One of the biggest driving forces of the retail and e-commerce sectors globally is undoubtedly installment sales. From electronics to furniture, white goods to clothing, consumers prefer to shop in installments to manage their personal cash flow. However, offering "installments at cash price" or managing the additional costs incurred in installment sales requires complex financial planning for businesses. The POS commission rates applied by banks for installment transactions are significantly different from cash (single payment) transactions. In this article, we will examine how installment sales increase POS commission costs and touch upon strategies to calculate and manage these costs.
Cash vs. Installment POS Commission Differences
When banks pay credit card collections to the business the next day (next-day payment model), they charge a certain commission to cover the funding cost. However, if a customer makes a payment in, for example, 6 installments, the bank will collect the payment from the customer in parts over several months, but will pay the entire amount (deducting the commission) to the business upfront (the next day).
This situation implies that the bank is effectively providing credit to the business. This time and financing cost undertaken by the bank increases proportionally as the number of installments increases, and this cost is reflected back to the business as a higher POS commission.
For instance, the next-day payment commission tariff of the same bank might look like this (Numbers are illustrative):
- Single Payment (Cash): 2.50%
- 3 Installments: 4.80%
- 6 Installments: 7.50%
- 9 Installments: 9.90%
- 12 Installments: 12.50%
How to Calculate Installment Transaction Commission?
Finding the cost of an installment sale to your business is no different from calculating a single payment. Only the commission rate you need to use changes. When calculating, you must also consider taxes and fixed fees if applicable.
Basic Formulas:
- Commission Amount = Gross Sales Amount × (Commission Rate of the Relevant Installment / 100)
- Tax Amount = Commission Amount × (Tax Rate / 100)
- Net Settlement = Gross Sales Amount - (Commission Amount + Tax Amount + Fixed Fee)
To instantly see the cost of different installment options to your business and the net amount you will receive, you can use our POS and Credit Card Commission Calculator.
Simulation for a $1,000 Product
Let's imagine you are a business selling furniture and you sell a sofa set worth $1,000. Assuming a fixed transaction fee of $0.50 and a tax rate of 5% on the commission, let's calculate the net settlement for different payment types:
Scenario A: Single Payment (Cash) - 2.50% Commission
- Commission: $1,000 × 2.50% = $25.00
- Tax: $25.00 × 5% = $1.25
- Fixed Fee: $0.50
- Total Deduction: $26.75
- Net Settlement: $973.25
Scenario B: 6 Installments - 7.50% Commission
- Commission: $1,000 × 7.50% = $75.00
- Tax: $75.00 × 5% = $3.75
- Fixed Fee: $0.50
- Total Deduction: $79.25
- Net Settlement: $920.75
As can be seen, when you sell the same product in 6 installments, the commission cost you pay to the bank increases from $26.75 to $79.25, and the cash you receive decreases by $52.50.
How to Set Up an "Installment at Cash Price" Strategy?
From a marketing perspective, offering installments without charging extra to the customer significantly boosts sales. However, if the business bears this financial burden alone, its profit margin will erode rapidly. Businesses typically establish a pricing strategy by embedding this cost into the base price of the product.
If your goal is to net $1,000 in your pocket from each sale, and you anticipate that you will mostly sell over 6 installments (Effective deduction rate 7.92%), you must determine the tag price of the product accordingly.
Pricing Formula:
Required Sales Price = Targeted Net Amount / (1 - Effective Deduction Rate)
Required Sales Price = 1,000 / (1 - 0.0792)
Required Sales Price = 1,000 / 0.9208 = $1,086.01
If you put the product on sale for $1,086.01 and advertise "6 Installments at Cash Price", exactly $1,000 will remain in your hand after a total deduction of 7.92% is made from the 6-installment transaction. If the customer wishes to pay in cash or single payment, you can maximize your collection by offering a discount off the $1,086.01 price. Establishing this strategy by testing different scenarios in our POS and Credit Card Commission Calculator will be much safer.
Legal Installment Limits and Consumer Behavior
Another critical point to consider when calculating installment sales is legal regulations. Financial regulatory bodies in various countries limit the maximum number of installments for different sectors to control consumer debt.
- For example, there may be specific installment limits on electronics (like televisions) or white goods, while installment options on credit cards for mobile phone purchases might be completely restricted for amounts exceeding a certain threshold.
- Installment limits in the furniture sector might be more flexible.
- Commercial credit cards are generally exempt from the restrictions applied to individual consumer cards, allowing for longer-term installment plans.
These restrictions affect consumer purchasing power and, consequently, your average basket size. When deciding which installment options to offer, you must balance the current legal limits with the installment commission costs charged by your bank.
Conclusion
Although installment sales are one of the most effective ways to increase trade volume, they can silently erode a business's capital if an accurate cost analysis is not performed. To bridge the massive commission gap between cash and installment transactions, it is imperative that you integrate this financing cost (Markup) into your business's product pricing from the very beginning.
To avoid getting lost amidst complex percentage calculations and tax deductions, secure your net settlement amounts by utilizing our POS and Credit Card Commission Calculator before making campaign or pricing decisions. Remember, knowing exactly how much of your revenue actually stays in your register is just as vital as generating that revenue in the first place for your business's long-term sustainability.
