Credit Card Processing

Effective Rate for Credit Card Processing Fees


November 17, 2022

For businesses that already accept credit cards and have actual processing data, the effective rate can be interpreted as an exact measure of the competitiveness of your current processing solution.

For businesses searching for a new merchant account without actual processing data, the effective rate should be interpreted as a general indicator of cost-effectiveness — not as a precise measurement. However, it is still extremely important in determining the best processing solution.

Basics of Effective Rate and Processing Fees

Varying interchange fees make predicting the exact total cost of a merchant account quote impossible. Luckily, it’s not necessary to calculate total costs in order to determine the best option; it’s only necessary to determine the lowest total markup.

As we’ve explained in detail in our explanation about credit card processing fees, base costs remain consistent among all processors. For this reason, they can be virtually ignored when calculating the effective rate of a credit card processing quote. Example A below illustrates effective rate calculation for prospective quotes and highlights how base costs are inconsequential.

Finding the best merchant account is tricky not only because average credit card processing fees vary from one provider to the next, but also because the significance of each fee varies depending on your business’s processing profile. Average sales volume, ticket amount, and seasonality are all factors that impact the competitiveness of a merchant account quote. The effective rate levels the playing field by taking into account all of these varying factors to deliver an accurate single measure of cost-effectiveness over time.

A crucial mistake when comparing merchant accounts is to focus on one particular rate or fee. It’s imperative to look at the big picture and to consider all costs — and that’s precisely what the effective rate does. Example B below illustrates how the effective rate clearly shows the best processing quote even though the best option is not immediately apparent by simply looking at rates and fees.

Just as rates and fees impact the effective rate, so too will time. The effective rate should be calculated on an annual basis to demonstrate how cost-effective a merchant account will be over time. This is especially true for businesses with a high degree of seasonality. A merchant account quote that’s less expensive a few months out of the year may actually be more expensive than other offers on an annual basis.


Let’s take a look at how this works in practice.

Example A

When reviewing merchant account quotes, the primary purpose of the effective rate is to give a general measure of competiveness. Base costs are inconsequential, and the processor’s markup is crucial. Keep in mind that our software here at CardFellow calculates the effective rate of each quote that you receive automatically, so there’s no need to do it yourself.

The processing details of our pretend merchant along with the two fictitious quotes that we’ll use for this example are listed below.

Merchant Details:
Annual average monthly sales volume: $10,000
Annual average ticket $50.00

Monthly Base Costs (interchange, dues and assessments)

Quote A:
Interchange markup: 10 basis points (.10%)
Transaction fee: $0.05
Monthly fee: $10
Annual fee: $120

Quote B:
Interchange markup: 30 basis points (.30%)
Transaction fee: $0.10
Monthly fee: $3

Calculating the monthly effective rate for Quote A including base costs:
((10,000 * .001) + (10,000 / 50 * .05) + 10 + (120 / 12) + 189) / 10,000 * 100 = 2.29%

Calculating the monthly effective rate for Quote B including base costs:
((10,000 * .003) + (10,000 / 50 * .10) + 3 + 189) / 10,000 * 100 = 2.42%

Quote A is 0.13% less expensive than Quote B.

Notice that the since base costs of interchange, dues and assessments are the same for every processor, they’re simply repeated in the calculation for each quote.
Removing the base cost will yield results with the same accuracy.

Calculating the monthly effective rate for Quote A less base costs:
((10,000 * .001) + (10,000 / 50 * .05) + 10 + (120 / 12)) / 10,000 * 100 = 0.40%

Calculating the monthly effective rate for Quote B less base costs:
((10,000 * .003) + (10,000 / 50 * .10) + 3) / 10,000 * 100 = 0.53%

Since base costs are consistent and independent of the provider’s markup, our calculations figured without base costs yield the same 0.13% advantage for Quote A. Hence, there’s no need to include base costs when calculating the effective rate of prospective merchant account quotes.

Example B

The effective rate shows the best quote even when one option appears to be better than another when looking at a single rate or fee.

The processing details of our pretend merchant along with the two fictitious quotes that we’ll use for this example are listed below. As per example A above, we’re not going to bother including base costs in the calculation for this example.

Merchant Details:
Annualized average monthly sales volume: $15,000
Annualized average ticket $10.00

Quote A:
Interchange markup: 25 basis points (.25%)
Transaction fee: $0.05
Monthly fee: $10

Quote B:
Interchange markup: 1 basis points (.01%)
Transaction fee: $0.10
Monthly fee: $10

Calculating the monthly effective rate for Quote A:
((15,000 * .0025) + (15,000 / 10 * .05) + 10) / 15,000 * 100 = .75%

Calculating the monthly effective rate for Quote B:
((15,000 * .0001) + (15,000 / 10 * .10) + 10) / 15,000 * 100 = 1.22%

As you can see, Quote B is significantly more expensive than Quote A even though judging by the interchange markup Quote B appears far more competitive. In this case the small average ticket amplifies the importance of the transaction fee, and the lower transaction fee of Quote A makes it a much better option.

Ben Dwyer

BY Ben Dwyer

Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.

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