Which is better: a higher discount rate and lower transaction fee–or a lower discount rate, but a higher transaction fee? The answer to this question is: it depends on your business.
If you have a small number of high-dollar credit card transactions each month, then it’s probably better to have a lower discount rate/higher transaction fee.
If you have a large number of low-dollar amount credit card transactions each month, then the transaction fee is really critical to you. You want that transaction fee as low as possible, and can sacrifice a little on the discount rate.
No matter where your business falls in the spectrum of credit card processing scenarios, you should calculate a few typical monthly scenarios for your business to see what the total cost of any deal would add up to in a typical month. Sometimes just knowing how it affects your bottom line can help you negotiate a better deal with your sales agent.
Credit card transaction fees
Transaction fees are charged by the number of transactions you process. If you only process a few transactions each month, a higher transaction fee isn’t going to make much difference to you, but if you process a lot of transactions, the transaction fee starts to make a big difference.
Let’s look at three example scenarios. All three stores are making the same total credit card sales in a month ($10,000), but they each process a different number of transactions with a different average ticket.
Example merchant A: 10 transactions of $1,000 each.
The difference between a 25-cent and a 50-cent transaction fee isn’t really going to make much difference if you only process 10 transactions in a month with $1,000 average ticket:
- 10 x $0.25 = $2.50
- 10 x $0.50 = $5.00
- Difference = $2.50
Example merchant B: 1,000 transactions of $10.00 each.
But if you process 1,000 transactions each month with an average ticket of $10.00, the higher transaction fee would really eat into your profits:
- 1,000 x $0.25 = $250.00
- 1,000 x $0.50 = $500.00
- Difference = $250.00
Example merchant C: 200 transactions of $50.00 each.
Now let’s say you’re somewhere in between the other two scenarios. Say you have 200 transactions in a month with a $50 average ticket.
- 200 x $0.25 = $50.00
- 200 x $0.50 = $100.00
- Difference = $50.00
Discount rates on credit card transactions
Discount rates are charged as a percentage of total dollar volume, so the discount rate is going to be the same across all three examples.
Let’s compare two hypothetical merchant account offers: (these numbers are completely hypothetical and may or may not be anywhere close to the types of offers you may encounter for your business)
- Offer X has a 2.0% discount rate and a $0.50 transaction fee
- Offer Y has a 2.5% discount rate and a $0.25 transaction fee
Example merchant A: 10 transactions of $1,000 each
- Offer X: (10 x $0.50) + (2.0% x $10,000) = $205.00
- Offer Y: (10 x $0.25) + (2.5% x $10,000) = $252.00
- Offer X is better by $47.00
Example merchant B: 1,000 transactions of $10.00 each
- Offer X: (1,000 x $0.50) + (2.0% x $10,000) = $700.00
- Offer Y: (1,000 x $0.25) + (2.5% x $10,000) = $450.00
- Offer Y is better by $250.00
Example merchant C: 200 transactions of $50.00 each
- Offer X: (200 x $0.50) + (2.0% x $10,000) = $250.00
- Offer Y: (200 x $0.25) + (2.5% x $10,000) = $290.00
- Offer Y is better by $10.00
Notice for example merchant A who has a high average ticket amount, the higher transaction fee/lower discount rate wins out, but for example merchant B who has a low ticket amount, the lower transaction fee is critical. For example merchant C, the two offers are very close–and it may vary from month to month which one turn out to be better.
How much would these merchant account fees cost you?
It can really pay to know how many transactions you process each month (high and low) and what your average, low and high tickets are. The sales agent should run the numbers for you and show you a typical month’s fees for any proposed merchant account agreement. If not, have a calculator handy and run the numbers yourself. Don’t be afraid to do a little comparison shopping.
Why don’t you get started by getting a quote from ApprovedPayments? Apply now for a no-obligation quote.
