The Credit Card Processing Effective Rate: How to Compare Merchant Service Providers

The Credit Card Processing Effective Rate: How to Compare Merchant Service Providers

It’s pretty much a given that entrepreneurs who want to get serious about their business in 2019 need to accept credit card payments. They account for well over half of consumer transactions by a dollar spent — compared to just 15% of transactions administered in cash.

Credit Card Processing Payments Image

But there are a few necessary evils that come with taking c\redit cards as a form of payment. One of those is added fees. 

When it comes to understanding credit card processing rates and evaluating merchant service providers, the effective rate can tell you a lot about how cheap — or expensive — the proposed rates are. 

Let’s dive in: 

What Is the Effective Rate in Credit Card Processing?

The effective rate is the rate merchants pay for credit card processing after factoring in the non-negotiable processing fees and your provider’s markup. Your effective rate is the rate that you’re getting when you add up all of your processing costs.

“The effective rate is the total average percentage you pay to process a single credit card transaction,” says Matthew Speiser, merchant services expert at Fundera. “If you have an interchange-plus or tiered fee structure — or if your payment processor charges different rates for accepting different credit card brands — it’s how you interpret your true cost of accepting credit cards.”

Importance of Effective Rate

Knowing the effective rate for different payment processors is the easiest, most straightforward way to compare the competitiveness of rates from different providers. Many providers will advertise their lowest rates available — and merchants often find themselves paying more in actuality. 

That’s because processing companies set their own processing rates based on the type of transaction: qualified, mid-qualified, or non-qualified. This “rating” system for credit card transactions makes certain purchases susceptible to higher processing fees than the ones companies lure merchants in with. 

If you’re already set up with a payment processor, you can also use the effective rate to make sure you’re not being scammed. “ It can help merchants identify if a processing provider is overcharging them,” says Shirshikov. “Business owners should understand how much they are paying for the service and if it’s worth it for them.”

Remember, there are other fees to consider too. But the effective rate is a great way to evaluate your particular payment processing provider. 

How to Calculate an Effective Rate for Credit Card Processing

The credit card processing effective rate “calculator” is simple: 

Effective rate = ( total credit card processing fees / total amount processed ) * 100

Credit Card Processing Effective Rate Formula

“For example, a $100 fee for $1,000 in sales results in a 10% processing fee,” explains Shirshikov.

Total fees = $100

Amount processed = $1,000


($100/$1,000) *100 = 10%

Speiser gives another example: “If you were charged $800 in fees over a 30-day period in which you also deposited $25,000 into your merchant account, your effective rate would be 3.2%.”  

Total fees = $800

Amount processed = $25,000 


($800/$25,000) * 100 = 3.2%

If you do this calculation, you might notice it’s different from the figure your processor provided during the sales process. That’s because these are often estimates — not exact figures for processing fees for every transaction. And sales teams almost always tout the more attractive rate. 

Let’s look at how this applies to a real merchant, using their statement below.

Credit Card Processing Statement Bill

Total fees = $1,506.68

Amount processed = $51,634.88

($1,506.68/$51,634.88) * 100 = 2.917%

So this merchant’s effective rate is about 2.92%.

Grab your merchant statement and go through this exercise to calculate the credit card processing effective rate for your own business. 

What Is a Good Effective Rate for Credit Card Processing?

What is a good effective rate for credit card processing for a small business with great credit? 

Speiser and Shirshikov weigh in with similar rates: 

  • Between 2.9% and 3.3%, according to Speiser
  • Shirshikov gives a bit more wiggle room, quoting between 2.5% and 3.5%

There are factors that play into whether you qualify for the average effective rate for credit card processing. “Digital transactions will typically have a higher effective rate because there’s more risk involved with accepting payments online,” says Speiser.

What makes an effective rate “good” ultimately comes down to your unique circumstances. Universally, “a good effective rate should be affordable for the business,” says Shirshikov.

Related: Average Credit Card Processing Fees >

How to Get the Lowest Effective Rate on Credit Card Processing

While credit card processing companies control effective rates, there are ways merchants can position themselves more favorably to get the best rates


While there’s no wiggle room with rates owed to the card associations, you do you have bargaining power with payment processor markup. “Most of the time, effective rates aren’t set in stone,” says Speiser. 

Some businesses are inherently likely to qualify for more attractive rates. “Generally speaking, low-risk businesses or brick-and-mortar businesses with high transaction volumes will get the best effective rates on credit card processing,” Speiser says. “This is because more transactions lead to more revenue for the processor, and the risk of fraud is minimized.”

To further help your chances at getting the best rates, focus on building up a good credit history. This makes you look dependable and trustworthy to processing companies, so they’re more likely to give you lower rates. “Payment processors will also give preference to businesses with good credit scores, a strong merchant account history, and many years in business, as this decreases a businesses risk factor,” says Speiser. 

Other ideas:

  • Sign a long-term contract
  • Shop around for multiple quotes to make sure you’re getting the best deal
  • Ask the payment processor to explain all of the rates and give a fee breakdown, specifically about the effective rate
  • Follow up with payment processor about special promotions or deals
  • Discounts for a high volume of transactions

Find Niche Experts

Ever hear the phrase “jack of all trades, master of none”? What it means is that if you’re a generalist, you can only be so good at everything. If you’re a specialist, you can become an expert at that one specific thing. 

The same is true when it comes to merchant services providers. “Every business is different, and it’s often low-margin businesses that accept credit card payments and worry about processing fees,” says Shirshikov. “Working with specialized processing companies is often better because they understand the industry and offer competitive rates compared to some of the larger providers.”

Remember the Big Picture

The effective rate doesn’t give you the whole picture. In fact, it only tells part of the story. If you really want to know how much you’re spending on payment processing costs, you’ll want to carefully evaluate the entire fee structure. 

“While the effective rate shows you what you’re paying per credit card transaction, keep in mind other monthly fees your payment processor may charge,” says Speiser. “These include fees for PCI compliance and account maintenance. Factoring these fees into your credit card processing costs along with the effective rate will give you the best idea of the true cost of accepting credit card payments.”

What’s Next?

FAQs About the Effective Rate in Credit Card Processing

Q: What is the effective rate in credit card processing?

The effective rate in credit card processing refers to the overall cost a merchant incurs for accepting credit card payments. It includes various fees such as interchange fees, assessment fees, and processor markup. To calculate the effective rate, divide the total processing fees by the total sales volume. It helps merchants understand the true cost of processing credit card transactions and evaluate the competitiveness of different merchant service providers.

Q: How can I compare merchant service providers based on their effective rates?

To compare merchant service providers based on their effective rates, gather detailed information on the fees they charge, including interchange rates and any additional fees specific to their pricing structure. Calculate the effective rate for each provider by considering your average transaction volume and the corresponding fees. Keep in mind that effective rates may vary based on factors like card type, industry, and transaction volume. Additionally, consider other factors such as customer support, contract terms, technology offerings, and reputation when evaluating different providers.

Q: Are there any other factors to consider when comparing merchant service providers beyond the effective rate?

Yes, there are several other factors to consider when comparing merchant service providers beyond the effective rate. Customer support and service quality are crucial for resolving any issues or technical difficulties promptly. Evaluate the provider’s compatibility with your business needs, such as the availability of payment options like online, mobile, or recurring billing. Transparent pricing, contract terms, and any potential hidden fees should be carefully reviewed. Additionally, consider the provider’s security measures, data protection, and PCI compliance to ensure the safety of customer payment information.

Q: Can I negotiate or waive certain fees with a merchant service provider?

Negotiating or waiving certain fees with a merchant service provider is possible in some cases. Providers may be open to negotiating fees based on factors such as your transaction volume, industry, or the potential for a long-term partnership. It’s worth discussing fee structures and expressing your expectations and requirements during the negotiation process.

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