The Green Sheet Online Edition
October 26, 2009 • Issue 09:10:02
Taking us to the Clouds
We received the following feedback on "POS forecast: Increas-ingly cloudy," by Dale S. Laszig, The Green Sheet, Sept. 28, 2009, issue 09:09:02:
Great article. I love the way Dale writes; she writes visually, taking what is a difficult topic for most and putting it into bite-size pieces that are easy to digest.
Paymint Partners LLC
Thank you for taking the time to send along this appreciative note. It is encouraging for both Ms. Laszig and The Green Sheet as we do our best to provide pertinent, informative, timely articles for the payments industry's feet on the street.
The fine points of ERR
Regarding "ERR, a merchant retention tool," by Bob Schoenbauer, The Green Sheet, Sept. 28, 2009, issue 09:09:02, we received the following note:
Bob Schoenbauer recently wrote a nice article about ERR [Enhanced Recover Reduced], but there was a slight math error. Using ERR, you have the option to assess a surcharge to the merchant's downgraded sales volume. The surcharge is an ISO-defined percentage that is applied to the downgraded sales volume of participating merchants. Bob did a great job of explaining that.
In the ERR article, the rate for the transaction came in at 4.06%, but that is incorrect. The proper formula for ERR, according to the FDR ERR Sell Sheet available to FDR clients is:
Qualified discount rate charged, i.e. 1.69% - (minus) Nonqual-ified interchange rate, i.e. 2.30% + $0.10 + (plus) Difference between nonqualified interchange rate and "base" qualified rate (i.e. 2.30% + $0.10 - 1.54% + $0.10 for CPS Retail) + (plus) ERR surcharge %, i.e. 1.00% = (1.69% x sale amount) minus (2.30% + $0.10 cents x sale amount) plus (0.76% x sale amount) plus (1.00% x sale amount) = 1.15% profit on the individual sale.
(By the way, the $0.10 transaction fee of the interchange was dropped off for ease of math in the example below.)
The "rate" of that sale would ultimately be 3.45%, which is 1.15% plus the nonqualified interchange of 2.30% (interchange for the EIRF credit sale).
The calculation that was done appeared to be the actual interchange rate (2.30%) plus the ERR rate (1.00%) plus the difference in the two interchange categories (2.30% - 1.54% = 0.76%) which came to 4.06%.
Instead, it should be the qualified discount rate (1.69%) plus the difference between the two interchange categories (0.76%) plus the ERR rate (1.00%), or 3.45%.
Basically, an easy way to think about ERR is as follows:
A. Charge the qualified rate.
B. Subtract whatever interchange category you hit (i.e. EIRF credit).
C. Charge the difference between the interchange category you hit (step B) and the "should of" rate (i.e. the CPS retail
rate of 1.54%).
D. Charge your ERR surcharge %.
E. Determine your profit on a particular sale.
On a $300 sale, that would look like this:
A. $300 x 1.69% = $5.07
B. $300 x 2.30% + $0.10 = -$7.00
C. $300 x ((2.30% + $0.10) - (1.54% + $0.10)) = $2.28
D. $300 x 1.00% = $3.00
E. A - B + C + D = $3.35 profit on the sale
The profit actually comes to around 1.12%. You have to take into account you billed 1.69% plus 0.76% plus 1% (3.45%) and still had an expense of 2.30% + $0.10 for the interchange, or an effective rate of 2.33%.
3.45% - 2.33% = your 1.12% profit
Otherwise, it was a nice article. Well done, Bob!
Electronic Payments Inc.
Thank you for drawing upon your expertise to address something that could cause confusion for ISOs and merchant level salespeople seeking to implement ERR. We will append your explanation to the online version of Bob Schoenbauer's fine article. Your clarity, commitment to excellence and generosity are very much appreciated.
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