What are your Rates???

In my 10 years in the merchant processing industry, by far the most asked question of me is “what are your rates?” If I had a dollar for every time I heard that, I’d be retired in Fiji… I understand why merchants ask it as it seems like a logical question. Business owners must manage every expense of their company, and their merchant service account costs are no exception. The problem, however, is that the question “what are your rates” is fundamentally flawed for a couple reasons.

First of all, the merchant services industry is not simply a matter of “rates,” it’s a matter of “rates AND transaction fees AND monthly fees.” For example, there might be a merchant processing company out there who offers a rate of 0.10%. Sounds amazing, right? The problem is, the company will ALSO charge $150 in monthly fees and a $.40 flat fee for every transaction. Not so amazing now, huh? We see cases all the time where we will keep the rate (percentage) the same as another processing company yet save the business $100’s per month by lowering their monthly and transactional fees. So, fight the urge to focus solely on the “rates” and remember there are other factors equally, and sometimes more, important.

The second fundamental problem with the “what are your rates” question is this: Unless they’re processing with Square, no business owner knows what their current rates are. They might think they know, but they’re never correct. (Yes, even though you are a smart business owner, you don’t know what you currently pay. Don’t feel bad, literally 100% of business owners don’t know). As mentioned in the previous paragraph, knowing what you pay to accept credit cards is complicated. Although there are only 3 main categories of fees (rate, transaction, and monthly), there are literally over 1,000 subcategories of fees which fall under those main categories. (Fees such as: Interchange fees, AVS fees, NABU fees, Debit Network fees, Assessment fees, Integrity fees, PCI fees, Gateway fees, Association fees, etc, etc, etc…) This makes being able to read your merchant statement impossible unless you’ve had years of industry training. It actually took me about 2 years of analyzing merchant statements every day before I truly understood how to read them. So, without knowing what you currently pay, how are you going to know a good deal when you hear it?

Fear not though, there is a simple trick to understanding what you pay and I’ll share it with you here… It’s called the “Effective Rate”. The Effective Rate cuts through the hogwash and gives you an exact, easy-to-understand overview of what you pay. No years of industry training necessary. You calculate the Effective Rate like this:

Pull out a recent statement and a highlighter… Find and highlight: 1) the Total Fees you paid for that month’s processing. And 2) The Total Volume you processed that month. Now simply Divide the total fees by the Total Volume. You’ll get some # with multiple decimal places (ex: 0.0297). If you don’t get a # less than 1.00, you probably divided the total volume by the total fees (very common mistake). Try it again. Assuming you now got a # less than 1, you now need to convert the # to a percentage and you’ll have your Effective Rate. Simply move the decimal to the right two spaces and that’s your Effective Rate %. For Example 0.0297 = 2.97%. Another example: 0.03153 = 3.153%.

Now you know exactly what you’re paying to take cards! The next question to ask yourself is this: Is my Effective Rate too high? As a simple rule of thumb, if you’re over 2.50%, YES, you are paying too much! We’ll lower that for you so call us..

Leave a Comment