Within the last year I’ve had to shop for a new processing home. In doing so I ran into a lot of half-truths that are being sold to MLS’s today. Now I’m not calling anyone liars or bad people, because after all the details are always in the agreement that comes over or the unanswered questions that come up after the fact as “misunderstandings”. After all, it’s your responsibility as the consumer to do your homework. What is it they say about customers “let the buyer beware”? Well it’s your chosen occupation so you best take the time to learn how it works so you can understand the deal you’re getting. I truly believe there are no bad deals so long as you understand the deal you’re getting.
For example let’s start with the split % that you will be
receiving. What’s better, a 40% split or a 70% split? You’re
thinking is this a trick question? Well the answer is you don’t have enough information to decide. There are three critical questions that must be answered that are purely mathematical. What are you splitting, how is it calculated and how will it change in the future.
First, what exactly are you splitting? Would you rather own half of Microsoft or all of my company? As highly as I think about my company I’m quite sure 2% of Microsoft is far more valuable. So look closely at your processor’s schedule A or cost sheet(s). What are
the costs that you have and are they passed along to the merchant?
For example, one thing I noticed when shopping around is that just about everyone said their split was off interchange, which is the same for everyone. However, I’d get the contract and see they would
have a .05 bps (five basis point) “risk” or “bin fee”. Many of you
are probaly thinking that .05 bps isn’t a lot, so let’s do the math.
Like everything else in life this brings up several more questions.
How and when do they take the assessment? Is it .05 bps added to all
interchange levels? Is it .05 bps off the total deal profitability?
Is it calculated on net, gross or gross plus return processing volume? All of these will effect what you get in the end and it’s hardly standardized between processors and ISO’s. So in a simple example let’s say the risk fee comes out of total deal profit and the average profit per deal is 40 bps. That’s how much the deal makes after all the cost fees and interchange has been assessed. So there’s $4 of profit for each $1000 processed and your processor is taking .05 basis points out before they split with you. So $0.50 is coming out leaving $3.50 to be split 60/40. That’s $2.10 that you’d receive. Or wait, someone could offer you a 55% split with no .05 bps fee and you’d get $2.20. Now let’s make believe that the processor with the .05 bps fee has a batch header or ACH fee, their statement fee is $2-$3 higher, the transaction fee is .02 cents higher and they charge you .02 bps for monthly discount. Now you only have .30 bps in the same deal. So the new total profit is $3.00 less your .05 bps at $0.50 leaving $2.50 to be split 60/40 and you get a whopping $1.50. Now wait, with slightly lower costs and no risk / BIN fee you’d make $2.00 at a 50/50 split and your 60% is really on 37.5% when compared to the other deal. Well we may have just figured out where “free equipment” and upfront bonuses come
from? Not that I’m knocking free terminals or upfront bonuses.
Those are personal choices so long as you know the deal you’re getting and using other aspects of those deals to drive more money to
your bottom line. Myself, I’ve always opted for the more profitable
processing deal and increased my residual over time. I’ve also always been able to give away a free terminal when necessary by using increased residuals, with my company maintaining ownership and depreciation of that terminal asset.
Next, I want to talk about the way people express “overrides”. This is a good example of how something is phrased and how it’s calculated can make a HUGE difference. I’ve heard so many people say if you refer someone to us we’ll pay you a 10% override. So let’s go back to our previous example. You refer a new MLS and their average total profit per $1000 processed is $4.00 you should receive 10% or $0.40, right? No way, many times override is calculated on the MLS’s earnings. So let’s say they’re on a 50/50 split you’d get 10% of $2.00 or $0.20. Half what you thought. Now let’s say it’s 10% of the worst program in the example. You’d get 10% of $1.50 or only $.
0.15.
Now I know when you look at these examples many say it’s only .50 cents or $5. But you need to look at the percentages to compare. On the override you’re being paid 50% less than you thought at the $2 level and there’s a 25% difference between the greater or lesser deal. How would you like your pay to go up or down 25%? The other processing examples above have differences of 10 to 25% in what you’d get paid. On bigger numbers these little differences are HUGE. For example earning $10,000.00 a month
in residual the smaller difference would be $2500.00 per month.
That’s a whopping $30,000.00 per year or 100 free terminals that you bought, gave away and now still own yourself. I know it’s confusing and complex. It’s worth taking the time to learn what I’m talking about here or you can end up like the merchant that says “the rep told me that I only had one rate and that I could quit my lease anytime I wanted”.
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