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Service Charge
The fee collected to pay for services related to the product or service being purchased
What is a Service Charge?
A service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased. In other words, a service charge is an additional charge for the service provided with the purchase of a product or service. For example, a service charge is typically added to your bill in a restaurant to pay for the waiter or waitress who comes and services your table.
Service Charges in Different Industries
Service charges come with different names, depending on the industry concerned. For example:
Banking Industry
A monthly fee is typically charged to account holders for maintaining a checking or savings account with a bank. For example, TD Canada charges different monthly maintenance fees for their various checking accounts.
Hospitality Industry
A service fee as a percentage of the total bill for restaurants and hotels is commonplace. For example, in British Columbia, there is an unspoken rule to tip (service fee) at least 10% for restaurant dine-ins or deliveries.
Airline Industry
A number of service charges are collected when purchasing a plane ticket. Service charges by the airline industry are to pay for services such as entertainment, baggage handling, seat selection, travel agent commissions, etc. The extra fees charged by airlines are highly controversial, as they have increased substantially over the past 10 to 20 years. Many fliers resent having to pay hefty extra fees for services the airlines used to offer for free, such as baggage handling services. In the past, airline passengers could check as many bags as they wished, with no additional cost. But nowadays, virtually all airlines charge $25 or more per bag for anything beyond one bag/suitcase.
Utility Industry
In addition to the actual bill for power, most utility providers impose service charges in addition to the charges for electricity used. For example, Hydro Quebec imposes a number of service charges, such as an initial installation charge, monthly meter reading charge, etc.
Example
John is celebrating his second anniversary with his girlfriend. He decides to choose the most romantic restaurant in downtown Vancouver. Upon arriving at the destination, the couple is greeted by a number of servers and seated promptly.
The meal itself comes to a total of $120, including taxes. John realizes the exceptional and additional services provided by the waiters at the restaurant and decides to pay a gratuity (service charge) of 15% on top of his bill.
Airbnb Service Charges
Airbnb is an example of an online rental platform that imposes service charges to cover company costs. Airbnb has separate fees for hosts and guests.
For Hosts
Airbnb charges a 3% fee, which is taken out of the total reservation amount. In addition, taxes such as value-added tax (VAT) may be added on top of the basic service charge, depending on the location of the listing.
For Guests
Airbnb charges a 5-15% fee that varies depending on the cost of the rental. The more expensive the rental, the lower the service charge percentage.
Key Takeaways
A service charge refers to an additional fee collected for providing a product or service. It is typically collected when there are interactions between a consumer and the company involved. Depending on the industry, such charges have different names – such as booking fees (hotels), maintenance fees (banking), and security fees (travel).
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
