By Jeff Fortney
In "The profit rules – Part 1," published March 8, 2021, in issue 21:03:01, I discussed rules one through three, which address ways to lower fees without lowering profits by compensating in other areas. I also emphasized the wisdom of listing fees in the correct statement fields. This article explains rules four and five.
Never waive or lower a fee that a merchant believes they can control by their actions.
Let's say your chargeback fee is $25, and a merchant asks you to lower it. Instead of accommodating what seems like a minor request, ask whether the merchant has had chargeback issues. Most will have none or very few. Then explain what the fee is for and why it's priced as it is. Once informed, the merchant will likely no longer protest the fee.
In another example, if a merchant's minimum processing fee is $25 a month and they process $10,000 or more monthly, they won’t see it assessed unless you price them very low. If the merchant is concerned about not reaching their current processing level, review the rest of the rates if they were based on that processing volume. The simplest way to avoid dropping this fee is to explain how it is charged. It’s merely the minimum cost to do business.
A fee collected by any other name is still revenue.
This rule applies in internal and external areas. Internally, it's about your residual revenue. Everyone's Schedule A outlines fees. Some agents believe if they don't charge a fee to cover a cost on the Schedule A, they will lose money. This misconception comes from how residuals are calculated. The common way is to deduct card brand fees and Schedule A expenses from all revenue collected from a merchant. The remainder is the net revenue. The earned percentage is based on the shared percentage on the schedule.
Also, if your schedule shows monthly fees on two line items, $5 for one expense and $2.50 for the other, the total monthly cost is $7.50. If you charged a flat $17.50, your profit would be $10. Often, the flat-fee profit is greater than the two line item fees combined.
Always list extra costs such as chargebacks. However, remember you can collect revenue for charges that occur during normal processing in many ways. And keep in mind the importance of asking merchants what their average ticket is.
Take, for example, a merchant processing over $2,000,000 who's interested in your services. You anticipate a floor of 10 basis points and 10 cents. Then, you see from their statement they are at 20 basis points and 5 cents. They ask you to price at just 15 basis points.
Many agents might consider $3,000 revenue at 15 basis points and make the deal. That would be logical if the average ticket was $90 or $100. If so, your cost on your schedule would be $0.03. The $3,000 wouldn't be accurate, but revenue would still be considerable. But what if the ticket is $15 or $20? At a $20 average ticket, your expense would be $3,000. You'd be processing for free.
If, however, you offered no basis points, just pass through, and charged a flat seven cents, your gross return would be $4,000. Yet on your schedule you may have a basis point fee. For every 1 basis point, on a $20 ticket, the cost is only 2/10 of one cent. That would reduce your $4,000 to $3,800. If the ticket is $200, the opposite applies. Basis points take on greater impact: 17 basis points would result in a return of $2,700 if you charge no transaction fee. Still a good return.
Internally, you have an expense, but you can cover that and maximize your return, while still providing a merchant a perceived good deal—if you price in accordance with their average ticket.
Today's merchants can do the math and often spot impacts to their bottom line. You must understand the math, too. Factor in all fees and remember a fee by any other name is still revenue.
Jeff Fortney is vice president ISO relations for Signature Payments. A long-time payments industry executive and mentor, Jeff is focused on strengthening and developing partnerships and evaluating new business opportunities. He can be reached at 214-458-1379
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