The Importance of the Effective Rate for Credit Card Processing

graphic of graphs

If your business accepts credit cards, you may have puzzled over your merchant statement, trying to figure out what you're truly paying for your credit card processing services.

Credit card companies make it hard to determine what you pay to accept credit cards

Most credit card processing companies make it difficult for a merchant to understand what they're truly paying for the ability to accept credit cards, especially when they're competing for the merchant’s business. Your effective rate tells you how much you’re paying per transactions to accept credit cards. Figuring out your overall effective rate will help with those “what the heck” moments.

The first step in figuring out your effective rate is getting some information from your statement. Most of the information you need will be in the summary section of your statements, which is generally on the first page of your statement.

You need two numbers to determine your effective rate

The summary section tells you the total amount of credit cards processed for the month, number of transactions, returns, charge backs, and the total fees billed for the month. To get your effective rate, you need two numbers:

  • Total fees you paid
  • Total credit card volume you processed

To calculate the effective rate, divide the total fees charged by the total credit card volume for the month. For example, if your total fees for the month are $300, and you accepted $10,000 in credit card sales, the calculation will look like this:

300 / 10,000= 3%

The overall effective rate takes all of your per transaction fees, fixed monthly fees, and any additional fees and lumps them into one rate. This lets you manage the overall cost of accepting credit cards so that you can factor the fees into your profit margin.

How do you know if your effective rate is too high?

If your business is accepting all credit cards at the point of sale, by swiping the credit card through your credit card processing software, then you want your overall effective rate to be close to 2%. If your business does not have the credit card present at the time of payment, then your effective rate should be close to 2.50%.

Any effective rate over these thresholds can be considered excessive. You should have your account reviewed by your credit card processor, or find a company willing to give you a better rate. Credit card processing rates vary from company to company. If your company would like to evaluate a new payment processing solution, you may want to consider Net1 Payment Solutions.

Amber Cooley

About the Author

Amber Cooley is the Sales Manager for NET1 Payment Solutions.