What Is a Good Effective Rate for Credit Card Processing?

October 6, 2021/ Posted in Credit Card Processing

An enterprise owner that uses services of credit card processing companies should know what is a good effective rate for credit card processing. If you understand how to calculate it, you can determine the basic costs needed for business growth, and you may be able to remove the unnecessary ones.

More and more enterprise owners set up a merchant account and implement non-cash payment options to attract customers. From physical retail operations to those who start an eCommerce business, non-cash paying options have become an inseparable part of the trade. But once we accept such a payment, the transaction is routed through the merchant service, which is often complex and entwined with different average CC processing fees but may contain some hidden ones, too. Small businesses may be greatly affected by this, and that is why along with understanding small business tax deductions, it’s important to know what is considered a good effective rate for credit card processing.

How Much Should You Expect to Pay the Average Fees?

Around 61% of customers would use a non-cash option to pay for a $10 purchase in a store instead of using cash. The average CCP fee for in-person transactions is usually around 2% (1.5-2.9%), although this amount is closer to 3.5% for card-not-present and online payments. If you run a larger enterprise, you may be able to negotiate for volume discounts because you qualify for them, so the rates will be lower. Small businesses typically pay slightly higher rates.

You should know much you are expected to pay

Effective Rates Explained

Applying for a merchant account and accepting non-cash payments requires us to understand the basics associated with partnering our enterprise with a credit card processing company. We gain insight into many things – from learning what is a merchant account to recognizing how CC processing works and all the costs associated with electronic transactions. When it comes to effective rates, there’s a simple explanation of what they are – a total sum of all the fees connected to transactions that you pay, divided by the total volume of sales.

The Main Factors Included, From Interchange to Other Card Payment Processing Fees

One of the mistakes enterprise owners make is not determining what are the credit card processing services fees. To be able to determine what is a good effective rate for merchant services, the first thing is to recognize the three main factors that are included:

  • Interchange, such as flat-rate CC processing, are costs associated with every transaction with cards. They are also known as “swipe fees,” and banks charge interchange in return for accepting the risk. The amount you pay will vary depending on the type of cards (such as Visa or MasterCard,) POS, and the bank in question. Interchange is not considered an acquirer processor fee but instead means the amount that the acquirer pays to the issuer.
  • Processor markups consist of the amount that your processor charges you for each non-cash transaction. This amount depends on the merchant service provider you have chosen and the type of service you receive from them. It also depends on the pricing model you’ve settled for.
  • Monthly fee expenses are comprised of all the fees you pay on a monthly basis, depending on your account plan.
Take time to learn what are the main factors that affect the costs

How Do You Calculate the Effective Rate of Processing?

Before we dive into further explanation, we will show you how to calculate the costs you’re paying to the provider, and you will see that it’s relatively easy to calculate. To get the exact sum, you need to take the processed amount and divide the total fees. The result you get should be multiplied by 100. Here’s an example if your sales are $1,000, and the sum of fees is $50:

($50 / $1000) * 100 = 0.05 * 100 = 5%

The result you get means that the cost per transaction is 5%. If you’re not sure that you’ve calculated right, simply take a look at the latest bank statement. You should deduct the total fee amount you have paid to your bank account from the total amount processed from sales.

Learn to navigate through each fee on the statement and calculate what you’re paying for

How to Tell What Is a Good Rate for Credit Card Processing?

We have cleared the explanation of this expense and the steps needed to calculate it, but the question is, how much should you expect to pay? Unfortunately, there is no exact amount, but the experts claim that the expected rates should be from 2.5 to 3.5%. Anything more than that shouldn’t be accepted.

Why Does the Amount of This Expense Vary?

The amount of the expense mentioned above varies and determining how much depends on a set of factors. Picking the suitable processor will significantly impact how you run your business and how much you will attribute to expenses. You should choose suitable pricing models and systems and pay attention to the POS fee as well as CC convenience fee. How much you pay for merchant services rates should be a decisive factor.

Accepting Credit Cards Will Come With Different Expenses Based on the Risk Factor

Picking the right provider is not the only factor to consider. There are various kinds of enterprises, and a merchant category code is used to classify them by the goods or services they provide. Also, different types of businesses have various risk factors, and belonging to a high-risk industry will also affect your expenses. They will be higher because banks and issuers will want to protect themselves from any possibility of losses.

Some Transactions Cost More

The types of transactions are among the factors that affect the total amount of expenses you pay. Any online purchase customers will carry a higher risk of being fraudulent, and thus you will be charged more. Also, any international transaction includes complex payment gateways, which are usually pricier for a business owner.

Consider what you’re paying for to be able to cut a better deal

Will I Be Able to Lower the Expenses?

The first step toward taking a firm grip on each cost you pay is to get yourself a fresh bank statement and look at it thoroughly. Once you sit down and calculate the actual amount of expenses, you may not like the number you see. But, it’s not the end of the world since there may be a way to cut down on these costs. There are several steps you can take to make better choices for your enterprise.

Unnecessary Expenses Are Easily Spotted, Once You Know What to Look For

Since we’ve made clear that the effective rates are a total sum of all the transactional expenses, so there’s a chance to find some unnecessary fees among the usual ones. You should thoroughly analyze your bank statement and try to spot any costs that might seem out of the ordinary.

Your Service Provider Can Be Negotiated With

While you can not negotiate interchange, the markups of your service provider are usually eligible for making an arrangement. You will be able to negotiate your way through if you put in a bit of effort. Perhaps you already qualify for a better plan, and this may be your opportunity to get a more suitable one with lower costs. But you’re probably wondering – who has the best credit card processing rates? If you don’t settle with the offer of your current provider, you should search for a better offer that suits you more.

Take Control of What You Pay For

If you’ve already taken the previous steps, there’s one more thing you can do. Consider whether your judgment in taking some business moves was perhaps rushed, and now you have to deal with more expenses than you can handle. That means you’ve incorporated some services you have no need for or some others ahead of time. You should contact your provider and look into canceling it.

Downgrading of Your Transactions

If your transactions are being downgraded, it means that they are getting routed into a higher-rate category for a number of reasons. For those who are on a tiered pricing plan, the provider should be asked to check the costs on qualified vs non-qualified non-cash transactions. Tiered pricing plans should be avoided to stay away from any unpredictable costs.

If you thoroughly understand the costs, you’ll be able to lower them

Learn to Pick the Best Options Out There

Since we’ve given you a few ideas on how to approach the analysis of expenses, you should use this advice to recognize the best offers by the providers. Look for companies that fit the following criteria:

  • Absence of early termination fees, which can be charged by some processors if you want to cancel the contract during the initial period.
  • They offer monthly contracts instead of long-term agreements (which usually last up to 3 years, and will automatically be renewed for an additional one-year term or go to month-to-month.)
  • Transparent costs on statements. If the statements are not clearly published, it’s easier to include hidden costs and odd expenses, so they can go unnoticed.
  • No PCI compliance costs or rather negligible ones. These costs are connected to compliance with data security standards that are set by the Payment Card Industry Data Security Standard (PCI DSS.) They are designed to ensure that your customers’ data is handled securely to downgrade the chance of a data breach to a bare minimum. It’s required by the issuing associations.
  • No hidden costs are included. These can be early noticed through the customer review section, so make sure to take a look at the processor’s ratings.

If you are sure of what you are looking for, in the terms of a pricing plan for your business account, you may be able to successfully negotiate all of the particulars and details.

Consider your options when it comes to providers

If You Determine What Is a Good Effective Rate for Credit Card Processing, You’ll Be Able to Save Up

In the words of L. Frank Baum – “No thief, however skillful, can rob one of knowledge, and that is why knowledge is the best and safest treasure to acquire.” This is true for enterprise owners, especially the ones who want to implement new ways of handling transactions. There’s a lot to keep in mind though; from understanding what is a mobile notary to keeping notes on how do small businesses pay taxes. But to be able to save up is to understand each cost you pay for. If you notice that you are paying above 4%, contact your current account provider and demand analysis.