The terms "basis point" in reference to credit card processing and merchant accounts is used to refer to the percentage of a sale that a business pays their service provider to processing a credit card transactions. Basis points sound a lot more complicated than they really are. Simply put, the basis points are 1/100th of 1 percent or 0.01% and they're used specifically when referring to the discount rate that a merchant pays to process credit cards.
For example, a typical three-tier merchant account could have a qualified rate 1.69% or 169 basis points, a mid-qualified surcharge or 30 basis points or .3% and a non-qualified surcharge of 100 basis points or 1%. A merchant account with more direct interchange plus pricing could have a discount charge of 33 basis points or .33% over interchange.
Since credit card processing discount rates are typically less than 5% with most being less than 2.5%, fractions of a percent often come into play. The term basis points makes it easier to discuss these smaller amounts without having to constantly express a number as a decimal or fraction.
Now that you know what the term means, it's important to understand that basis points are used to calculate what will amount to the bulk of a merchant account fees. Bass points are used to refer to the discount rate that is applied to a merchant's credit card transactions. With a tiered merchant account, the first tier will always have the most basis points followed by the mid and non-qualified tiers that are expressed as a surcharge that must be added to the qualified rate to arrive at the total basis points for that tier.
A merchant account that utilizes an interchange plus or cost plus pricing structure will only have one figured that is the provider's markup charged for processing services. This figure is added to Visa or MasterCard's interchange percentage which is also referred to in basis points, to arrive at the total amount charged for a transaction. For example, if a transaction has an interchange charge of 158 basis points and the provider's fee is 30 basis points, the total discount charge the merchant would have to pay is 188 basis points or 1.88%.
Understanding processing charges is far more important that knowing or even using the industry terminology that's used to calculate them. Half the battle in understand how merchant processing works is learning the professional lingo. If you find the term basis points or any other merchant account term to be confusing, put it aside and concentrate on understanding rates and fees in a way that makes sense to you. Just remember that one basis point equals 1/100th of one percent of .01%.
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