14 Mar What is redemption and what should you be aware of?
What is redemption and what should you be aware of?
When you as a restaurant choose your payment solution, you must also have linked a redemption agreement. Redemption can for many restaurateurs be a jungle to find head and tail in, but here we will try to make it a little more palatable.
What is a redemption agreement?
A redemption agreement is an agreement between your business and a redeemer, such as Nets, Bambora or Swedbank. The redeemer’s task is to redeem the transactions that your business receives with various payment cards. In other words, this means that the payer ensures that the money is moved from the guest’s bank account to your restaurant’s bank account. The acquirer therefore also makes sure to check whether there is coverage on the payment card that the guest uses, so that your money is secured.
What types of redemption agreements are there?
There are generally two types of redemption agreements; one to redeem transactions made in your physical store and one to redeem transactions made online. The former must be provided by the vast majority of restaurants, while the latter is only necessary if you want to sell take away, sell gift cards online or use a self-order solution via QR code and digital menu.
What costs are involved in a redemption agreement?
The prices for a redemption agreement differ from redeemer to redeemer, and here it is good to be aware of the total costs for the agreement. The total costs can be split into 4 parts:
- Creation of redemption agreement – a lump sum
- Subscription – a fixed monthly amount
- Transaction tax – a fixed amount per transaction
- Percentage transaction fee – a fixed percentage per transaction
Here, it is especially the size of the percentage transaction tax that you must pay attention to when choosing a redemption agreement, as this is where you can really save money by choosing the right one. Below we have put together a table so you can see what an average difference of 0.5% in the transaction fee percentage means. The example here is based on the simplest setup in a restaurant with one cash terminal and a turnover of a modest DKK 300,000 per month.
Expected turnover with payment card
DKK 300,000
Percentage transaction cost
1.80%
Monthly cost
DKK 5.400
Expected turnover with payment card
DKK 300,000
Percentage transaction cost
1,30%
Monthly cost
DKK 3.900
Expected turnover with payment card
DKK 300,000
Percentage transaction cost
0,80%
Monthly cost
DKK 2.400
This means that DKK 1,500 per month can be saved even with the simplest setup and a very modest turnover. If you have a higher turnover, there is of course even more money to save. Therefore, there is good reason to be aware of how high the percentage transaction fee is, as it can quickly become somewhat more expensive compared to paying a higher monthly fee for the POS subscription and a higher one-off price – and then correspondingly having a low redemption fee.
Different redemption prices for different payment cards
The size of the transaction fees varies – in addition to between acquirers – also between card types. For example, there is a difference in what it costs to redeem transactions made with Dankort compared to transactions made with a foreign card such as Visa, Mastercard, Diners Club and American Express. Basically, a redemption agreement on Dankort is the cheapest solution and a redemption agreement on foreign cards the most expensive. If you want the option of taking payment via MobilePay, this can also be done, but you must have a separate redemption agreement.
How do I obtain a redemption agreement?
There are three ways in which you can acquire a redemption agreement. Here, however, there are some very specific areas where you must pay attention, which we will review here. There are different options depending on which POS supplier you choose, as they make money in different ways.
Forced redemption agreement
The first way you can acquire a redemption agreement is by choosing a POS vendor that has a set redemption agreement that you must choose, if you wish to be a customer. This solution typically includes a relatively expensive redemption price for your transactions, but conversely there are typically low costs for both software and hardware, and it is therefore a trade-off you have to make.
Our experience, however, is that this model is basically beneficial for smaller and especially newly started restaurants that are unsure of the size of the turnover or do not want too high establishment costs. However, it can be an expensive solution if you choose this model, as higher transaction fees will be charged per transaction than if you negotiated a redemption agreement yourself directly with a redeemer.
Acquisition of redemption agreement on your own
If you choose a POS supplier that does not have a defined redemption agreement, you have the option of obtaining a redemption agreement yourself directly from the redeemer. Here you can save a lot of money, as you do not pay an inexpediently extra fee for the mediation of a redemption agreement, which you have to choose. However, it may well seem like an unmanageable process for many restaurateurs, which is why there is also a third way in which you can acquire your redemption agreement.
Optional redemption agreement via POS supplier
Some POS vendors offer their own optional redemption agreements where no extra fee is charged for the arrangement of the agreement. The advantage of choosing a POS supplier with its own optional redemption agreement is, of course, that you don’t have to familiarize yourself further with the matter yourself and safely leave it to the POS supplier. In some cases, the POS supplier also has an agreement with one or two redeemers, where the price of the redemption is cheaper than the agreement you can procure yourself. However, in rare cases it may happen that the POS provider does not have an agreement with its acquirer that deals with all the card types you want to be able to accept.
With this solution, there will typically be higher costs associated with the purchase of hardware and the use of software than with the first-mentioned method, but conversely some lower transaction fees can be achieved, which ultimately makes it a better solution.
Forced redemption agreement
Benefits:
- POS provider handles it all
- Low establishment costs
Disadvantages:
- High transaction fees
- You may risk that redemption is not offered for all desired card types
Own redemption agreement
Benefits:
- Low transaction fees
Disadvantages:
- You have to do all the work yourself
Optional redemption agreement
Benefits:
- POS provider handles it all
- Low transaction fees
Disadvantages:
- Higher establishment costs
- You may risk that redemption is not offered for all desired card types
Our recommendation
If you do not choose a POS provider that has a forced redemption agreement, our recommendation is that you first find out which payment card types you expect to receive and how much volume you expect for each card type. You can then – if you wish to procure an agreement yourself – obtain offers from the purchasers who meet your needs. Finally, the total costs can be compared and the best solution can be chosen.
However, we always recommend that you also ask your POS supplier about what options they have for arranging a good redemption agreement. In this way, you are always guaranteed the best possible agreement for you and your restaurant. Finally, it is recommended that you review once a year whether you have the optimal redemption agreement, or whether you need to renegotiate or change the redeemer.