Friday, February 3, 2023

How To Calculate Effective Rate For Credit Card Processing

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How To Use Effective Rate To Compare

calculate your credit card processing effective rate – how to

Calculating the effective rate will help you compare among credit card processing providers.

You can’t just look at individual fees. One processor may have lower transaction markups but higher service fees. Another one may have higher markups but no miscellaneous fees. It’s hard to know without comparing the effective rate.

Take this example. Let’s assume you have $10,000 in sales each month, with $50 average ticket size. That’s 200 sales total per month.

If you’re comparing between these 3 providers, here’s what you would get:

Processor 1

Benchmark Card Processing Fees

To swipe a card youre looking at roughly 1.95 percent2 percent for Visa, Mastercard, and Discover transactions. For online ordering, its roughly 2.30 percent2.50 percent. Amex will invariably cost more to process than other cards, depending on your payment processor and the pricing model youre on.

Keep Your Chargeback Rate Low

Your chargeback rate is the percentage of transactions disputed by customers for instance, because of unauthorized card use, billing errors or unresolved disputes about the quality of the items purchased. Chargeback fees can be costly, often $20 to $50 per dispute on top of refunding the complete transaction, and high rates of chargebacks can cause providers to increase your transaction fees.

Minimize chargebacks by using contactless and chip card readers to reduce your liability in case of fraud, and by offering return policies, good customer service and quick responses to any customer complaints.

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How Does My Effective Rate Compare To Others

When the typical B2B organization initially looks at their effective rate, its usually between 2.5% and 3%. Within that effective rate are several different types of fees:

Interchange: Makes up the largest portion of the fee. Goes to the issuer to fund cardholder operations and rebates.

Goes to the merchant processor which the supplier uses to accept card payments.

Assessment: Goes to the network for allowing the issuer to transmit the payment from the cardholder to the merchant.

If your organization simply accepts these fees as the cost of doing business, its time to rethink that position.

What Are Credit Card Merchant Fees

Credit Card Payment Interest Calculator

Youll have to pay a merchant fee on every credit or debit card transaction that you accept. Typically, this fee is a combination of three factors: interchange fees, assessment fees, and the payment processors markup. While your payment processor is the party that sets the merchant fees, the card issuer and the card network each play a starring role in determining the fees that are ultimately taken from the transactions you process.

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What Is Flat Rate Pricing

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If you find yourself hacking through a jungle of credit card processing pricing models, you may be wondering, What is flat rate pricing? There are enough pricing structures and models out there to make anyones head spinevery processor has different rates and fees, and its overwhelming to sift through all the possibilities, let alone decide which option is the best for your business.

To help ease the pain and demystify at least one part of the process, lets explore one of the most straightforward credit card processing pricing models: flat rate pricing.

How Can I Find The Lowest Effective Rate

If youâre asking yourself this, youâve come to the right place. SwipeSum is transparent about using effective rates in our quotes to ensure you know exactly what youâll be paying. In fact, effective rates are the primary quotes used in our proposals.

When we help you find a processor, you can rest assured that the quote we present is dependent on the total percentage of revenue youâll be charged rather than just the base rates that the processor readily provides. We understand that fee structuresâand most breakdowns of processing feesâare confusing. And confused is the last thing you want to be when youâre thinking about switching processors.

We want you to be confident, so we show you the real effect switching will have on your companyâwhich is all about the effective rate.

The most important thing to keep in mind when youâre on the hunt for the lowest rate, is that your total fees are directly related to your specific business. One processor may be the most cost-effective service for you, while being the most expensive service for the restaurant down the block. Things like the industry youâre in, the volume of transactions that you process a month, and even the different ways you accept credit card can all impact the fees youâll end up paying. The effective rate allows you to see the big picture, which is what you really care about, after all.


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Accepting Debit Cards To Cut Costs

Transaction fees typically cost less on debit card payments simply because the interchange rate is lower for debit cards due to their lower risk. With a debit card, funds come directly out of a customers bank account, instead of credit that they need to repay.

If you use Square or another flat-fee solution for credit card processing, youll pay the same amount in transaction fees whether its a debit card or a credit card.

How To Negotiate A Lower Flat Rate

How to Read a Credit Card Processing Statement Effective Rate

Perhaps youve decided to go with a flat rate pricing structure. But now you want to get the best deal possible on your processing rate. Here are a few tips to negotiate a fair flat rate for your business.

First, determine your effective rate. If youre currently processing credit cards, you can use your effective rate to get a comprehensive picture of your overall processing costs. Oftentimes, when it comes to processing fees, merchants get bogged down in details or particular percentages. The effective rate will give you a more holistic idea of how much youre paying for credit card processing and a better sense of the overall cost.

To calculate your effective rate, divide your total processing fees by your total sales volume. For example, if your processing fees totaled $350 and your sales volume totaled $10,000, then your effective rate is 3.5%. You can use this number when negotiating with your current processor or switching to a new one.

To negotiate a low flat rate, take a look at your last three credit card statements. Find your average processing fee and then use this number to negotiate for a lower fee. If you can get a rate thats lower than your historical average, then you know that youll save money each month. This is the only true way to guarantee savings.

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Wholesale Merchant Fees Vs Markup Processing Fees

The terms wholesale and get thrown around a lot in the processing industry. It can be difficult to identify which credit card fees for merchants fall into which category. At its core, however, the distinction isnt too difficult to grasp. The two primary considerations are 1) which of the parties weve discussed ultimately collects the fee, and 2) how fixed the cost is across the industry. Heres all you really need to know:

Wholesale Fees VS Markup Fees

Wholesale Fees
Go to the issuing banks and the credit card associations Go to your payment card processor, plus any other add-on equipment or software providers
Are fixed amounts regardless of which processor you use Are different amounts from processor to processor
Are non-negotiable Are negotiable

As the merchant, youre the lucky one who ultimately must cover all these costs. Meanwhile, your credit card processor is right in the center of the fee-collecting and directing process. It chooses how to pay the necessary wholesale costs for running your account while also adding markups to cover its costs, paying other third-party service providers associated with your account, and turning a profit.

There is something else you should know about wholesale costs: They vary from industry to industry and from card association to card association. They also tend to differ by how the card is used whether its an in-person purchase or an online purchase. The reason for the difference has to do with risk.

Why You Should Read Your Merchant Processing Statement

Every merchant will have different goals when reading their merchant processing statement. Common goals include:

  • See how much youre paying in processing fees
  • Search for hidden fees
  • Distinguish wholesale/base costs from markup costs
  • Determine if your fee has changed month-to-month
  • Check your interchange rates for the month
  • Educate yourself on the credit card processing industry and industry standards

Each of the above goals will help your business achieve a different purpose. As they say, knowledge is power, and the information you glean from your merchant processing statement will empower you to make informed decisions and chart a better course for your business.

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What Is A Good Effective Rate For Credit Card Processing

Accepting credit cards is essential for most businesses in this day and age. However, monthly processing fees can quickly add up without your knowledge, cutting into your profits and making it difficult to expand and grow.

To keep them at a minimum, youll need to understand the basics of card processing costs and how the effective rate can be a good indicator of cost. Generally, a competitive effective rate is between 2.5 and 3.5%, and if it exceeds 4% it may be time to find a new processor or find ways to lower it.

How Much Does Credit Card Processing Cost

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This is such a general question that it requires multiple steps to answer. Do you process card-present or card-not-present transactions? Whats your average ticket size? Do your customers typically use debit or credit cards? With these answers, we can evaluate your effective rate, which is your most accurate estimate to determine how much does credit card processing costs.

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What Determines Your Interchange Fees

With each payment network, there are several factors that affect where your interchange fees fall within the ranges above. Here are the most significant:

  • Merchant category: Every merchant has a merchant category code corresponding to its business type. Payment networks charge different interchange fees based on the business’s MCC. For example, a supermarket has different fees than a restaurant.
  • Type of credit card used: Networks have various types of cards with their own sets of benefits. Cards that offer more benefits, such as travel rewards or purchase protections, usually have higher interchange fees. A World Elite Mastercard will tend to have higher interchange fees than an Elite Mastercard, a Visa Signature Preferred Card usually has higher fees than a Visa Signature Card, and so on.
  • Processing method: Interchange fees can change based on whether the card was swiped/inserted , keyed in, or not present . This is in part because the risk of fraud varies based on the processing method. Card-not-present transactions carry a higher risk of fraud and/or chargebacks, and interchange fees are often higher on these transactions.

American Express also uses transaction amounts to determine its interchange fees, with higher-value transactions costing merchants less.

What Goes Into Your Effective Processing Rate

To know if your rate is fair, first it’s important to understand what it includes. Your effective processing rate includes:

  • Interchange fees: These fees are paid to the card issuing banks and are non-negotiable. The average interchange rates are 1.7% – 2%. They should be the MAJOR BULK of your processing rate, making up 70% – 80%.
  • Assessment fees: These are paid to the card networks and are non-negotiable. The average assessment fee is 0.13% – 0.14%, so it’s just a very tiny percentage.
  • Processor markup: This is your merchant account provider’s commission for each transaction. This should make up just 10 – 15% of your total processing rate.
  • If your effective rate is too high, it’s probably because your provider has a high markup. This is where you want to reduce rates.

  • Service fees: This includes any service fees you’re paying, like monthly fee, payment gateway fee, PCI compliance fee, statement fee, etc.
  • Go through your statement and identify all these types of fees. If they add up to a lot, then you probably have too many “junk” fees. Consider switching to a provider without hidden junk fees.

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    How To Lower My Effective Rate

    You can lower your effective rate and total credit card fees by defining a smart credit card acceptance policy along with implementing technology that will lower your fees and costs associated with credit card processing such as cash application.

    A smart credit card acceptance strategy combined with innovative automation can help you slash those fees up to 1%.

    How To Find The Lowest Processing Rates: The Effective Rate

    Credit Card Processing – How to Calculate your All-in Rate

    Simply stated, the effective rate is the total percentage of revenue that processing eats up. Luckily, it can be calculated through a very simple equation, and all you need is your monthly statement.

    The credit card processing industry is confusing and complex. For business owners, itâs tough to navigate, especially when it comes to pricing. Thatâs all by design.

    As a business owner, you want the best value out of your payments provider. That is, you want a solution that fills your needs without costing you an arm and a leg. That should be simple to find, but unfortunately, thatâs not always the case. One of the biggest reasons for that is how payment processing is priced.

    As weâve written before, there are numerous ways that processors can price their services, which makes comparing quotes a difficult task. At SwipeSum, we require all processors to bid using a uniform pricing model, but weâll admit, thereâs actually a better way to compare processors: the effective rate.

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    How To Lower Processing Rate

    If your effective rate is over 3.25%, then you’re most likely paying too much.

    If you like your current provider, you can try negotiating with them first. Remember that the interchange rates and assessment fees are not negotiable. BUT you can negotiate anything the provider has control over. This includes:

    • The processor’s markup
    • Payment gateway / virtual terminal fee
    • Equipment fee / setup costs
    • PCI compliance fee

    Reducing any of these fees will help lower your effective processing rate. Ideally, you want your provider fees to be no more than 20% of your entire processing cost.

    The key to negotiating is to be a valuable client. The more sales you have, the more negotiation power you have.

    It’s also important to have a good history. This means always making payments on time and having fewer chargebacks. By being a good client, the provider is more likely to work with you to cut down fees.

    Here is the general rule of thumb:

    • If your business has a small average ticket size, negotiate the fixed fee.

    For example, if your processing rate is Interchange + 0.2% + $0.10, getting it down to + 0.2% + $0.05 will save you 5 cents each purchase. That can add up to a lot of savings if you’re processing thousands a month.

  • If your business has a large average ticket size, negotiate the percentage markup. For instance, you can cut it down to 0.15% + $0.10.
  • Also see our 8 ways to lower credit card processing fees for more practical tips.

    How To Determine Your Average Credit Card Processing Fees

    Business owners have been relying on traditional merchant accounts to process credit and debit card transactions for years. But with the industry expanding and evolving more rapidly over the past few years, including the introduction of the industry has expanded and evolved over the years, its even more important to know the processing fees your business is being charged.

    As a business owner, you may be wondering, whats the average credit card processing charge for my type of business? There is not one simple answer. Many different variables impact the fees a merchant pays. The more you know, the more likely you are to save on your credit card processing fees. Below you will find our guide to calculate your credit card processing cost.

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    What Fees Will Your Church Pay And Which Giving Solution Is Most Affordable

    Every online church giving solution charges their customers, but the fees can vary greatly. High-priced options could cost your church or ministry hundreds of dollars in unnecessary fees every year, so its essential to compare all the options before committing to one.

    Most online giving solutions for churches only talk about their processing rates and the flat fee they take out of every donation. While these are the only costs associated with Subsplash Giving, most other giving solutions have additional fees that churches need to be aware of because they drive up their true cost, potentially making a seemingly low-priced solution quite expensive.

    The most important metric to use when comparing the prices of online church giving solutions is the effective rate. A giving solutions effective rate takes everything into consideration, from its processing rate to any additional charges, like monthly subscription costs and security compliance fees.

    How To Calculate Effective Rate For Credit Card Processing

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    For smaller businesses, the cost of payment processing can be a financial burden. However, the FTC cautions against extremely low credit card processing rates that can be a sign of a scam. To help you check whether your business is paying too much for your merchant account, you can calculate the effective rate.

    The effective rate is a combination of the interchange rate, credit card processors markup fee, and other fees. It can be calculated by the total sum of your processing fees divided by your total sales volume.

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