To understand what a “monthly minimum” is you must first understand why a monthly minimum exists. Once you grasp why it exists it becomes much easier to understand.
Every time you process a credit card payment gateway transaction a small percentage of that transaction is retained by your credit card processor as their service fee for processing the transaction. This is called the discount rate. The discount rate fee is how a credit card processor generates income in exchange for the processing service that they provide. With the understanding that a credit card processor generates a tiny bit of income each time they process a transaction, you will now understand that if a merchant does not process any transactions, then the processor will not generate any revenue from that merchant. This is why the monthly minimum exists – to cover costs on inactive or dormant accounts. It is only charged when merchants are inactive and do not process transactions. With this description in mind, we can now better explain what a monthly minimum is through an example:
Example: A merchant has a monthly minimum fee of $10. In plain English, this means that the processor expects this merchant to pay at least $10 in discount rate charges during the month. For the purpose of this example we will pretend the merchant has a discount rate of 2%.
– During the entire month the merchant does not process any transactions at all.
If this were to happen the merchant would be billed a monthly minimum fee of $10 because they did not process any transactions at all during the month.
– The merchant processes a single $100 sale during the month.
In this example the merchant processes $100 in total sales during the month:
$100 (monthly sales) x 2% (discount rate) = $2 total discount rate fees paid during the month.
The merchant has paid a total of $2 worth of discount rate fees during the month. The monthly minimum was $10, which they didn’t satisfy. We then subtract the discount rate fees that they did pay from the monthly minimum:
$10 (monthly minimum) – $2 (discount rate fees paid during the month) = $8 unpaid minimum.
So in this example the monthly minimum payment gateway fee would have been $8. Remember all of the discount rate fees that are paid during the month count fully towards the monthly minimum.
– The merchant processes $1,000 in sales during the month.
In this example the merchant would have paid $20 in discount rate charges. (2% of $1,000 = $20). Because they have already paid $20 in discount rate charges during the month they have suprassed their monthly minimum, so absolutely no monthly minimum fee is charged.