Why am I downgrading? – Part 3/3 – Case Studies

To finalize my 3 part post on downgrading, I will conclude with three case studies using different business models to show possible savings by using some of the methods described in part 2.

These business models should show a good monetary representation of the possible savings by using the previously described methods to help prevent downgrades. There will be some technical terminology and calculations, but following should not be extraordinarily difficult.

Case 1 – Reduced Rate Debit:
Business 1 is a small retail business. The average ticket size for business 1 is $30, and the monthly volume is ~ $6,000 / month. Business 1 is setup as a retail merchant at a 1.75% processing rate and a $.22 per transactions fee, without a discounted signature or pin debit system.

Base Monthly Fees for Business 1:
Total # of Transactions / Month:
(Monthly Volume / Avg Ticket) $6,000 / $30 = 200 Transactions

Total Monthly Processing Fees:
(Monthly Volume x Processing Percentage) $6,000 x 1.75% = $105.00

Total Fees for Transactions:
(# Of Transactions per Month x Transaction Fee) 200 x $.22 = $44.00
Total Monthly Processing Cost:
(Monthly Processing Fees + Total Transaction Fees) $105 + $44 = $149.00

Business 1 can setup a pin and signature debit program to reduce their fees.

Monthly Fees With Savings:
Assume that business 1 gets setup with both signature and pin debit. 50% of customers use a debit card, 40% of debit customers use a pinpad for pin debit.

Signature debit reduces business 1’s processing fee to 1.50% and pin debit has a flat $50 / transaction fee with no processing percentage.

Debit Transactions: 100 transactions per month, 40 of which are pin debit.

Total Monthly Processing Fees:
Credit – (Monthly Volume x Processing Percentage) $3,000 x 1.75% = $52.50
Debit – (Monthly Volume x Processing Percentage) $1,800 x 1.50% = $27.00

Total Fees for Transactions:
Credit – (# Of Transactions per Month x Transaction Fee) 100 x $.22 = $22.00
Debit – (# Of Transactions per Month x Transaction Fee) 60 x $.22 = $13.20
Pin Debit – (# Of Transactions per Month x Transaction Fee) 40 x $.50 = $20.00

Total Monthly Processing Cost:
(Monthly Processing Fees + Total Transaction Fees)
$52.50 + $27.00 + $22.00 + $13.20 + $20.00 = $134.70

Total Savings: $149.00 – $134.70 = $14.30 (~10% Savings)

Case 2 – Business to Business Merchant Account:
Business 2 is a retail business that sells mainly to business and corporate card holders. The average ticket size for business 2 is $500, with a monthly volume of $75,000. Business 2 caters to 70% business and corporate card holders, but is setup as a standard retail account with a processing rate of 1.69% and a transaction fee of $.19 per transaction.

Base Monthly Fees for Business 2:
Total # of Transactions / Month:
(Monthly Volume / Avg Ticket) $75,000 / 500 = 150

Total Monthly Processing Fees:
(Monthly Volume x Processing Percentage) $75,000 x 1.69% = $1267.50

Total Fees for Transactions:
(# Of Transactions per Month x Transaction Fee) 150 x $.19 = $28.50

Total Downgrade Charges:
70% downgrade at an additional 1.25% to the processing fee
(Monthly Volume x Percentage of Charges Downgrading x Downgrade Charge)
$75,000 x 70% x 1.25% = $656.25

Total Monthly Processing Cost:
(Monthly Processing Fees + Downgrade Fees + Total Transaction Fees)
$1267.50 + $656.25 + $38 = $1961.75

Business 2 is in need of a Business to Business merchant account to help avoid corporate and business card downgrades.

Monthly Fees With Savings:
Same 150 transactions per month

By setting up a business to business merchant account, business 2 reduces their downgrade percentage to 10% instead of 70%.

Total Downgrade Charges:
10% downgrade at an additional 1.25% to the processing fee
(Monthly Volume x Percentage of Charges Downgrading x Downgrade Charge)
$75,000 x 10% x 1.25% = $93.75

Total Monthly Processing Cost:
(Monthly Processing Fees + Downgrade Fees + Total Transaction Fees)
$1267.50 + $93.75 + $28.50 = $1389.75

Total Savings: $1961.00 – $1389.75 = $570.25 (~29% Savings)

Case 3 – Two Merchant Accounts:
Business 3 is a restaurant that accepts 50% of its orders over the phone. Due to the anticipated large volume of phone orders, business 3 is setup as a keyed account. The average ticket size for business 3 is $35, with a monthly volume of $70,000. Business 3 has a processing rate of 2.25% with a $.25 per transaction fee. Since the business is setup as keyed, all transactions are processing at the keyed rate.

Base Monthly Fees for Business 3:
Total # of Transactions / Month:
(Monthly Volume / Avg Ticket) $70,000 / $35 = 2000 Transactions

Total Monthly Processing Fees:
(Monthly Volume x Processing Percentage) $70,000 x 2.25% = $1575.00

Total Fees for Transactions:
(# Of Transactions per Month x Transaction Fee) 2000 x $.25 = $500.00

Total Monthly Processing Cost:
(Monthly Processing Fees + Total Transaction Fees) $1575 + $500 = $2075.00

Business 3 will benefit from having two merchant accounts. One account for keyed entry and one account for swiped entry. The new swiped entry account has a processing rate of 1.70% and a $.20 transactions fee.

Monthly Fees With Savings:
# of Transactions: 2000 total transactions, 1000 keyed and 1000 swiped

Total Processing Fees:
Monthly Volume = $35,000 keyed and $35,000 swiped
Keyed Account
(Monthly Volume x Processing Percentage) $35,000 x 2.25% = $787.50
Swiped Account
(Monthly Volume x Processing Percentage) $35,000 x 1.70% = $595.00

Total Transaction Fees:
Keyed (# Of Transactions per Month x Transaction Fee) 1000 x $.25 = $250.00
Swiped (# Of Transactions per Month x Transaction Fee) 1000 x $.20 = $200.00

Total Monthly Processing Cost:
(Monthly Processing Fees + Total Transaction Fees)
$787.50 + $595 + $250 + $250 = $1832.50

Total Savings: $2075.00 – $1832.50 = $242.50 (~10% Savings)

All three business models saved at least 10% with the business to business model saving almost 30%. There are going to be many more factors with an actual business, but this should be a decent representation of a reasonable savings.