Understanding what basis points are is extremely important when getting a merchant account. This article explains the basic details of basis points and how they are calculated.
For those who are in the process of applying for a merchant account and have been doing merchant account comparison for a while they would have come across the term “basis points” quite frequently. Basis points are very frequently used when referring to retail merchant accounts and credit card processing. And even though the concept and the term might seem to be a little too complicated to understand, it isn’t.
In simple terms basis points is a percentage of the sales the businessmen makes that he has to pay to the service provider as a fees for processing credit card transactions. Retail merchant accounts all have a credit card processing facility since most people prefer to purchase products and services online through credit cards. The service provider enables the businessmen to accept these credit card payments and processes these payments online for which they need to paid a certain amount as fees for their services.
Basis points are calculated to be 1/100 of a percentage. The basis points that would be charged on your merchant account would be calculated at the time of the process of application processing. For example if your application has been qualified for 159 basis points then it means that you would be paying 1.59% as a fee to the service provider for the sales that you make.
Basis points are also known as credit card processing discount rates. Basis points are usually under 5% and a larger chunk of merchant accounts fall under 2.5% basis points category. What you should keep in mind while you do merchant account comparison is the exact basis points that you qualify for. Even a fraction of basis points can make a lot of difference in the long term when it comes to service provider fees. So to get a cheap merchant account you must approach a lot of service providers, see what you qualify for and choose one where you qualify for the lowest discount rates.
If the merchant has a tired merchant account then this concept will work slightly differently. There would be a first tire, mid range tire and non-qualified tires. The first tire would have the highest discount rate, followed by mid range and then the non-qualified tires; these are basically all surcharges that would be added up to the rate that you were qualified for to come to a final figure of basis points that you would be paying to the service provider.
If your merchant account uses an interchange plus which is also known as a cost plus method of price structure then there would be only one figure charged by the service provider, this basis point figure would have to be then added up to the basis points that are charged by visa or mastercard to come to a final figure of basis points that would be charged on your account.
The best thing to do while selecting an account is to ask the final total figure of basis points that would be charged from you if you find all these calculations and terminologies a little confusing.