What Are Basis Points in Credit Card Processing?
In the world of credit card processing, there are many terms and concepts that may seem confusing to the average consumer. One such term is “basis points.” This article will explain what basis points are and how they are used in credit card processing. In addition, we will provide answers to some frequently asked questions about basis points.
In simple terms, a basis point is a unit of measurement used in finance to describe the percentage change in a financial instrument. One basis point is equal to one-hundredth of one percent, or 0.01%. When it comes to credit card processing, basis points are used to calculate the fees that merchants pay for every transaction processed.
Credit card processing fees are typically calculated as a percentage of the transaction amount, plus a per-transaction fee. The percentage fee is often expressed in basis points. For example, if a merchant is charged a fee of 30 basis points, this means that they are being charged 0.30% of the transaction amount.
To understand how basis points work, let’s look at an example. Suppose a merchant processes a credit card transaction of $100 and is charged a fee of 30 basis points. The fee for this transaction would be calculated as follows:
Transaction amount: $100
Percentage fee: 0.30% (30 basis points)
Fee amount: $100 * 0.0030 = $0.30
In this example, the merchant would pay a fee of $0.30 for processing a $100 transaction. The percentage fee is often combined with a per-transaction fee, which is a fixed amount charged for every transaction processed. The total fee paid by the merchant for a transaction is the sum of the percentage fee and the per-transaction fee.
Now, let’s move on to the frequently asked questions about basis points in credit card processing:
Q: Why are basis points used in credit card processing?
A: Basis points are used in credit card processing to provide a standardized measurement for calculating fees. By expressing fees in basis points, it becomes easier to compare pricing between different payment processors and understand the cost of processing transactions.
Q: How are basis points determined?
A: The basis points charged by a payment processor are typically determined by factors such as the volume of transactions processed, the average transaction amount, and the risk associated with the merchant’s industry. Payment processors may also consider factors like the type of card being used (credit, debit, rewards, etc.) and the method of transaction (in-person, online, mobile, etc.).
Q: Can merchants negotiate basis points?
A: Yes, merchants can often negotiate the basis points charged by a payment processor. Factors that may influence negotiation include the merchant’s transaction volume, the length of the contract, and the competitiveness of the payment processing market.
Q: Are basis points the only fees charged in credit card processing?
A: No, basis points are just one component of the fees charged in credit card processing. As mentioned earlier, there is often a per-transaction fee in addition to the percentage fee expressed in basis points. Other fees that merchants may encounter include monthly statement fees, chargeback fees, and equipment rental fees.
In conclusion, basis points are a unit of measurement used in credit card processing to calculate fees charged to merchants for processing transactions. Understanding basis points can help merchants compare pricing between payment processors and better understand the cost of accepting credit card payments.