- 1). Examine the most recent three months' credit card activity statements for one merchant. Record the total volume in dollars and numbers of transactions for each month. Unless this is a seasonal merchant -- with high volume during one or more seasons, and much lower volume during others -- add the three months' data and divide the result by three to see an average month's results.
- 2). Record the volume in the "major" credit card categories, which include card present, card not present, mail order, telephone order -- or MOTO -- and e-commerce. Although VISA and MasterCard have hundreds of buy rates -- or charges -- many card processors attempt to keep their charges and categories as simple as possible. Even if they report multiple categories, create three separate dollar and transaction totals for simplicity.
- 3). Write down the "buy rates" charged by the processor and the rates the merchant is paying. Merchant rates are the "price" you quoted the merchant. For example, for card present -- or in person -- swiped transactions, the processor is charging 1.75 percent and 10 cents per transaction. For similar transactions, you charge the merchant 2.25 percent and 20 cents per transaction. Calculate the difference between the buy and merchant rates. In this case, the merchant is paying .5 percent and 10 cents per transaction more than the buy -- or wholesale -- rate. This is the gross profit and potential residual amount for each dollar and transaction during the month.
- 4). Calculate the average gross "spread" -- the difference between buy and merchant rate -- by multiplying the dollar volumes times the appropriate category profit margins for the three months. Divide the result by three to learn the average gross profit each month. Adjust the figures when analyzing a seasonal merchant, be it on or off season. For example, you sold a merchant at a rate of 2.5 percent and your processor is charging you 2 percent. The gross spread is .5 percent. However, this merchant is seasonal, with volume of around $15,000 per month for six months, but only around $5,000 per month the rest of the year. The credit card residuals will be around 67 percent higher during on season.
- 5). Multiply the three separate dollar and transaction averages by the gross spread -- the difference between buy and merchant rates -- to estimate the residual income to be paid by the credit card processor. Create three separate analyses or reduce the estimates to one if you are using average profit margins. The result is the expected monthly residual income from this merchant. Duplicate this analysis for each merchant in the portfolio to estimate gross monthly income for future months.
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