Effective Rates

Understanding Pricing
The most important element about understanding pricing is the concept of an effective rate. An effective rate measures the aggregate percentage paid by taking the processing fees and dividing the processing dollars.

Effective Rate = Processing Fees / Processing Volume

This ratio is the single most accurate way to measure processing expenses because it evaluates all of the fees, not just specific percentages or transaction fees. With over 1,300 classifications of card categories as determined by Visa, MasterCard, American Express, and Discover, it’s impractical to evaluate individual rates.

It is empirical, definable, and measurable.

The managing partner at a law firm claims that his fee for accepting debit and credit cards is 1.50%.  He asks if Velocity can “beat the rate”. A conversation ensues about effective rates and the managing partner provides Velocity with his most recent merchant statements. After performing a comprehensive analytical review, it is discovered that his base rate is indeed 1.50%, however only 20% of the debit and credit cards processed qualified at this percentage. The other 80% of his debit and credit cards were priced at higher rates, making his effective rate 2.80%.

That’s 87% higher than the perceived rate of 1.50%.

RateDebit & Credit Card Volume% Allocation (Weight)Fees Paid

Effective Rate = $2,800 / $100,000 = 2.80%

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