Cash Discounting Residuals – The Most Important Variable

Cash discounting has caused some confusion for merchant services reps who are used to interchange plus pricing.  Understanding the effect of the average ticket size is a MUST.  In this episode I’ll try to clear the confusion and explain the process.  Let me help you maximize your cash discounting residuals.

To gain the proper insight, we need to reclassify cash discounting as flat rate pricing.  Sales reps are not affected by the discount offered for cash payment.  Rather, we care about the service fee collected when consumers don’t use cash.  Cash discounting is basically flat rate pricing, and that is very different from interchange plus pricing.  It can be a lot more profitable, but it can also be less profitable.

Interchange plus pricing is passing the cost of interchange and other fees to the merchant and adding mark-up.  Therefore, the sales person’s profit is always the same, regardless of the size of a transaction.  The profit is always a percentage of volume.

Flat rate pricing involves regulated interchange cost of $0.22 plus five basis points.  The “sweet spot” for flat rate pricing is usually between $25 to $75 average ticket size.  That’s where costs are the lowest.  After adding other fees such as processor fees to the fixed $0.22, the rate will be about $0.30 or $0.32.  That amount is only 1% on a transaction of $30.  If you’re collecting a service fee of 3%, you probably have about 180 basis points of mark-up, which means you’re making a lot of money.

Understand there are two edges which you should consider.  There is the very low average ticket size merchant and the higher than average ticket size.

#1.  Low average ticket size.  Suppose a merchant has an average ticket size of $10.  Suddenly that $0.32 becomes 3.2%.  If your service fee is 3% but the cost of servicing that transaction is 3.2%, your residuals are negative 20 basis points.  You are losing money.  Your profits get lower and lower and lower with the size of the transaction.  A five-dollar transaction which has a $0.32 cost translates to 6.4% cost!  This means if you’re collecting 4% (3.99%), you’re still way under water with that deal.  Consider your strategy carefully.  To charge $0.59 per transaction might be better than 3.99% flat rate service fee.

#2.  Larger than average ticket size.  You may be surprised that merchants who have an average transaction size of $150 are accepting many reward or corporate reward cards.  Such cards have a 2.5% interchange cost.  Therefore, you’ll have a huge cost but are only charging a 3% service fee.  You won’t make any money.

In summary, consider using a per item fee for small ticket size businesses.  And raise your percentage a bit to cover rewards cards for larger ticket size businesses.

 I hope these tips will help you maximize your cash discounting residuals.  If you’ve been helped, please let me know in the comments section and share this with your social media connections.

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