Understanding how pricing and payment processing works in the credit card industry can be very confusing. Learn how to convert basis points to a percentage rate and properly calculate bps when reviewing your merchant pricing.
For business owners who have no on how idea on how to calculate basis points into a percentage rate, it can become a muddled mess of recurring payments, month-by-month costs, per-transaction charges, interchange card fees, interest rates and a whole lot more.
It is not always an easy task for merchants to fully understand how all these fees add up or how to calculate basis points in a simple way. A free consultation with SecureGlobalPay will show you how.
However, a basic understanding of common pricing structures and the small percentage rates that credit card companies use for transaction costs is important.
This understanding helps merchants make more informed and cost-effective decisions about their businesses.
The 2 pricing concepts that every merchant should know are “interchange” and the term, “basis points.”
Interchange and Basic Points
In simple terms, interchange is the cost of completing a transaction in a percentage rate or basis points. Banks, credit card companies and card associations usually work together to determine the interchange rates merchants would be charged.
These interchange costs and fees are common knowledge and are usually updated approximately 2x’s per year.
Basis points (bps) are mostly transparent payment structures. Basis points are equivalent to the margins charged by the card processor. These basis points are then added to the interchange costs for a profit. These fees are usually kept separate from interchange costs and will be detailed in your merchant statement.
Irrespective of the financial institution that you choose, interchange rates are influenced by the type of card used for transactions and the method used to collect the information.
So if your credit card information is collected by punching numbers manually, a swipe or simply waving a card in front of a reader, it will attract a different charge.
Most merchants think that understanding this pricing structure is difficult. But it is one of the easiest models to understand, once you set your mind to it. Learn how to calculate bps and understand what you are paying in merchant fees.
With this payment model, you know exactly what covers your costs and what is going into the processor’s pockets as commissions.
For you to fully understand how to calculate basis points, you need to know how to calculate bps into a percentage rate.
What are Bps?
Bps are also known as basis points. Bps are a small fraction of a percent. One basis point is 0.01% and when written as a decimal, it is 0.0001.
50 basis points is 0.50% or half of 1 percent. 100 basis points equals 1 percent.
Credit card processing services come with a variety of fees. Some companies charge per transaction, others are percentage-based and still others are accessed on a monthly basis.
For you to be able to know the right credit card processing service best suited for your needs as a merchant, you need to know how to calculate bps or basis points as a unit of measure.
Basis points are used to describe differences in fee structures by using a fraction of a percentage point.
They are often used as financial instruments for credit card processing, where small percentages play an influential role in fees and charges.
How To Calculate Basis Points?
The calculation of basis points is used to pinpoint a payment processor’s markup with an interchange plus pricing model.
By calculating bps, a merchant knows how much in fees he is paying a payment processor based on the sales volume he is processing.
The first thing to do in the calculation process is to change the basis point to a decimal.
Do keep in mind that a single basis point is written as 0.0001.
The second thing to do is to convert this decimal by using an equation—divide the number of bps by 10,000.
For instance, 25 basis points written as a decimal is 0.0025.
The calculation process for this number is 25 ÷ 10000=0.0025.
After changing bps to a decimal, the next process is to multiply the decimal by the dollar volume.
For example, if your garage installation business processes $20,000 per month in credit card volume and a payment processor offers interchange plus 25 basis points, you will pay ¼ of 1 percent over cost to process those payments.
How to Calculate BPS and Credit Card Processing Fees
Basis points are mostly present in interchange plus pricing models.
With this processing model, a merchant is charged interchange, plus a small markup for both the rate and transaction fee for every sale done.
A merchant pays a small percentage of every sale amount to a credit card company.
According to experts, this fee is meant to cover handling costs, fraud, bad debt and the risks that come with approving a transaction.
Why Credit Card Companies Use Basis Points
When a processor quotes 5 basis points and $0.12 per transaction, it means that the merchant is paying regular interchange rates plus 0.5% over cost and 12 cents over cost on each transaction.
Most credit card companies are willing to reduce their monthly fees once merchants increase their sales volume and have built a solid track record.
Sticking With Interchange Plus Pricing
Tiered pricing is not a transparent pricing structure. It is the standard in most industries, with fees broken into three tiers—qualified, mid-qualified and non-qualified.
Processors using this pricing model usually display the qualified transaction fee in the biggest font, but include a disclaimer somewhere that it is for qualified purchases only.
Merchants are often tricked with low rates, only to find that there are subsequent charges passed on due to certain card types and transactions downgrading.
Fixed pricing charges a single fee for all transactions, but can also charge different fees based on specific card type and the way payment is accepted.
Interchange-plus pricing fees are usually lower on card payments, while fixed pricing tends to overcharge on the same types of transactions.
Last Words on How to Calculate Basis Points
Interchange-plus pricing is the right fit for merchants looking for flexibility and transparency. However, not all merchants are offered IC Plus pricing, usually due to low volumes processed.
With this type of payment structure, a merchant knows the exact amount that is going to a processor with every transaction.
No merchant wants to be charged unnecessary fees and an interchange-plus pricing model makes it easy to spot.