What is the effective rate in payment processing?

The credit card processing industry has some of the most complex pricing of any industry. To make it more difficult, the industry is so competitive that most payment processors don’t try to make it clear and even try to mislead what the pricing actually is. Is is also common that processors hide fees, overcharge for services, or charge for unnecessary items.

What’s worse is that some payment processors have so complex monthly statements with so many line items that it’s frustratingly difficult to determine what you are paying. This is where effective rate comes in.

To get the effective rate, cut through all the line items and just add up all the charges you had for the month. In your statement, it might say you are paying 1.95% in fees. However, you have to be careful and understand how they got that 1.95% because that is almost certainly not the rate. That 1.95% might be:

$10,000 in processing with $195 in “processing fees”

OK, that is 1.95%, but with closer inspection, you see that you have a monthly charge, PCI fee, cross-border fee, and potentially a few others. All those other fees add to $140.

To get your effective rate, add up all your fees. Don’t just take the rate you were given. The actual rate, or effective rate is:

$10,000 in processing with $335 in fees ($195 in “processing fees” + $140 in other fees). Effective rate is 3.35%.

So, in this case, you’re actually paying 3.35%. A far cry from 1.95%. So get your effective rate to know what you are paying or to compare processors.

Effective rate: Sum of all your fees divided by your total credit card sales.