7 Reasons Why Effective Rate Is Important

by Oct 31, 2013Rates & Fees

Knowing why to calculate your effective rate is even more important than knowing how to calculate it.

I realize that I just “one upped” myself as I have previously stated that knowing how to calculate your effective rate is THE most important aspect of maintaining your merchant account.

Allow me to explain…

Understanding why goes hand in hand with knowing how, but knowing why is slightly more important because without the “why” the “how” would be insignificant.

The calculation of knowing your effective rate, as previously mentioned is a means to gauge the cost of your merchant account fees.

 

Like an oil change

Every month you receive a statement from your merchant account provider and you are charged a total fee for accepting credit cards.

Watching this fee is the best and easiest maintenance measure that you can use.

When you change the oil in your car every 3,000 (or 5,000) miles you’re taking a maintenance action to keep your car running smoothly.

Similarly when you check your effective rate each month you’re “checking the oil” to make sure it is still running at optimal levels.

 

Turning all apples into oranges

Often times merchant account providers have different rate programs and rate structures.

There’s interchange plus, tier based, and blended rate programs and all of them make it difficult to understand the inner workings of how the rates are charged.

If you’re shopping around, comparing your service to another provider can become difficult as is simply monitoring your own rates if you don’t have an understanding of interchange pricing.

I’m not saying that you should constantly compare to other providers (that would be a lot of work) but if you are currently shopping for a new provider then you’re probably in the middle of this dilemma.

On top of the different pricing structures, there are various formats to the statement that you receive. Some show transactions fees and hide provider markup. Others show interchange costs with percentage rates and hide downgrade fees.

The point is, it’s challenging to compare one program to the next because of these intentional differences set up by the merchant account providers.

 

Clearing the smoke and seeing past the mirrors

You’ll be in a losing game of push and pull, unless you know how to win.

Trying to find the best deal and then wondering how yours compares to the next is a dangerous roller coaster to be on.

Instead, arm yourself with the knowledge of calculating your effective rate and you’ll have the ability to cut right through the smoke and mirrors games of teaser rates, lowest rate guarantees and free terminals that aren’t really free.

Keep the ball in your court by knowing your effective rate.

 

Easy to monitor

Everyone likes easy but some things are difficult to comprehend because of the elements surrounding it.

If there was an easy way to do calculus perhaps we would have more math majors in school.

Or what if there was an easy way to make money? If there was we’d probably see more people nipping at the heels of Bill Gates in effort to be the next one to break the top 50 list of Forbes millionaires.

For the sake of understanding merchant account fees, “easy” is possible if you see it from the right angle.

Monitoring your effective rate is a wonderful benchmark comprehension tool to make use of when managing your merchant account.

Knowing that you’re not going to become an expert at merchant accounts or understanding interchange plus pricing is okay.

Look at it as your completely legitimate “cheat sheet” way to know without a shadow of a doubt that you understand the pricing of your merchant services account.

 

Playing your “show me” card

“Actions speak louder than words.”

“Put your money where your mouth is.”

Both of these idioms are indications of a request to carry out a promise with actions rather than words.

A reputable merchant account provider should and will be able to do this.

If you get a feeling that a merchant account provider is giving you a flimsy, smoke filled promise about a rate or some other feature, make them prove it by allowing you to enter a month to month contract so you can see how things unfold for a month or two.

I’m not saying that you should automatically distrust an offer, I’m just attempting to provide you with a way to a put yourself in the drivers’ seat and keep control of the situation, rather than vice versa.

 

7 reasons why effective rate is important

  1. It’s a simple and quick way to calculate your cost
  2. Calculating this “benchmark” cost takes less than 5 minutes per month (easy to monitor)
  3. Keeps focus on what’s really important, which is the total cost of your merchant account and not just one rate or transaction fee
  4. Knowing effective rate levels the comparison playing field when shopping for a new merchant account provider
  5. It eliminates bogus claims of lowest rates
  6. It gives you leverage and keeps you in the drivers’ seat
  7. It gives you peace of mind in knowing your getting a fair deal

 

The Bottom Line

Your effective rate IS your bottom line.

Simply put: know how to calculate your effective rate and monitor it each month.

The common element in all apples to oranges comparisons is the all encompassing fee at the end of the month.

The next time someone comes to you with the lowest rate in town, offers you a free terminal, or claims they have the lowest rate in town, you’ll be better equipped to address and analyze the offer.

Brian Manning

Bancardsales founder and 15 year payment processing veteran, Brian Manning has helped thousands of businesses streamline their electronic payment systems. With a healthy disdain for things like terminal leases and "lowest rate" guarantees he regularly advises on best practices to anyone setting up merchant account related solutions. Brian's mission and passion is to help business owners use their merchant account simply as one tool in the big picture of growing their own business and creating an experience that is positive and meaningful for their customers.

Brian Manning

Bancardsales founder and 15 year payment processing veteran, Brian Manning has helped thousands of businesses streamline their electronic payment systems. With a healthy disdain for things like terminal leases and "lowest rate" guarantees he regularly advises on best practices to anyone setting up merchant account related solutions. Brian's mission and passion is to help business owners use their merchant account simply as one tool in the big picture of growing their own business and creating an experience that is positive and meaningful for their customers.

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