which lawyers accept cash payments have evolved significantly in the last two decades. This article will address some of the issues to consider when making the determination to accept credit cards or other non-traditional payment methods.[1]For the purpose of this article, “non-traditional payment methods” refers to the different methods by which an exchange of cash for work performed is effected. For example, cash, check, EFT, credit card, PayPal, Venmo, or any other method by which a cash transfer can take place.

As recently as a decade ago the great majority of lawyers accepted only cash or payment methods that were 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 has grown 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 introduced it’s own payment system that may revolutionize payment systems 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 that the principles underlying the rules of professional conduct are still valid. Most of the specific recommendations that were made are clarifications and expansions of existing model rules. A lawyer must know the principles because technology develops faster than rules can be changed or created.[2] While the exact method of tomorrow’s payments are unknown, the guiding principles of how those funds should be handled by the lawyer 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 the protection of client funds and 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 issue of chargebacks. In the traditional payment model if a fee is disputed the dispute is handled through the traditional fee arbitration process. When a lawyer accepts a credit card payment she subjects herself to the credit card chargeback policy. Consider this scenario: a lawyer accepts a $5,000 retainer via credit card. The lawyer does $5,000 worth of work and withdraws her earned fee. Months after the earned fee has been withdrawn, 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 directly from the IOLTA account. One of two things has happened: (1) the balance of the lawyer’s IOLTA account went negative or (2) the lawyer has misused another client’s funds to cover the chargeback. The solution is to make sure the credit card agreement only authorizes the company to withdraw chargebacks from the lawyer’s operating account.[3] A lawyer should NEVER authorize another party to withdraw funds from their IOLTA account without their knowledge for any reason.

Transaction fees

‪A second issue that results from the business decision to accept credit cards is the payment of transaction processing fees. 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 needs to expressly state that the client is responsible for these fees. Keep in mind that credit card processing fees can sometimes be substantial (typically 2.5%-4%). It is unclear if 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, not a cost associated with handling the case. The best practice is to avoid confusion and expressly state who is responsible for the processing fee in the fee agreement or subtract the processing fee from your legal fee.

The rules of professional conduct allow a lawyer to maintain a small amount of funds in an IOLTA account to pay fees and expenses associated with maintaining the IOLTA account. For example: if you order new checks the bank will charge somewhere between $40 and $125. Wire fees, stop payment fees, and negative balance fees are other common expenses associated with maintaining an IOLTA account. This de minimis amount of funds held for bank fees is an exception to the rules against commingling. It is unclear, however, if credit card processing fees are considered bank fees associated with maintaining the account which would allow a lawyer to hold funds for processing fees in an IOLTA account.

Often the credit card company withdraws their processing fee before the funds are deposited into the IOLTA account. This is an area where the fee rule and safekeeping property rules intersect. In this scenario a lawyer may need to keep two ledgers to conform to both the fee rule and safekeeping property rule.[4] A lawyer collecting a $5,000 retainer via credit card minus a 2.5% transaction fee will only receive a $4,875 deposit in the IOLTA account. The lawyer is responsible for keeping a ledger for all trust funds deposited into the IOLTA account by the lawyer for each individual client matter. In this example, that starts with a $4,875 deposit. A lawyer is also required to keep track of all funds received and expenses paid for each client matter. In this example, that starts with a $5,000 deposit and $125 transaction expense.

The decision to accept non-traditional payment methods is one that many lawyers make in order to remain competitive. While these payment methods offer a degree of convenience and comfort for the client, the lawyer needs to be aware of the issues these payment methods create.

[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 and Venmo.

[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 in many states 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. Most of the time one ledger noting the total amount the client paid with a notation of the transaction fee will suffice. Since the transaction fee will NOT appear on the bank statement, the lawyer must keep the payment transaction receipt and excellent records in the event she is audited.