The Effective Rate: How you can Rapidly Determine whether You’re Having to pay An Excessive Amount Of in Processing Charges

effective-rate-calculatorAmong the first thing’s which i do after i evaluate a client’s credit card merchant account statement, is calculate the “effective rate.”

The effective rate of the charge card processing statement may be the total processing charges divided by total product sales. It’s usually expressed by means of a portion, and for me is among the quickest ways to determine if you’re having to pay an excessive amount of for the credit card merchant account.

The easiest method to explain the effective rate is always to demonstrate a good example, the like that note…


Let’s imagine, we’ll make use of the following statement:


Let’s think that the above mentioned statement is perfect for a company that sells backpacks, and sells them solely online. An upright online business.

I’ve highlighted the totals product sales in eco-friendly, and also the total charges in red.

So, what’s the effective rate with this statement?

Should you suspected, 5.99 or 6% (rounded) you’d be right.

Let’s perform the math again:

$5907.03 / $98511.45 = .0599 or 5.99%.

Now, exactly what does that 6% inform us?

Well, we all know without a doubt that about 6% of the merchant’s processing volume would go to charges, but is the fact that 6% bad or good? Could it be excessive, or simply right?

To find out that, we have to work out how much the merchant should be having to pay. We have to determine if 6% is industry standard, or maybe it’s much greater. So, how can we determine that?

Have you ever heard of interchange rates?

Should you not understand what interchange minute rates are, It is best to look at this article, then go back here. Meanwhile, I’ll provide you with a quick recap.

We know that each charge card transaction includes a specific cost, and it is usually by means of a portion. You are able to consider interchange rates because the “wholesale price” of individuals transactions. Furthermore, every transaction differs with respect to the atmosphere it’s processed in (e.g. eCommerce versus. retail), and the kind of card which is used (e.g. rewards versus. business). So, every transaction includes a different wholesale cost, in other words, interchange rate.

Visa and MasterCard set these interchange rates like a standard for the whole charge card processing industry for their “base costs.” Any entity that resells charge card processing services, needs to pay Visa and MasterCard the bottom price of each transaction, that is their cut. Something that is billed above that base cost (markup) may be the resellers. Seem sensible?

Moving on…

Let’s imagine, we’re going to check out Visa’s rates since both MasterCard and Visa’s minute rates are nearly identical.

Open this PDF and scroll to page 3. On-page 3 underneath the column “Fee Program” you will see some rate groups that say something similar to “CPS/e-Commerce Basic” etc… Individuals would be the interchange rates for many eCommerce transactions. And, since our example statement comes from a rigid online business, then individuals are the type that people want to concentrate on.

Here’s an overview:


Notice anything?

I see 2.10%, 1.80%, 1.54% and 1.70%, however i don’t see anything even remotely near to 6%.

What’s the offer?

This merchant’s effective rates are almost 3x those of the greatest interchange rate for his/her transaction type. That’s a warning sign if I’ve seen one.

So, what’s next?

At this time, we have to start searching in the “why’s?” How can this be merchant’s effective rate excessive?

Here’s things i would search for:

May be the merchant considered high-risk?
Within our situation, the merchant sells backpacks, and it is not considered high-risk. Whether it was something similar to a grownup store or debt consolidation company, i then wouldn’t be so surprised at that 6% effective rate. Mainly, because high-risk retailers should count on paying greater rates to process their transactions, it doesn’t matter what the interchange minute rates are.

Are this merchant’s transactions being downgraded?
I’ll cover this later on articles, until then, you can study what downgrades are by visiting this site.

What are the hidden charges?
Remember, the effective rate considers total charges, not only interchange. There might be some hidden or incidental charges which are adding to that particular 6%.

May be the processor’s markup excessive?
This one’s pretty self-explanatory. 🙂

That’s it! Calculate your effective rate, then mix-make sure that with Visa and MasterCard’s interchange rates. In case your effective rates are much greater compared to “wholesale cost,” then start searching in it. Otherwise, call your processor and thank them for his or her fair prices.

Note: When calculating the effective rate for the statement, make sure to omit the product sales for just about any American Express transactions. American stock exchange interchange minute rates are greater than Visa and MasterCard’s, so that your calculation will end up skewed through the American stock exchange figures. I’ll be writing articles about Amex’s rates soon here.



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