What’s Your Net Effective Rate?

Have you ever experienced frustration trying to figure out exactly what you are paying for the “privilege” of accepting plastic in your business? There seems to be so many miscellaneous fees on Merchant statements and it keeps getting more complicated. It really shouldn’t be that way, but, unfortunately, it is often done by design. So, what’s the answer to simplifying your analysis? It’s called the NET EFFECTIVE RATE.

So, let’s break it down and here’s as simple as it can be. Grab one of your statements, and take a look at the total “FEES” you paid for the month. Now divide that by the total volume of sales utilizing plastic. Voila… you have your NET EFFECTIVE RATE. This will give you the total percentage that it has cost you for the month to accept credit and debit cards. So why is this important?

You see, there are several components to the fees you are charged. There is the Interchange Rate (paid directly to the card issuing entity… and this is the biggest chunk of your fees) and there is the Discount Rate (what the acquiring bank, your provider, is charging) and then there are all kinds of “other” fees. Some processors spell them all out in individual line items. Some, on the other hand, lump a bunch of fees into a “Monthly Maintenance”, “Service Fee” or “whatever they want to call it” fee. Many of these miscellaneous fees, are what is referred to as “pass-through” fees and there is not really much of anything you can do with them. Your merchant services provider is simply “passing on” fees that they are being charged. When these are listed as an individual line item, you can, and should, question them. If you don’t see many line items of “other fees” you should probably be concerned. That’s when you will often have a bunch of these fees lumped into a “monthly fee” of some sort.

The bottom line in this discussion is simply this… look at your statements thoroughly and question anything and everything you don’t understand. It has been my experience over two decades in this industry, that, unfortunately, a great number of merchants never try to decipher their statements. They feel it is too complicated and is just, simply, another cost of doing business and there are other things more important. Please don’t be one of those merchants. Credit/Debit card processing costs are probably the third most expensive cost center in your business, preceded only by rent and employee costs.This idea of the Net Effective Rate gives you a good, somewhat simple, tool with which to compare one provider with another.

I pray your business is prospering and that my articles have been enlightening for you. Keep moving forward… we live in the greatest country on the planet with opportunities abound.