Knowing Your Effective Rate For Credit Card Processing Is The Best Way To Not Overpay For Merchant Services

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There ’ s a crawl cost that can become unmanageable if you ’ re not mindful : the price of your requital action. To keep requital serve expenses pruned to the minimal, one of the first things that we do is calculate the effective rate. Once we find the effective rate, we can determine what costs may need to be weeded out, and which are necessary for business emergence .

What Is An effective Rate Anyway ?

The effective pace is the total processing fees divided by total sales volume on your credit card process statement. It ’ s normally expressed in the form of a share, and it ’ s is one of the quickest ways to uncover if you ’ ra paying excessively much for your merchant report.

Understanding Credit Card Processing Costs

Because your effective rate is the sum cost including all markups and other fees that you ’ ll incur if you swipe, dip, or tap, it ’ second significant to establish a baseline. No matter who your credit tease processor is, you ’ ll meet one type of cost no matter what : the interchange rate. Interchange rates represent the wholesale accredit card processing monetary value of any transaction .
Every individual credit or debit card transaction has a specific wholesale price and it varies depending on how it ’ s processed in ( for example, eCommerce vs. retail ), and the type of calling card that is used ( for example, basic, rewards, business ). so when you look at work costs, keep in heed that every individual transaction has a unlike wholesale price or interchange rate associated on the back end. It ’ second true that you might not always see this deviation on the movement end ( e.g. if you have flat-rate pricing ), but these costs are ceaseless on the back end of things no matter what .
Your effective rate is a combination of this interchange tip plus your processor ’ second markup, and any other fees that could balloon your costs .
For a commodity overview and crash run in terms, check out our complete Guide To Credit Card Processing Rates And Fees. For now, let ’ s keep going down the path of finding our effective rate .

How To Find The effective Rate For Your Processor

To find the effective rate for your credit circuit board process, you first need to round up all of the fees on your statement and add them up. We ’ ll use the pursuit statement as an example :
calculating-effective-rate-statement
In the example above, we ’ ve highlighted the total sales volume in fleeceable, and the entire fees in red .
therefore, what is the effective rate for this statement ? If you figured out 5.99 or 6 % ( rounded ) you would be right. To find the effective rate, you divide the total sales by the sum fees :

$5907.03 / $98511.45 = .0599 or 5.99% .
sol now we know that we are a hair under 6 % for our effective rate. But what does this 6 % mean in the context of requital processing ? Is it excessively high, or is it just right ?
To determine that, we need to figure out how much the merchant should be paying. We need to know if 6 % is industry standard, or if it ’ south much higher .

What Is A Good Effective Rate For Credit Card Processing?

by and large speaking, a good effective rate for credit card action is around 3-4 % — I parcel that figure to give you a starting compass for the “ red-flag area. ” immediately that being said, there besides may be some legitimate reasons your rate inches beyond that .
here are a few things to consider when you look at your effective rate for credit poster process. By going the checklist of questions below, you can identify any likely areas of concern :

  • Are you considered high risk?  High-risk merchants can be defined by industry, and if you are considered high risk, you should expect to pay higher rates to process their transactions, regardless of what the interchange rates are.
  • Can you spot hidden or junk fees?  Remember, the effective rate takes into account total fees, not just interchange rates and rate markups. You could have hidden fees or incidental fees for that particular month. Check out our complete guide to rates and fees and our guide to analyzing your processing statement in full to learn more about all the potential fees involved in card processing.
  • Is your average transaction size quite small? Businesses with very small average tickets are often hit hard by the flat, per-transaction piece of an interchange rate or processing rate. For instance, if you sell very small-ticket items, the effective rate on a flat-rate plan could be higher than it could be before any other fees are counted.
  • Do you have international transactions? Card brands like Visa and Mastercard also charge some wholesale transaction fees, but that these are typically much less than interchange. The exception is for international charges, particularly if currency conversion is involved. If your processor passes cross-border assessments through on the statement, this is added on top of all other normal fees and rates.
  • Are your transactions being downgraded? Downgrading means that transactions are getting bumped into higher-rate tiers for any number of reasons (most of which are completely out of your control). If you’re on a tiered pricing plan, we’d check to see costs on qualified vs non-qualified credit card transactions. We generally recommend steering clear of tiered pricing plans because fees often get muddy and unpredictable.
  • Are there other factors inching costs up? If you’re on a more transparent cost-plus model (like interchange-plus or subscription) you can also examine your statement in more detail to look at any specific fees like annual fees. You also want to identify if your team is manually keying in transactions, which almost always cost more to process and should be avoided if possible. Additionally, security fees could also contribute to your overall effective rate. And to add to all that, you may identify other rogue fees that may not have been clearly disclosed if you were lulled by a “teaser rate”.
  • Is the processor’s markup too high? This one’s pretty self-explanatory, but it’s also worth pointing out that the only way you can accurately see the difference between standardized, wholesale costs (like interchange) vs. the processor’s variable markup is with a cost-plus/pass-through pricing plan like interchange-plus.

How To Find The Best Merchant Services Rates

now that you have a better idea of what might contribute to your effective rate, the respect comes in using this datum to find the best rates on credit card processing for your minor business. When it comes to looking for the best merchant services rates, you ’ ll want to find companies that meet the following criteria :

  • No early termination fees
  • Month-to-month agreements rather than long contracts
  • No or small PCI compliance security fees
  • Clearly published rates
  • No junk fees or bait-and-switch tactics (We look at customer reviews to uncover these.)

If you very like a sport set but you aren ’ triiodothyronine sold on all the price details or other particulars, we besides encourage you to advocate for yourself before signing a merchant agreement. Check out How To Negotiate The Perfect Credit Card Processing Deal.

The Bottom Line : Break Out Your merchant Processing Statement & Do The Math For Yourself

By immediately you ’ re probably feeling more endow to take the reigns and make better choices for your little business. To recap, if you ’ ra fuzzed on what you ’ ra paying in payment work, the foremost footfall is to get yourself a fresh statement, add up your full fees and divide those by entire sales. Should you find that your effective rate is over 4 % for barely work, you might want to start asking some questions which we ’ ve outlined above .
not felicitous with what you found in your statement ? Check out some of the best options for credit rating poster processors in our Merchant Account Comparison Chart. These are release of the bigger crimson flags you ’ ll want to look out for, and they all have excellent pricing transparency .
Need more information to make an inform decision ? We ’ ve got a short ton of resources here to help you navigate through and simplify payment serve. Check out our station What Is payment Processing ? for more about all types of payments including eCheck, digital wallets, ACH, and lots more .

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Category : Finance

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