How to Calculate Your Credit Card Processing Effective Rate

How to Calculate Your Credit Card Processing Effective Rate

When a business is considering taking credit card payments, there are several questions that should be answered before they select a partner, including the following:

  • “What are the terms of the contract?”
  • “What equipment am I receiving?”
  • “What level of support will I get?”
  • “What are the risks involved?”

However, there’s another question that most businesses tend to fixate on:

“What is the cost?”

The answer to this particular question can get quite convoluted. When you say “cost,” are you referring to the cost on your current Interchange-plus pricing plan of a downgraded over-the-phone transaction on an American Express card that was issued in a foreign country? Or possibly a keyed-in debit transaction where the owner couldn’t remember her billing address and your tiered plan dropped it from rate 1 to rate 4? Or maybe a chipped business rewards card that you swiped because your Bluetooth EMV reader wouldn’t connect to your POS?

See how it can get confusing?

What if we told you that there was a question that you could ask — and better yet, answer — to circumvent these confusing scenarios? The good news is that we can share not only that question but also why it’s important and can teach you how to calculate the answer on your own.

“What is my effective rate?”

The importance of your effective rate cannot be overstated. You may have been promised a certain number of basis points, no monthly fees, no per transaction fees, etc. But if you do some research, you’ll find that the merchant services industry is rampant with borderline-fraudulent billing techniques designed to squeeze as much profit as possible from your processing.

The only way to measure what you are truly paying is to calculate your effective rate. Any proposal you receive from a sales rep should include this figure. If it doesn’t, simply ask. You may get responses like “I can’t determine your effective rate without your card breakdown” or “You haven't decided if you want Interchange-plus or Tiered pricing yet.” If this happens, ask for an estimate.

If a sales rep won’t give you an estimate, one of two things are probably taking place.

  1. The provider doesn’t work with many businesses that match your business type and, therefore, probably won’t be able to give you the service you deserve.
  2. The provider is looking to add additional, unethical fees to their plan and sharing an effective rate would bring this to light.

If you’re already processing credit card payments, then calculating your effective rate is simple. Grab a recent merchant statement, take your total fees and divide them by your total processing volume.

Depending on the results, you may be asking a whole new range of questions.

  • “Where can I find my total fees?”
  • “Why are there multiple numbers that could be my total processing volume?”
  • “Where are my merchant statements?”

Luckily, there are companies that are happy to help you calculate — and potentially lower — your effective rate. Tack on a month-to-month contract, free state-of-the-art equipment, industry-leading support and the technology to lower your risk — these are all the characteristics we recommend looking for in a provider you can trust.

Need help calculating your effective rate?

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Have further questions about your credit card processing rates? We’re here to help! Ask them in the comments section below.

About Casey Russell

Casey Russell is a risk analyst for PayJunction. He analyzes merchant statements to detect unethical billing and savings.

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