A Guide to the Effective Rate in Credit Card Processing

The credit card processing industry is confusing and complex by design. Monitoring and calculating the credit card processing effective rate is a best practice for maintaining merchant services fees.

As a business owner, you want the best value out of your payments provider. That is, you want a solution that fills your needs without costing you an arm and a leg. That should be simple to find, but unfortunately, that’s not always the case. One of the biggest reasons for that is how payment processing is priced.

As we’ve written before, there are numerous ways that credit card processors can price their services, which makes comparing quotes a difficult task. At Swipesum we act as a fractional Chief Payments Officer to help others navigate the industry and monitor credit card processing effective rates, let's dive in.

What is Effective Rate in Credit Card Processing?

The effective rate is a total percentage of revenue that goes toward processing fees. It’s a straightforward metric that lets you see how much your processor is really costing you every month.

To calculate your effective rate, all you need is your monthly statement:

How to Calculate Credit Card Processing Effective Rate?

The effective rate is calculated by dividing the total fees by the total sales volume and then multiplying by 100.

This calculation gives you the percentage of revenue your processing eats up monthly, providing the clearest way to assess the cost-effectiveness of your payment processor. That’s the percentage you are paying your card company and bank each month in fees. Sure, it’s basic, but it’s the best way to measure the cost-effectiveness of your processor.

But why? If credit card processing is so complex, why should the method of measuring it be so simple? Well, it’s really the only way to compare apples to apples. Constantly changing interchange rates and a variety of credit card processing fees across the board make it impossible to know exactly what your processing fees will be, but you don’t have to worry too much about that. What you really want to know is which processor will take the least revenue from you, which is exactly what the effective rate can tell you.

Now, some processing statements make it easy for you and put all your fees in one place, but others will spread them out throughout the statement. Some might even show “fee buckets” rather than listing the individual fees, which is a good indication that you’re being ripped off.

In many cases, customers will find that their effective rate is much higher than what the processor originally promised with their rates. Calculating your effective rate is a great way to figure out if your processor is holding up to their part of the bargain. This is also why it is important to calculate your effective rate annually, at the very least. Time can change a lot of fees, so you need to continue to assess them.

Factors Affecting Your Effective Rate

Several factors contribute to your effective rate:

• Interchange Fees: Set by the card networks and dependent on card type, reward cards often incur higher fees.
• Assessment Fees: Charged by card associations like Visa or Mastercard.
• Payment Processor Markup: The rate your processor quotes, which is just one part of your effective rate.
• Transaction Volume and Average Ticket Size: High-volume, low-ticket businesses might see higher effective rates due to fixed per-transaction fees.
• Industry Risk Level: High-risk industries, like travel or e-commerce, often face higher fees.

Understanding these factors can help you assess and optimize your processing setup. At Swipesum, we prioritize transparency to ensure you have all the information needed to make the best decision.

Wait, then what’s the rate quoted by the processor?

All the lingo can get a bit confusing, especially what you’re looking at a bunch of different rates at once. There are so many fees to keep track of—transaction fees, flat rate fees, incidental fees, interchange fees, the list goes on. If your head is spinning, take a look at this comprehensive guide to all the fees you may encounter.

For now, let’s just break down the difference between the processor rate and the effective rate so you don’t get tricked into thinking you’ll be paying less that you will be. On every transaction, you will pay two parties who play a part in completing the transaction: the card network and your payment processor. Card networks set rates known as interchange, which are universal for every processor. It’s like the basic cost of completing a transaction.

On top of interchange, you will pay what are often called “markup fees” to your processor. These are the rates that processors most often quote. So, if a processor tells you you’ll pay 0.5% and 15 cents per transaction, you’ll actually pay more than that. Processors won’t show you the expected interchange, or any of the fees that are not assessed on a per-transaction basis.

The effective rate, on the other hand, takes all of that into account. It includes the interchange fees, the markup rates, and every other fee that you may encounter.

It is not always easy to determine the most cost-effective option by looking at the numbers provided. In fact, it is really easy to see a low markup and think you’ll be getting the best deal. In reality, one low rate is not going to ensure a low effective rate. There might be large monthly fees, service fees, or other hidden expenses. That’s why the effective rate is so, well, effective.

The biggest problem that many people face is that they are unaware that rates outside what they are being presented should be taken into account. However, a processor is going to do their best to show you the lowest numbers so that they can stand out from their competitors. In order to have the upper hand in the situation, you have to do a little bit of the work yourself to calculate the estimated costs your business will face.

Don’t get swindled because you got distracted by a simple-looking rate. The effective rate is what you’ll be paying every statement, so make sure you look at that first and foremost.

How can I find the lowest effective rate?

If you’re asking yourself this, you’ve come to the right place. SwipeSum is transparent about using effective rates in our quotes to ensure you know exactly what you’ll be paying. In fact, effective rates are the primary quotes used in our proposals.

When we help you find a processor, you can rest assured that the quote we present is dependent on the total percentage of revenue you’ll be charged rather than just the base rates that the processor readily provides. We understand that fee structures—and most breakdowns of processing fees—are confusing. And confused is the last thing you want to be when you’re thinking about switching processors.

We want you to be confident, so we show you the real effect switching will have on your company—which is all about the effective rate.

The most important thing to keep in mind when you’re on the hunt for the lowest rate, is that your total fees are directly related to your specific business. One processor may be the most cost-effective service for you, while being the most expensive service for the restaurant down the block. Things like the industry you’re in, the volume of transactions that you process a month, and even the different ways you accept credit card can all impact the fees you’ll end up paying. The effective rate allows you to see the big picture, which is what you really care about, after all.

Moreover, it may be the case that you aren’t actually looking for the cheapest possible processor. You may need certain hardware or software that can only be run through a more expensive processor. Or, you may really like the simplicity of a “flat-rate” price offered from services like Square or PayPal even if it’s not the most cost-effective option or your specific business. Everyone is looking for something a little different.

Wrapping Up

Understanding and calculating your effective rate is essential for managing your processing costs. Since the ideal processor for one business may not be best for another, consider your unique needs, transaction volume, and the payment methods you support. At Swipesum, we ensure that every quote we provide reflects the total cost, so you’re never caught off guard by hidden fees.

If you’re ready to simplify your processing costs, book a consultation to get started.