Many small business owners struggle to understand the variety of fees on their merchant account statement. After all, each month your charges will go up and down based on the number of transactions you run through your terminal, the amount of those transactions and the type of cost structure you are on. With all these variables, how can you do a true comparison on your own to see if you are getting a good deal or to see if you are getting a better rate than you were with your last processor?
The answer is something called the “Effective Rate.” The effective rate is the one number that no matter which processor you are using, how many transactions you run or what cost structure you are set up on, it will always show if you are paying too much. The effective rate is simply the total processing fees divided by the total processing volume. So, let’s look at both of these numbers and then show you some examples.
The total merchant account processing fees are the total fees deducted from your bank account or kept back from your batch totals by the processor. If you are simply charged one fee each month and the processor deposits all of the funds from your daily batch to your bank account, this number is easy to get. Just look on your merchant statement and or your bank account to see the total fees that they charged you.
If your merchant account is on “daily discount” which means your merchant services provider takes a small fee out of each daily batch, make sure you look on your merchant statement and add these fees. Also, some merchant service providers charge you separately for equipment or pin based debit, so make sure you look at your bank account to add all of these fees.
Your Total Merchant Account Processing Volume is the easiest number to figure. Usually if you look on your merchant statement you will see the “Volume” for Visa, Mastercard and Discover and simply add these three numbers up to get your total “Volume” or they may even list your “Total Volume” on the statement. Let’s look at a few examples below to figure out if you are paying too much for merchant services. Let’s say you processed $10,000 in visa, Mastercard and discover transactions last month. This means your “Total Processing Volume” was $10,000 and let’s say you paid $400 in fees on your merchant statement plus a $50 equipment rental fee and a $10.00 pin based debit fee. If we add all of those together, you paid $460 in total fees. So we take $460 divided by $10,000 and see that you paid 4.6% of your total volume to the merchant services provider. So, your effective rate is 4.6%.
Here is another example. Let’s say you processed $25,000 in volume and you paid $700 in total fees on your statement and you didn’t see any other fees in your bank account. We could take $700 divided by $25,000 and your “effective rate” was 2.8%.
So, how do you know if this is a good deal? At Capital BankCard, we offer our clients merchant services through several different processing companies and work to find them the best deal. We are usually able to provide merchant services with an effective rate of between 2.0% to 3.0%. We are able to achieve this by lowering our rates and offering free equipment.
As a general rule, if your effective rate is 4.0% or higher, you are paying way too much and we can probably save you a 25% or more on your total processing fees. If your effective rate is in the 3% range, we would still be able to save you some money and offer you free equipment. If your effective rate is in the 2% range, you might have a pretty good deal already but, I would advise sending us a copy of your merchant account statement so we can take a look at it because there are many ways merchant service providers slip in extra fees and it is always good to have a professional take a look. If your effective rate is less than 2% you can be sure that there are some fees missing.