Business owners have many things to worry about when it comes to successfully running a business. However, accepting credit card payments while truly understanding the costs associated with merchant services in general should be of significant importance. Learn how the basis points conversion calculation helps determine the actual percentage rate paid when accepting payments for most credit cards & debit cards over interchange. The understanding of pricing will go a long way when negotioning your next merchant agreement.
Seeing as we live in a relatively cashless society, it is almost impossible to run a successful business without accepting card payments. If your business does not accept credit cards, the business next door likely will.
Businesses that accept card payments have to pay the price. This is why merchants need to go all out, to always try and get the best pricing structure for their transactions, based on their specific business model.
Understanding Basis Points Conversion Calculations
To fully understand credit card processing rates in percentages, a solid definition of basis points, aka (bps or bips) and how they are calculated is necessary.
Markups determine card costs and also help determine whether a merchant is getting a fair rate. With regards to credit card processing, this markup is generally what the payment processor charges for their services.
There are many different costs associated with debit and credit card processing.
While some costs are fixed, others can be negotiated. Interchange fees are non-negotiable fixed costs set by card companies like MasterCard, Visa, Amex and Discover.
These hard costs are always expressed in a percentage rate and per transaction fee format.
On top of Interchange, comes the markup that a merchant service provider charges for allowing you to use a merchant account.
This markup is generally conveyed in basis points and a per transaction fee. There can also be other fees involved in the total sum of card processing costs, so always be aware when reviewing your pricing.
When a payment processing provider sends you a quote for IC Plus or Interchange Plus pricing, it is done in basis points.
The crucial question now becomes, how do you know the exact markup a processor is charging and what your overall percentage rate will be?
A simple basis points conversion calculation will help determine what the actual costs will be when accepting payments under an Interchange Plus Pricing model.
A Basis Point is Equivalent to a Percentage Point
A basis point (bps) is the same or equal to 1/100th of 1 percent. In other words, 0.01% is the same as 0.0001 in decimal form.
This means that 100 basis points is 1% and 50 basis points is equal to half of 1 percent.
A basis point is the unit of measure used when calculating financial instruments like credit card processing fees and interest rates.
The argument in favor of using basis points conversion is that they are less confusing than percentages.
For example, if a regular yield rate is 8.5% and it goes up by 3.5%, is it 8.85% or 12%?
Basis points conversion helps eliminate the problem of numerical misinterpretation.
With basis points, if the rate is 8.5% and goes up by 350 basis points, it is an increase of 3.5% totaling 12%.
And if it increases by 35 basis points, that would make it a total of 8.85%.
Calculating Basis Points Conversion
To understand how much you are paying in processing fees, first convert the basis points to a percentage or decimal.
Then multiply the number by the volume of your transactions.
For instance if a merchant processes $50,000 in transaction volume and a processor charges Interchange plus 20 bps, it will be calculated like this:
1. Change bps to a percentage or decimal. 20 basis points (bps) X 0.0001 (0.01%) is equivalent to 0.20% or 0.0020.
2. Multiply the percentage with the monthly volume to get a fee. 0.20% (0.0020) X $50,000 = $100.00.
Some statements show markups as percentages.
A reverse calculation of this will show you how to confirm the actual number of basis points you have been charged.
So let’s say the percentage rate on your statement is 0.25%, how do you calculate your basis points?
You simply multiply the percentage by 100 and that is 0.25 X 100 = 25.
This means you are paying 25 basis points.
Using BPS and Interchange Plus Pricing to Get a Fair Deal
Basis points conversion can only work if you are on an Interchange-Plus pricing model. Interchange fees are the actual costs (buy-rates) associated with accepting a specific card type.
Basis points conversions will not work on Tiered Pricing models because interchange fees are not listed as separate from the markup costs.
With this pricing model, the merchant has no idea on what exact percentage goes back to the processor for their services.
For merchants on Tiered Pricing models, the closest way to try and figure out pricing is to calculate the effective rate as a percentage.
Interchange Plus pricing comprises 2 components—basis points and an authorization fee charged by card companies for their services.
This pricing model offers a more transparent way to calculate and pay for credit card processing.
With Interchange-Plus pricing, you know the exact percentage rate charged by the associations for the specific credit card or debit card used in the transaction being made. With this pricing model, you do not have to worry about hidden fees. Understanding Interchange and the percentage rates charged for debit cards and credit cards can save you a significant amount of money when processing higher monthly volumes of transactions.
SecureGlobalPay has pricing options available to suit all business types. Whether you are a smaller business looking for fixed pricing or an enterprise operation with multiple merchant accounts requiring Interchange Plus Pricing. SecureGlobalPay – Payment Processing Solutions That Make Sense!