We know that comparing rates for merchant services can be confusing. There are more than 300 different interchange rates, and they vary depending on the type of card. Most of us are familiar with rewards cards, the card brands that offer perks, miles, cashback, etc. to the cardholder. What you may not be aware of is that the businesses accepting those cards are paying higher fees to offset those giveaways! How the card is processed also impacts the rates. Cards not present, online, or over the phone transactions are the most expensive. With so many variables, some merchant services companies deceive you and sneak in hidden fees. Fortunately, there is a simple way to wade through all the numbers and technical terms to determine how much your business is paying for merchant services. Here’s where the effective rate comes in!
So What is an Effective Rate Anyway?
The effective rate is virtually the only rate you need to worry about when picking or changing your merchant services company! While payment processors charge different fees for different credit cards, the effective rate simplifies this mess by telling you the average percentage you pay for processing credit card transactions. It accounts for the interchange rates, transaction fees, and monthly fees. Essentially, the effective rate captures your total processing cost, and that’s the only number that matters for your business.
How Do You Calculate Your Effective Rate?
The calculation to find your effective rate is, thankfully, very straightforward! Divide total processing fees by total credit card processing volume, and that’s your effective rate.
Effective rate = (total processing fees / total amount processed) x 100
What is a Good Effective Rate?
Most experts agree a good effective rate can range from 2.5% and 3.5%. This changes as types of cards and how they’re processed effects the cost. The effective rate will vary a little from month to month, but if you encounter a large increase, it’s time to schedule an account review. True Merchant’s unrivaled customer service really comes in handy in these situations! When choosing a payment processor, you should consider the company’s reputation, customer service, and processing technology, but understanding and comparing effective rates is an excellent place to start!