What is an Effective Rate?
You may have heard the term “Effective Rate” when it comes to processing credit cards. An effective rate is the percentage of sales you pay for credit card processing. This rate is determined by dividing your total credit card processing fees into the total dollar amount of all transactions submitted in a month.
As you know there are many fees charged to merchants for accepting credit cards. Those include interchange fees, statement fees, transaction fees, and other incidental fees. All of these fees can quickly gobble up your profit. It’s difficult to forecast what your actual costs will be from month-to-month as the fees are determined by the type of cards you accept. For instance, if you accept an American Express card for a $100 transaction, you will likely pay about $3.50, based on a 3.5% interchange fee. The same transaction using a non-rewards Visa card might cost you $1.70, assuming an interchange fee of 1.7%. To keep it really simple, if those were your only two transactions of the day, you would divide $5.20 (total interchange costs) into $200 (total submissions). Your effective rate is 2.6%. You can see how this rate would change from day to day based on dollar volume transacted and the types of cards accepted.
The amounts used in the above example are typical costs per transaction. The day-to-day range can change based upon many factors, such as how the transaction is processed, the industry you are in, and the kind of credit card presented. The cost of flat fees and incidental fees ultimately depends on your credit card processor. Some processors might charge more fees than others. Some have no monthly statement fee at all, while others can be as high as $20 a month. You may be charged a fee for a chargeback, and that fee will impact your total effective rate for that particular month.
On average, it is safe to say that incidental fees average from $5-100 a month. Many credit card processors quote your effective rate based upon interchange fees alone. As a merchant, you should take the entire dollar amount spent with your processor, regardless of what type of fee it is, and divide that whole amount into the total transactions amount submitted. This is the only way you can determine the true percentage your business is paying to process credit cards in a month. You should check your effective rate every month and track it. If it climbs unexpectedly, you will be able to spot it and determine what caused the spike.
Chosen Payments is committed to low fees and fee transparency. To find out what we can do for your business, please call us at 855-4-CHOSEN.