Merchant account effective rate: what you pay to process credit cards
Merchant Account Effective Rate
Adding merchant services capabilities to any business can significantly boost its bottom line. Ease-of-doing business not only makes the shopping experience more favorable for consumers, but it can contribute to ongoing repeat business. One of the features to understand when either adding or updating your current merchant services account is the effective rate charged.
So, what exactly is this charge and how should it equate into the overall decision making process about which vendor to leverage for your business?
Effective Rate Basics
In simplest terms, the effective rate refers to the NET percentage of a business’s sales that will be charged for the ability to accept credit cards; credit card processing fees.
For example, if a business receives $15,000 in credit card sales in any given month, and their total processing expense is $450; its effective rate for that month was 3.1%. While this calculation is very basic and straight forward, there is another consideration to be aware of; the qualified discount rate.
If you are offered a qualified discount rate, which is very common and an excellent option to consider, this is the base fee rate to be assessed. Once surcharges and other merchant account fees are added back into the equation, you arrive at the net effective rate. When determining your fees, be sure to break them out individually so you can assess each one independently.
Calculating your Estimated Effective Rate
For established businesses, this calculation will be fairly simple; take your average monthly credit card sales x the effective rate from the merchant services provider, to arrive at your average monthly processing fee. Newly established businesses or businesses with inconsistent sales will have a slightly more difficult time arriving at this calculation. In these instances, factoring a higher monthly average than anticipated will make it easier for the business to budget costs.
While an effective rate is indeed a cost assessed, it is often a small price to pay for the end value offered to your customers and ultimately to your business for this added payment option.