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Do You Understand Your Cost Structure / Schedule A? – Commission Traps Part 4

When you sell merchant services, you should receive a "Schedule A" which outlines your cost structure. This is a very important document, and understanding it is the key to generating a profitable portfolio of merchant accounts. Here are three important tips to help you understand your cost structure.

One thing that turns sales professionals off from our industry is the complexity of the residual compensation, but hopefully this article will help you gain a better undersstanding. Not understanding your cost structure can kill your credit card processing career for 3 reasons:

#1 – If it is too high, you cannot make large, profitable sales because you are not competitive.

#2 – If it changes frequently, your clients will get discusted and cancel.

#3 – If it is inflated and you are providing competitive pricing, your residual per account will be very low. As we have gone through the commission traps in this industry, we have covered some basic concepts and some that are more advanced. Today’s topic is certainly much more advanced and you may even need to do a little research to understand this article if you are new to the industry but trust me, your time spent in research will be worth it!

Let’s start by identifying a key term, “Schedule A.” If you don’t have a Schedule A, you absolutely must get one! Do not make another sale for your processor until they provide you with a “Schedule A.” This is the document that lists all of your costs and determines the profitability of each account. I will dive a little deeper into what this means below. When you make a sale, you charge your client certain fees, which generate revenue. So, a small business owner, might pay $400 in total fees, in order to process $10,000 worth of credit card transactions. Some of this $400 is “cost” and some is “Profit.” Your residual will be based on the “Profit” portion of the fees collected. The “Schedule A” is a list of costs, so if your cost structure is higher, your profits will be lower or you will have to charge higher rates to generate the same profit.

  #2 – Inflated or Changing Cost Structure.
  • Passthrough Costs – Interchange Fees, Dues and Assessments and NABU (Network Access Brand Usage). Let me try to simplify this as much as possible for you. Banks issue check and credit cards. Brands like Visa and Mastercard tie multiple “issuing banks” together. The banks charge “Interchange Fees” and the Brands charge fees to access their network. A portion of the fees your client pays go to cover these costs. On most “Schedule A” documents, they have something at the top that says, “Interchange Passthrough and Dues and Assessments Passthrough” this means that every month, when your processor collects fees from your client, they first pay the interchange fees and card brand fees and then pass these costs through to you at face value. Some people in the industry call this “True Interchange Passthrough” It gets this name because sadly, there are lots of “Untrue Interchange Passthrough” meaning the processor inflates these basic costs. If you find you are dealing with such a processor, my advice is to make a move. This is a highly complex topic that I have tried to simplify into one paragraph so I will write more on this later because it deserves an entire post.

*Side Note: The range for the brand access or “Dues and Assessments” should be somewhere in the range of $0.025 to $0.04 and 11 to 15 basis points. This would represent true cost pass through at the time of this blog post. This range, together with a true residual pass through is a good start to a competitive Schedule A.

  • Auth and Capture – These two fees represent what most people consider the most important part of the cost structure and indeed they are very important. On some Schedule A’s these two will be split up and on others they will be combined. Basically, this is the cost of the transaction fee. So, if you have an “Auth and Capture” cost of $0.05 and you sell a merchant with a $0.10 transaction fee, you will generate $0.05 of total profit on each transaction, just from the transaction fee. Be careful here!!! You need to also understand the NABU Per Item Fees being charged as this does vary from one processor to the next. Just because someone has a low auth and capture, check their NABU and their “Dues and Assessments.” The Dues and Assessments are not able to be “marked up” so you can’t generate any profits from it, but remember that on the cost analysis, this does come into play, so a lower brand access or assessments will show greater savings for your merchant without taking away anything from your profits and if they are low, it allows you to charge a higher transaction fee while still offering savings. Again, this really warrants an entire post of its own but just keep this in mind when comparing schedule A’s.

*Put a dollar value on the effect of this portion of the cost structure to rank it’s importance. Most merchants do 100 to 300 transactions, so if you are comparing a processor with a $0.06 auth and capture to one with a $0.04 auth and capture, that represents a real dollar difference on each account of $2.00 to $6.00 so this is not make or break. You need to look at the other required fees and costs as well, not just the auth and capture. In our industry, sales people have started thinking of the “Auth and Capture” as the only number that matters on the Schedule A and that is just not the case, based on the dollar values. *Many processors offer volume discounts on the auth and capture cost, so for instance if your merchant processes $20,000+ in volume, the cost structure per transactions may go down a penny or two for that particular merchant to help you be more competitive in your pricing on these larger accounts.

  • Fixed costs. The last item you need to check on the Schedule A is the fixed costs. There are two very important things to understand here. First of all, are they required or not? In other words, they may have a Schedule A cost for an annual fee of $5.00. Does this mean that you will have an annual fee cost of $5.00 every year regardless of whether or not you charge the client an annual fee or that it is optional and if you charge it, the processor takes $5.00 before sharing in the profits? Same with the monthly fees, are they required or not?  So, if you sign up a merchant for pin debit which will become much more popular with EMV, and you give them a pin pad, you charge say $10.00 per month. With most processors you would only generate a very small profit after cost. This is an optional fee, so if you charge a debit access fee, this cost applies, if you don’t, then it doesn’t apply. How important this is, depends on how much you sell pin debit.
Make it a great day!
James Shepherd

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