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Calculating the effective rate
Updated over a week ago

The effective rate is a common denominator often used to analyze competitors or it can be used to track and identify changes in your own pricing package. It is calculated by dividing total processing fees by total processing sales volume.

This is a great tool for traditional merchant accounts but can be misleading for custom-built packages such as the no monthly fee model. There is no monthly fee to maintain the account; you just pay processing fees every time you run a transaction. The challenge is that some pass through fees from the networks are not assessed until the following month. If you do not have any sales that following month, the fees without volume makes for a very high effective rate but this is misleading and inaccurate. To find the true effective rate, the pass through fees you see on your statement the following month should be applied to the previous month of processing fees in your calculations. If you are calculating this rate on a monthly basis, including occurrence fees such as one-time chargeback or change fees will also make the effective rate appear higher but that isn't a true representation of your processing fees.

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