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What Is a Good Effective Rate for Credit Card Processing

March 2, 2020 / Posted in Credit Cards

If you’re a merchant who accepts payments with cards, odds are you’ve asked yourself: “What is a good effective rate for credit card processing?” To be able to answer this question, we have to take a closer look at what these rates are, what they include, and how they’re calculated. If the percentage seems too high, there might be ways in which you can lower it. Let’s take a look.

What Is an Effective Rate?

Simply put, effective rates are a sum total of all the processing fees you pay divided by total sales volume. For the most part, this includes three main factors:

  • Interchange rate. This is the amount that banks charge for handling your transactions in plastic. The amount will vary depending on the bank, the type of card, and the type of POS. For example, digital transactions usually cost more than physical ones, as online purchases carry a higher risk of fraud.
  • Processor markup fees. This is the amount that your credit card processing service provider will charge you for each transaction. The amount of the markup depends on the merchant service provider you choose, as well as the type of services i.e., pricing model you receive from them.
  • Monthly fee expenses. In addition to per-transaction charges, the effective rate also includes your monthly fees. This is comprised of all the fees you’re asked to pay on a monthly basis, depending on your merchant account plan.

What Is the Best Way to Calculate Your Total Processing Fees?

The effective rate is relatively easy to calculate. It is the amount you get when you divide your total fees by the amount processed, and then multiply the result by 100. Let’s say that your sales amount to $500. The total fees you were charged amount to $50. Carry out the following equation:

($50 / $500) * 100 = 0.1 * 100 = 10%

This means that your total per-transaction expense is 10%. If you’re not sure how much you were charged in total, simply take a look at your latest statement and deduct the amount paid to your bank account from the total processed amount from sales.

So What Is a Good Effective Rate for Credit Card Processing Then?

Now that you know what this expense is and how to calculate it, you would probably like to learn how much you should expect to pay. The simple answer is that there is no answer.

In general, experts say that you should expect rates of 2.5-3.5% and that you shouldn’t settle for more than that. However, this amount will vary depending on a number of different factors:

  • Your processor. Knowing how to find the best credit card processing can play a big role in your expenses. Different service providers have different pricing systems and models, so don’t hesitate to shop around before you find the right one.
  • Your risk factor. If you belong to a high-risk industry, your expenses will be higher. Banks and companies that issue credit cards want to protect themselves from possible losses with such businesses, which is why your interchange will likely be higher.
  • Types of transactions. Some transactions cost more than others. Usually, online purchases carry a higher risk of fraud, which is why you’ll likely be charged more for them. Likewise, international transactions include a more complicated payment gateway, which usually carries a higher price.

How Can I Lower My Expenses?

Do you not like the number you’re seeing? Don’t worry, there might be a way to lower your expenses. Here are some steps you should take.

Know How to Spot Unnecessary Fees

The effective rate is pretty much a sum total of all your transactional expenses. This means that there is a chance there are some unnecessary charges there. Take a careful look at your last statement and try to spot anything that seems odd. For example, if you haven’t verified your PCI compliance, you might have been paying for it without even knowing.

Negotiate With Your Credit Card Processing Service Provider

Interchange can’t be negotiated, but the payment processor’s markups usually can. So put in effort into lowering the markup. You might be able to qualify for a better plan where your average credit card processing fee would be much lower. If not, don’t hesitate to shop around and find a merchant provider with a better offer.

Control Your Payments

Although it is hard to admit, sometimes we bite off more than we can chew. Perhaps you introduced international sales before your business was ready for it, and now you’re dealing with higher expenses than you can handle. Talk to your service provider and check if it would be possible to cancel this service for the time being.

Make Sure Your POS Terminal Is Set up Properly

Sometimes, higher expenses are nothing but a result of a mistake when setting up your account and POS terminal. For example, your account may contain business information that is incorrect, which will, in turn, cause higher charges.

If you still have questions regarding your per-transaction expenses, don’t hesitate to contact your merchant service provider. They are the experts in the business, and they can offer valuable advice when it comes to getting the most bang for your business buck.


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