The Processing METHOD
Can be More Important Than
The Discount Rate

The method used by the Acquirer to calculate a Merchant's discount fee can be more important than the discount rate itself. This is yet another example of how Merchants shortchange themselves by tunnel-visioning only on the 'discount rate' and ignoring everything else.

There are two common computation methods used by credit card Acquirers:

Gross Processing: The discount percentage is calculated on the total gross amount of sales. In other words, refunds and returns are NOT backed out. If a Merchant does $10,000 in gross sales, then transacts $2000 in refunds which results in NET sales of $8000, the Merchant still pays the full discount percentage on the $10,000 gross amount.

Net Processing: The Merchant pays full discount rate on the NET amount of his sales. In other words, refunds and returns are backed out before the discount fee is computed. The Merchant in the example above would pay his discount percentage on net sales of $8000, not the gross figure of $10,000.

Why is this important?

Acquirers justifiably charge a slightly higher discount rate to upgrade to Net from the Gross method of computing discount fees. For any business with a significant amount of return/refund business, the upcharge may be well worth it. Let's do the math, using the examples from the Gross and Net computation scenarios above:

• Merchant "A" does $10,000 in gross volume. He transacts $2000 in refunds, so his NET sales amount is $8000. His discount rate is 1.69% GROSS processing. So his cost of transacting these sales is $169.00 ($10,000 X 1.69%)
• Merchant "B" also does $10,000 in gross volume and also does $2000 in refunds. His discount rate is a little higher at 1.74%, but his Acquirer uses the NET processing method. So his cost of transacting these sales is only $139.20 ($8000 X 1.74%).

CONCLUSION: Merchant "B" has a higher discount rate than Merchant "A", but his cost of processing the very same sales was $29.80 less because his fee was computed NET instead of GROSS.

See what we mean? If you selected your credit card Acquirer solely because they offered the lowest discount rate with no consideration of computation method, you might well want to re-think that decision.

Which computation method is best for YOUR business?

Examples of business types that should consider net processing:

• Apparal
• Giftware
• Shoes
• Bedding and housewares
• Any business that does a signicant number of refunds and returns

Bear in mind that not all business will qualify for the Net method. Determining factors may include:

• Your business type.
• Your business and/or personal credit history
• Your business chargeback history
• Age of your business--Net Processing is usually not available for start-ups

In addition to HOW the discount is computed which we covered above, the savvy Merchant should also understand the difference between methods of WHEN his discount fee is computed and paid. There are two very different methods for this:

• Daily Discounting: The fees a Merchant owes on any given transmitted daily batch is deducted immediately from the amount that is deposited into the Merchant's bank account. For example, if a Merchant batch total $300 and his discount rate is 2%, the 2% of $300 ($6) will be deducted immediately from the bank deposit--the Merchant will only see a deposit for $294.00. Note that additional fees due on the transactions such as Interchange downgrade surcharges and others may not be included in this daily debit and may be deducted from the Merchant's funds at a later date in an additional ACH debit from the Merchant bank account.
• Monthly Discounting The Merchant receives the entire amount of his daily batch into his bank account. All accrued fees are deducted one time per month,usually at the end of the statement period. In the example above, the Merchant would see the full $300 batch amount deposited into his bank account.

Why Is This Important?

In the first place, if a Merchant is paying a CPA by the hour to do his books, Monthly discounting makes for a far easier and therefore faster process, thus saving the Merchant many hours worth of accountant fees.

Secondly, cash flow is a consideration. Many Merchants operate on lines of credit for their day-to-day operations, against which they accrue and pay interest fees. A Merchant on Daily Discounting has to wait weeks for his money, during which time he's is paying interest (and losing out on discount invoices) if he needs his money now. This Merchant would benefit from Monthly discounting (assuming he qualifies for it) because he would get hiw money faster instead of having to borrow and pay interest on operating funds.

Note that not all Merchants will qualify for Monthly discounting; particularly start-up businesses.






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