As a small business owner, you probably get bombarded with phone calls, emails, or drop-ins from credit card processors all the time. They’ll promise you the world and the lowest rates possible, but then when you switch over, you might end up feeling let down.
This is one of the reasons why we’re trying to change the industry by providing transparent rates, no hidden fees, and nothing hidden in the fine print. To make sure you’re not being taken for a ride, one great tool to have in your belt is figuring out how to calculate an effective rate. It’s a great way to figure out if you’re either paying too much in credit card processing fees or if you are, in fact, being offered too-good-to-be-true rates by your processor.
What is an effective rate?
If you look at your monthly credit card processing statement, your effective rate is your month’s total processing fees divided by your monthly total sales volume. It’s calculated as a percentage and will be the quickest way to find out if you’re being overcharged.
Let’s use the below statement as an example.
In this example, the business’ total monthly sales are highlighted in green and the total monthly processing fees are highlighted in red. So, how do we find the effective rate?
Remember the formula is TOTAL FEES / TOTAL SALES.
$691.11 / $11,132.58 = 0.06207 or 6.2%
How do I determine if my effective rate is too high?
The percentage shown from dividing total fees by total sales shows how much of a merchant’s processing volume goes to fees. To determine if you’re being overcharged, you need to find out how much you SHOULD be paying. Is 6.2% too much or just right?
The next thing you need to look at are interchange rates.
What are interchange rates?
Interchange is the amount of money that banks and card brands (Visa, Mastercard, American Express, Discover) charge. Interchange rates will vary depending on how you’re processing the card and what type of card is being processed. For example, rewards cards and business cards typically have higher interchange rates. Interchange is the portion of the processing cost that no credit card processor has control over. These rates remain the same no matter where your merchant services account exists.
To find typical interchange rates, check out our Card Brand Fees page.
In this example, we’ll take a snapshot of Visa’s rates and pretend the above merchant is running an eCommerce business.
Looks like we’re seeing an interchange rate of 1.75% across the board.
That means the business’ effective rate is almost 3.5 times that of the highest interchange rate. That should set off a red flag. However, before you release the hounds…
…there are a few things to ask yourself.
Is your business considered high risk?
There are a few business types and industries considered high risk. Some of those include adult stores, casinos, marijuana dispensaries, and transportation services. Typically what categorizes a business as high risk are things like a high instance of chargebacks or fraud. It could also be bad credit. So, if you’re considered a “high risk” business to your processor, you’ll likely incur higher rates.
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However, as a word of caution, do not always go with the processor who will give you the lowest rates possible. Likely, the deal will be too good to be true, and a lot of fees could be hidden in the fine print. Make sure you’re combing through your statements each month and you’re actually paying the rate they promised.
Are your transactions being downgraded?
Pricing is structured in three different ways, but for this example, we only care about tiered pricing. In tiered pricing, you are charged predetermined rates based on the card type or risk of each transaction. There are three different tiers: qualified, mid-qualified, and non-qualified. Many merchants receive unavoidable downgrades on their transactions based on things like swiping or “dipping” rewards cards or international transactions. A merchant can minimize their downgrades by making sure they pass on information like address verification or by submitting settlements.
Are there hidden fees?
This is often the most common reason effective rates are so high. Remember, the effective rate takes into account total fees, not just interchange. Again, make sure you take a deep dive into each fee. If you’re not sure why you’re being charged for something, reach out to your processor. If you’d like help or have questions on any fees (whether you’re a Gravity merchant or not), please feel free to reach out to our team! We’d be happy to walk you through your credit card processing statement.
Are you paying too much in processing fees?
If you’re saying “no” to all of the above questions, chances are your processor is overcharging you. If that’s the case and you’re looking to switch, we’d be honored to earn your business. You can sign up today or contact our team if you have more questions.