The True Cost of Credit: Understanding Your Payments’ Effective Cost

Pricing in the credit card processing industry is very complex and most merchant statements do not make it easy to understand. There are so many technical and industry jargon-laden terms (interchange, qualification tiers, downgrades, batch fee, ACH fee, authorization fee, AVS fee, PCI compliance fee, etc.) that even a sophisticated financial manager can get confused. So how do you truly understand the cost of credit/debit card processing, and then use that knowledge to ensure that your company is getting the best value? This article will help you understand and manage the effective cost of different payment cards.

The first step is obtaining electronic or paper copies of your most recent monthly merchant statements. Using this information you can use the following calculations, typically in an Excel spreadsheet, to determine your company’s costs. This methodology may take a little time to set up but will become easier and routine over time.

One output of this exercise can be a dashboard with the following information – the effective cost/rate by card type. This analysis can be done on a monthly or quarterly basis to identify trends and issues with payment processing costs.

Effective Rate for Visa & MasterCard Credit Cards

Since the cost of accepting and processing Visa and MasterCard credit transactions is very similar, they are combined together for easier analysis. Add all fees from interchange categories related to credit card transactions (do not include any interchange categories for debit transactions).

Step 1

Add fees from assessments and dues. Assessments are not typically broken out separately for credit and debit transactions but they can be easily calculated since they are uniform for all Visa transactions at 0.0925% and all MasterCard transactions at 0.0950%. Dues are small fees charged per transaction by both card networks. Some fees from dues include the $0.005 fee per authorization and the $0.0185 Network Access and Brand Usage from MasterCard.

Step 2

Add all transaction fees (authorization, settlement, and AVS) batch fees, chargeback fees, statement fees, reporting fees, annual fees, monthly fees, and other miscellaneous fees.

Do not add authorization fees related to American Express or Discover. All fees in this grouping are levied by the payment processor and a portion of these fees should be allocated to signature debit card transactions based on a weighted average of all transactions. For example, if credit transactions represent 70% of total transactions then 70% of all processor fees should be allocated to credit and the other 30% to debit.

Step 3

For companies who have qualified and non-qualified rates – add all fees from discount charges, downgrades, and surcharges.

Step 4

Divide the sum of all of the above fees by net sales (total sales minus refunds/credits). The result is the effective rate or cost for accepting Visa/MasterCard credit transactions.

Step 5

Take this rate and multiply it by the average sales ticket for Visa/MasterCard transactions. The result is the average cost to process an individual Visa or MasterCard transaction.

Effective Rate for Visa & MasterCard Debit Cards

The process for calculating the effective rate for debit cards is exactly the same as credit cards. Remember to allocate a portion of all of the processor fees to debit cards based on the weighted average of all transactions.