Plain talk: figuring out your processing costs can be a real pain in the cash flow. Card schemes like Visa and Mastercard have their own unique rate structures, as do the MSPs and gateways that handle your transactions. Your pricing and transaction volume also influence the equation significantly. So making an apples-to-apples comparison between gateways or processors can be as complicated as filing income taxes.

However, there are core concepts in every cost structure that if understood, can simplify your efforts to get a handle on your processing costs. These concepts range from the fairly obvious to more complex. Understanding them will help you wrap your head around how much you’re spending – or should be – on processing.

Processing Method

There are two basic processing methods that sort merchants into basic pricing structures: card present or card-not-present (CNP) processing. Card-present merchants fall on the low-cost end of the spectrum. Card-not-present transactions have higher processing costs, and high-risk merchants face additional costs on top of that. For example, a card-present transaction will incur roughly 2% transaction fee from Visa, Mastercard, and Discover transactions. That same fee for CNP transactions goes up to 2.5%.

Transaction Volume

The volume of transactions processed affect your costs. Merchants will qualify for better rates as their volume increases. So if you’ve grown your business significantly and your processing costs have not gone down, it’s time to have a chat with your merchant service provider. Volume is commonly measured by average ticket size – your average sale amount per transaction. Roughly speaking, this is your total dollar about processed divided by the number individual transactions. Anytime your processing cost is a percentage of a your transactions, knowing your ticket size will help you translate that rate into dollars and cents.

Risky Business

Then, whether the merchant is considered high-risk will multiply the cost of each method. Merchant account fees for high risk merchants can be double that of their lower risk counterparts. And since high-risk means more potential fraud and chargebacks, there are variable costs and fees that stem from them. High-risk merchant accounts can end up taking up to 10% of your gross sales in processing costs.

Effective Rate

Now, let’s do math! This is how you can calculate your approximate effective rate. Once you’ve worked out your average ticket size, divide your monthly processing volume by that ticket size. That number is multiplied by the transaction fee. If you’re a CNP merchant, it’s roughly $.25 – $.30.

So let’s say your monthly volume is $10,000 with an average ticket size of $50:

  • {$10,000 (monthly volume) / $50 (avg. ticket size)} * $0.25 (transaction fee) = $50 (total transaction cost)

Divide the transaction cost by your monthly volume, and multiply that by 100:

  • {$50 / $10,000} * 100 = 0.50%

0.50% is your approximate rate for transaction fees. Add that to the interchange costs (fees + markup)… for CNP that rate is roughly 2.15% so:

  • 0.50% + 2.15% = 2.65%

2.65% is your total transaction rate. Now divide your gateway costs – let’s say it’s $15/month – by your monthly total volume, multiplied by 100 to get your gateway cost percentage:

  • {$15 / $10,000} * 100 = 0.15%

Add that percentage to your working total for transaction fee plus interchange:

  • 0.15% + 2.65% = 2.80%

2.80% is your effective rate for processing costs. Finally, multiply your total monthly volume by the combined effective rate to get your approximate monthly cost:

  • $10,000 * 2.80 = $280 monthly in processing costs.

ChargebackHelp can help optimize your costs through our Merchant Services by helping your find the right merchant accounts. We also offer our own gateway BILLAPAY, which in turn can reduce your processing costs by up to 80%. Furthermore, by fighting chargebacks, ChargebackHelp can reduce the costs faced by high-risk merchants.

We’ve shown you here in the simplest form possible how to understand your processing costs. That amount is influenced by the kind of processing you do, your overall volume and ticket size, and risk associated with transacting your business. This was meant to be a guide, to give you a ballpark estimate of your monthly cost. For a more comprehensive look at what your costs might be, give ChargebackHelp a call today! +1.800.975.9905