Basis Points – The Basis for Fees
The term basis point is thrown around a lot in the credit card processing industry, but many sales people fail to realize that most people aren't quite sure exactly what a basis point is, or what it means in terms of credit card processing fees.
This article explains what a basis point is, how to calculate fees using basis points, and finally the role basis points play in credit card processing — specifically having to do with a processor's markup.
If you're looking to learn how to calculate or convert basis points, you may want to skip on over to our basis point calculator.
What is a basis point?
A basis point is a unit of measurement that is equal to 1/100 of one percent, or 0.01%. A basis point expressed numerically as a decimal is equal to 0.0001.
Basis points are often abbreviated as simply "bp," which is pronounced as "bip," and more than one basis point is abbreviated a "bps," pronounced as "bips." For example, people will often say "thirty bips" instead of "thirty basis points."
The term basis point is particularly common in financial fields where small percentages often play a role in fees or charges, such as in credit card processing. With credit card processing, basis points are most often used to refer to a processor's markup on an interchange plus pricing model.
In fact, we've posted a table that shows the decimal and percentage representation of five through one hundred basis points in our article about whether a certain basis point markup is competitive.
How do you calculate basis points?
When looking to calculate basis points people usually want to know how much in fees a given number of basis points will yield over a given (sales) volume of money.
The first step in the calculation process is to convert the basis point in question to a decimal, keeping in mind that one basis point represented as a decimal is 0.0001. To perform this conversion using an equation, simply divide the number of basis points by 10,000.
For example, 25 basis points shown as a decimal is 0.0025. (25 / 10000 = 0.0025)
After converting basis points to a decimal, the next step is to multiply the decimal by the dollar volume in question.
For example, let's assume that your business processes $20,000 a month in credit card sales volume, and a processor offers you a rate of 25 basis points over interchange fees.
The processor's fee of 25 basis points will yield a charge of $50 over $20,000 - (0.0025 * 20000 = 50).
"No Basis Points" Markup
Occasionally, a business owner will tell us they've been offered processing with "no basis points" and ask if that means there's no markup / it's the lowest cost option. A processor claiming "no basis points" may be trying to simplify the pricing, but unfortunately it does not mean that there is no markup. Remember, basis points are simply a unit of measurement. There are other ways to express fees and costs.