Do you know what your business is actually paying to process credit card payments? Sure, maybe your provider quoted you a rate, or sold you on potential savings, but what figuring out what it costs your company to actually process payments is easy and very important. You might want to familiarize yourself with the concept of “effective rate.”
The effective rate is one of the many rates and fees you need to know about so you can properly review your merchant statement. While some are relatively straightforward in terms of what costs they cover (i.e., set-up fee), others require more explanation. Although you may not be able to identify what effective rate means right off the bat, its purpose is highly significant.
What does effective rate mean on a merchant statement?
The effective rate on a merchant statement refers to the total amount of money that you paid for credit-card processing in a specific month divided by the total amount of volume that was processed during that month.
By calculating your effective rate, you can accurately compare the rate that your merchant service provider first sold you on...
The end result comes in the form of a percentage that represents the rate you're paying for credit-card processing. By calculating your effective rate, you can accurately compare the rate that your merchant service provider first sold you on when you became a client versus the rate that you are actually paying to handle your business.
Here’s an example:
Let’s say you processed $60,523 in credit-card transactions last month, and your business was billed $1,857 in the month of June. You would divide $1,857 by $60,523:
$1,857 / $60,523 = .0307 or 3.07%
This indicates that your merchant service provider is charging you at a 3.07% rate. So for every $1,000 you process, you’re paying $30.70. Now, if that is the rate that you agreed to pay, then this shouldn’t come as a surprise. But if you were under the impression that you would be paying a 1.59% rate, then it's another story, because you're paying almost twice what you anticipated.
What makes determining if you’re being overcharged a bit more complicated is that merchant service providers have the power to actually charge you whatever rates they want. They can give you one rate for “qualified transactions” but not tell you what transactions qualify. They can then mark up your rate however they like or pass on “hidden fees” that they failed to tell you when you signed up.
The best way to find out if you can get a better deal is to contact other merchant service providers (not just one) and see if they can offer you a lower rate.
The key is to notice not only the new rate, but the reasoning behind it. Have the providers approximate what your effective rate would be. Then you can compare and contrast what you’ve been told, and assess what works best for you.
Doing this comparison may take some time, but it will definitely be worth it if you wind up with a new merchant account that saves your business money. The savings could surprise you.