Credit Card Processing | How to Calculate Basis Points
Occasionally, a lot of effort must be put into negotiating with a credit card processor if you are looking for the best overall deal. Price should never be the most important factor. However, understanding the units of measure used to determine what you pay is of utmost importance. Learn how to calculate basis points and convert them into percentage points and percentage rates.
Some of the industry terms you will be discussing when negotiating a deal will include “terms of the agreement”, “monthly fees”, “percentage rates”, “PCI fees”, “hardware costs”, “leasing factors”, a “cost-plus interchange pricing plan”, with a reasonable markup, and many other factors.
Most start-up merchants do not think negotiating credit card processing percentage rates are that important. They are not high on their list of priorities. At least not initially when they are starting their business or first getting approved. This is normal.
But ultimately, it is very important, especially after a solid working relationship has been established because it gets you the best rates for your business while helping you save money and maximizing your profit.
One of the ways to put your best foot forward in a negotiation is to understand percentage rates and (basis points bps) and turn them into real-time numbers. And the way you can do this is by learning how to calculate basis points.
Basis Points in Simple Terms
Basis points are also known as bps (pronounced bps or bips) and against popular opinion, not something only financial experts should know.
As a merchant, you need to know what they are, how to calculate basis points, and more importantly, know how they affect your credit card processing rates and fees.
One basis point is equivalent to 0.01% or equal to 1/100th of 1 percent. It is also equal to one-hundredth of 0.01% which in decimal form would be written as 0.0001. When basis points move up or down, your pricing structure will change.
Investors and portfolio managers indicate financial ratios or percentage changes in interest rates with bps. They do this with real-estate-linked investments, trading stocks, mutual funds, U.S. Treasury bonds, and various other financial instruments like interchange.
Basis points are also used to describe credit card processing rates when discussing cost plus, IC Plus, or interchange-plus pricing. To try and keep it simple, 100 basis points are equal to 1.00 percent. 50 bps is equivalent to one-half of one percent. If you are currently paying 50 basis points over cost and your fees were increased by another 50 basis points, you are now paying 100 basis points over cost or 1% over interchange.
Why Basis Points are Important
How to calculate basis points will help you understand how interest rates are calculated better.
For example, if a standard yield rate is 8.5% and it goes up by 3.5%, do we now say it is 8.85% or 12%?
How to calculate basis points offer a great way to clarify confusing numerical statements.
By using a bps formula, a yield rate that is 8.5% and goes up by 350 basis points is a rise of 12%–if it is 35 bps, it would be 8.85%.
How Basis Points Affect Credit Card Processing Rates & Fees
Don’t be fooled by the tiny numbers because understanding basis points can help you save plenty of money on transaction fees.
A fraction of a percent may not look like much, but a hundredth of a percent on card payments, over and over, again and again, can quickly add up to thousands of dollars, especially if you are doing high volume.
This is why learning how to calculate basis points is vital because it gives a merchant the opportunity to pay less in credit card processing fees.
Apart from learning how to use bps to get lower rates, here are other things to keep in mind.
If you are on an interchange-plus plan, the rate a processor gives you is not the only thing that you will pay.
There are also rates or interchange fees set by card networks like Mastercard, Visa, and American Express that you need to pay too.
If you are on a tiered pricing model, it is likely you will be quoted a markup percentage.
It means you might pay a standard fee between $0.10 and $0.25 for every transaction alongside a percentage markup.
This is especially important when reviewing your merchant card processing statement. A small difference in bps can significantly offset your overall fee structure.
How to Calculate Basis Points
To convert basis points to percentages, you start by changing the basis points to decimals first.
One basis point is the same as 0.0001, so you multiply all basis points by 0.0001
So if you have basis points of 250, you multiply it by 0.0001 and that would be 250 x 0.0001=0.025.
This leaves you with a basis point percentage of 2.5%.
If you are looking to convert the interest rate back to basis points, you do the reverse of the equation above.
So, using the interest rate of 2.5%, first, you revert it into decimal form by dividing it by 100 i.e. 2/5 ÷100=0.025.
You then percentage divide the number by 0.0001 which gives you 250 basis points.
Putting things into a Payment Processing Context
Let’s say a company offers you an interchange-plus plan of 35 bps and a $0.20 fee per transaction.
This comes down to interchange +0.35% +$0.20.
When you see that your processing rates are set to go up by 8 basis points, it means that it will increase from 0.35% to 0.43%.
Let’s go ahead and learn how to calculate basis points by doing a little math to see how much this affects what you will pay in credit card processing fees.
Using an example, an interchange rate of 1.8% + $0.10, with your processor offering a 0.25% markup of 25 basis points and a flat fee of $0.20 for every transaction.
It comes down to a total processing cost of 2.05% +$0.30 and an average transaction size of $12 dollars. 12 x 0.0205=0.246.
When we round this up, that is $0.25, and add the transaction fee of $0.30, we get $0.55 cents in processing costs for a $12 transaction–this leaves you with $11.45.
But what if your credit card processor lowered your markup to 15 bps that is 0.15% over interchange, but pushed your per-transaction costs from 10 cents to 30 cents?
It means your new interchange rate would be 1.95% + $0.40.
Even with a lower percentage, your savings change with a $0.10 bump in per-transaction costs.
This is why you need to know how to calculate basic points. Never assume that you are saving money with interchange-plus pricing without a proper understanding or calculation.
Beware of Hidden Fees
Remember, interchange fees are not all the same. There are literally hundreds of interchange fees that often change from one card network to the other.
In addition, rates will be based on the industry you operate in and the types of cards you accept.
Even the cards that you swipe as opposed to keying them in can affect your rates. For example, rewards and business cards cost more than standard credit cards.
If you want an idea of the interchange rates that you will pay on credit card fees, visit here.
In Conclusion – How to Calculate Basis Points
Understanding how basis points bps work is one additional key to your success as a merchant.
It’s not something that you can glaze over and hope for the best. You need to understand how to calculate basis points bps because you could be losing plenty of money without a basic understanding of it.
If you still do not understand how basic points and interchange rates work, ask a representative from SecureGlobalPay to break it down for you.
If a credit card company is not keen on explaining it to you, simply use a basic points calculator.
Knowledge is power even for a small-scale merchant. Never accept the first offer a merchant account provider or a credit card company puts on the table.
Research your options, know the risks in your industry and learn how to calculate basic points. These 3 things will help you in settling down with the right card processor.