Credit Card Processing Basis Points — What Are They?

Every industry has its jargon, and credit card processing is no different. You are probably familiar with more-common terms just from bumping elbows with folks in the industry. These include Interchange, EIRF, downgrade and tiered. However, there are others that are used less frequently and are purposefully deceptive, such as settlement funding, padded dues and assessments, breach coverage security, etc.

We wanted to cover a term that anyone who is accepting, or thinking of accepting, credit cards should be familiar with: basis points.

What Is a Basis Point?

A basis point, bip or bp is 1 percent of 1 percent (i.e., 0.0001). In credit card processing, it is most commonly referenced in regard to rates. So, a rate of 0.75% is the same as 75 basis points.

Are Basis Points Important?

Of course basis points are important, but basis points are only one piece of an equation that can get quite complicated. Many companies in the credit card processing industry rely on dialogue that attempts to fixate customer attention on the number of basis points offered. Naturally, most business owners will hear these incredibly low numbers (5, 10, 25, etc.) and assume they are getting the best pricing available.

When you hear of a rate like this, you should always ask yourself, “What’s the catch?”

After a little digging, you may find that the low advertised rate comes with quite a few tacked-on fees. For example, let’s consider a veterinary clinic that’s processing $35,000 each month with an average transaction value of $100.

Provider A offers a wholesale pricing plan with a rate of 0.75% and no additional, unethical fees. With Provider A, the clinic would pay $3,150 a year in non-Interchange fees.

Now consider Provider B, which offers a lower rate of 0.50% but with a number of fees:

• $0.15 per transaction fee
• $25 monthly fee
• $99.95 annual administration fee
• $59.70 semiannual breach coverage security fee
• $28.80 quarterly PCI fee
• $5 transaction express monthly fee

The same veterinary practice would pay $3,424.55 a year in non-Interchange fees.

In this example, even though Provider B’s rate is 33 percent lower than Provider A’s, Provider B’s customers would pay nearly 10 percent more annually in credit card processing fees. This is why we recommend evaluating providers based on the effective rate, not just the basis points offered.

If you’re in the process of evaluating new Merchant Service Providers, ask for a sample billing statement so you can view the fees charged on top of the Interchange, or wholesale, costs to process credit cards.

Do you have additional credit card processing questions? Ask them in the comments section below or visit our Questions and Answers category.