Are you a business owner who’s been feeling the pinch of mysterious payment processing costs? It’s time to shed some light on this financial enigma and figure out what the heck rates you’re actually paying. In this blog, we’ll break down the complexities of payment processing fees, and by the end, you’ll have the tools to make informed decisions about your business’s financial health.
The “What” and “Why” of Effective Rates
Let’s dive right in. The creeping cost of payment processing can become unmanageable if you’re not aware of it. To keep your payment processing expenses in check, one of the first things you should do is calculate the effective rate. But what is this effective rate, and why should you care?
The effective rate is your total processing fees divided by the total sales volume on your credit card processing statement. It’s typically expressed as a percentage, and it’s your key to uncovering if you’re paying too much for your merchant account. In other words, it’s your financial compass in the labyrinth of payment processing costs.
Understanding the Anatomy of Costs
Your effective rate is a combination of the interchange fee (the wholesale cost of processing each transaction) and your processor’s markup, along with any other fees that may be lurking in the shadows. It’s crucial to grasp the baseline cost of interchange rates because, no matter who your credit card processor is, you’ll encounter them. Every credit or debit card transaction has its specific wholesale cost, which varies depending on factors like how it’s processed and the type of card used.
Keep in mind that these costs might not always be apparent upfront, especially if you’re on a flat-rate pricing plan. But rest assured, these costs are ever-present on the backend of things.
Deciphering Your Effective Rate
So, how do you find your effective rate for credit card processing? The process is as simple as rounding up all the fees on your statement and adding them up. Once you’ve got that total, you can divide it by your total sales volume, and voilà, there’s your effective rate.
Now, what’s a good effective rate for credit card processing? Generally, it’s around 3-4%. This figure serves as a starting range for the “red-flag area.” But there may be legitimate reasons your rate exceeds this range.
Here are some factors to consider when assessing your effective rate:
High-Risk Classification: If your business is considered high-risk by industry standards, you might have to pay higher rates, irrespective of interchange rates.
Hidden Fees: Your effective rate takes into account all fees, not just interchange rates and markups. Be vigilant for hidden or incidental fees, which could spike your costs.
Small Average Transactions: If your business deals with very small-ticket items, your effective rate on a flat-rate plan may be higher due to the per-transaction component of the interchange rate.
International Transactions: International charges, especially those involving currency conversion, can add extra costs. Check if your processor passes cross-border assessments through on your statement.
Downgrading: Transactions sometimes get bumped into higher-rate tiers due to various reasons, many of which are beyond your control. On tiered pricing plans, analyze costs for qualified vs. non-qualified credit card transactions.
Other Cost Contributors: Additional factors, like annual fees, manual transaction entry, security fees, and undisclosed rogue fees, can impact your effective rate.
Processor’s Markup: The only way to distinguish between standardized wholesale costs (interchange) and the processor’s variable markup is with a transparent cost-plus pricing plan like interchange-plus.
Hunting for the Best Rates
Now that you’re equipped to understand what influences your effective rate, it’s time to leverage this knowledge to find the best rates for your business. When seeking the best merchant services rates, keep an eye out for providers that meet these criteria:
- No early termination fees.
- Month-to-month agreements, not lengthy contracts.
- No or minimal PCI compliance security fees.
- Clearly published rates.
- No hidden fees or deceptive tactics.
If you encounter a provider with features you love but are uncertain about pricing details, don’t hesitate to negotiate for the best deal.
The Bottom Line: Take Control of Your Payment Processing Costs
Now that you’re feeling empowered, it’s time to take control of your business’s financial destiny. To recap, if you’re uncertain about your payment processing costs, the first step is to examine your statement, add up the total fees, and divide them by total sales. If your effective rate surpasses 4% for processing alone, it’s a sign to start asking questions.
If you’re dissatisfied with your current statement, explore some of the best options for credit card processors. These providers are transparent and free from any red flags that might inflate your costs.
Still seeking more information to make an informed decision? Our wealth of resources is here to help you simplify the intricate world of payment processing.
Remember, when it comes to understanding your payment processing costs, a little knowledge goes a long way in saving you big money. So break out your merchant processing statement, do the math for yourself, and start making financially savvy decisions for your business!
As always, we are here to answer any questions. (970) 259-8660.