Maximize B2B Profits By Understanding The Effective Rates In Payment Processing

What is the Effective Rate?

Effective rate is a measure that encapsulates the total cost of processing payments relative to the transaction volume. While it's relatively straightforward to calculate the effective rate for credit card transactions by dividing total fees by volume, the true effective rate requires consideration of various factors beyond just the fees. These factors may include chargebacks, interchange fees, processing time, and risk management costs, among others.

How To Calculate Effective Rates for Different Payment Methods

1. Credit Cards

Credit card effective rates are relatively easy to calculate on the surface. You divide the total fees incurred in processing credit card transactions by the total transaction volume. However, to determine the true effective rate, you need to take into account factors such as interchange fees, chargeback costs, processing time, and risk management costs.

2. ACH (Automated Clearing House)

Processing checks via ACH also comes with its own set of costs and considerations. While ACH transactions typically incur lower fees compared to credit cards, the effective rate for ACH payments depends on factors such as transaction volume, processing fees, return fees, and risk management.