Effect on Profits

The math for the effect on profits of card transaction cost is pretty interesting. I hope I can present it here in a clear and valuable way.

This baseline example is using these inputs...

• Card Discount Fee = 2.17% of the payment plus 25 cents per transaction. This has been a good rate in the past. You can substitute your own actual rates in the formula. Don't forget the flat per transaction fee many agreements include.
• A six month policy for $1,000.
• You have a Combined Ratio of 98% - very good.
• You expect a profit of $20.
• You offer a 4 payment plan and you get a $3.00 payment fee for each payment after the down payment.

If your insured just pays the down payment with her card, here is what happens…

Change to Profit = $20 profit minus $5.68 = $14.32 profit.

If your insured pays only one monthly payment with her card, you are a little better off due to the $3.00 payment fee…

Change to Profit = $20 profit plus $3 pay fee minus $5.74 = $17.26 profit.

Change to Profit at Various Payment Numbers

Worst Case

• Paying the fees yourself leads to a change in your combined ratio from 98% to 99.39.
• On $1 million in premium the profit went from $20,000 to $6,100.

If you write 12%* less premium because of the fee and all else is equal…
(*this is the percentage decline in usage in the Federal Reserve Study on the Payment Trends page)

• New written premium is $880,000 with a profit of $17,600.
• The written premium would have to drop to $305,000 to equal the profit drop from the transaction cost of card payments.

The use of Convenience Fees is the only way to accept card payments and legally avoid this impact on profits. To discuss this further please call me - Duke Williams - at 800-768-0907.