Understanding the Effective Rate
The effective rate is the most accurate way to measure the competitiveness of a merchant processing quote. It shows the amount of volume a business pays in credit card processing fees to process a given amount, making it the single most important rate to consider. The effective rate is shown as a percentage, and is calculated by dividing gross processing fees by gross sales.
Below is an example of how to calculate the effective rate for an established business that processes $15,000 in transactions per month, with an average transaction amount of $100 and an estimated consistent $200 in monthly base costs (interchange, dues, etc.).
- Average interchange markup: 10 basis points (0.10%)
- Transaction fee: $0.10
- Monthly fee: $20
The effective rate of their current MSP relationship can be calculated with the following formula:
Total Monthly Sales: $15,000
Total Monthly Processing Fees:
(($15,000 * 0.001) + ($15,000 / 100 * 0.10) + $20 + $200) = $250
Effective Rate: $250 / $15,000 = 1.66%
For this business, the 1.66% can be used as a proxy to measure the cost-effectiveness of their merchant processing solution. However predicting the exact cost of card processing is nearly impossible – average monthly sales volume, transaction amount, seasonality, risk, type of business or product / service, type of card, and card issuer are all factors that impact a merchant services quotes.
Many businesses make the mistake of focusing on one rate or fee when evaluating merchant service providers. Calculating your effective rate is a great way to evaluate the total costs of your current merchant services provider or to compare other merchant services quotes. Contact the team at PaymentVision today for a free merchant account analysis.