How to calculate effective fee rate?

Understanding the True Cost of Payment Processing: How to Calculate Effective Fee Rate

Businesses need to accept payments from their customers, and there are a variety of payment processing companies that can help with this. However, it’s important to understand the true cost of payment processing, and not just rely on the advertised rates. The effective fee rate is a more accurate measure of the actual cost of payment processing.

Advertised Rates vs. Effective Fee Rate

When you’re looking at payment processing companies, you’ll see that they often advertise their rates as a percentage of each transaction. This might be something like 2.9% + $0.30 per transaction. This is known as the advertised rate.

However, the advertised rate is not the true cost of payment processing. There are a number of other fees that can add up, such as:

• Monthly fees
• PCI compliance fees
• Chargeback fees
• Cross-border fees

The effective fee rate takes all of these fees into account. It’s calculated by dividing the total fees paid by the total sales volume. This gives you a more accurate percentage of the actual cost of payment processing.

Why is the Effective Fee Rate Important?

The effective fee rate is important because it gives you a more accurate picture of the true cost of payment processing. This can help you make informed decisions about which payment processing company to use.

For example, you might be considering two payment processing companies. Company A advertises a rate of 2.9% + $0.30 per transaction, while Company B advertises a rate of 3.5%. Based on the advertised rates, you might think that Company A is the better option.

However, when you calculate the effective fee rates, you might find that Company B is actually the cheaper option. This is because Company A has a number of other fees that add up, such as a monthly fee and a PCI compliance fee.

How to Calculate the Effective Fee Rate

To calculate the effective fee rate, you need to gather the following information:

• Total fees paid
• Total sales volume

Once you have this information, you can use the following formula to calculate the effective fee rate:

Effective fee rate = Total fees paid / Total sales volume

For example, if you paid $1,000 in fees and processed $100,000 in sales, your effective fee rate would be 1%.

Conclusion

The effective fee rate is a more accurate measure of the true cost of payment processing. By understanding the effective fee rate, you can make informed decisions about which payment processing company to use.