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…

$253.00
payment plus $3 payment fee (if allowed)
times .0217
discount percentage
$5.49
Sub-total
+0.25
discount fee
$5.74
Total Transaction Cost
Change to Profit = $20 profit plus $3 pay fee minus $5.74 = $17.26 profit.

Change to Profit at Various Payment Numbers

# of Payments by Card
Cost to Accept
Revised Profit
Revised Combined
Ratio
0
$0.00
$20.00
98%
Down Pay
$5.74
$14.26
98.57%
+ 1 Month
$11.48
$8.52
98.15%
+ 2 Months
$17.22
$2.78
99.72%
All Pays
$22.96
$2.96
100.27%

 

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 use of Security & Delivery 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.

Contact us at 800-768-0907 to discuss accepting credit cards and benefits for your company.