The effective rate is the total monthly cost of credit card processing divided by the volume of processing. The effective rate usually varies from 1.5% to 4%+ depending on the merchant’s industry and type of transactions. If a merchant receives mostly debit cards which have a low risk and low interchange rate, the effective rate will be a lot lower than a merchant taking transactions over the internet, which has a higher risk and higher interchange rate.
True Story – The Bob from Brand X Restaurant Scam!
One of our large volume, fine dining restaurant clients was approached by Bob from Brand X who said he would save them over $300/month on their fees! Our client asked us to evaluate. We said we needed to see the rates Bob was presenting, not just a number of $300 with nothing to back it up. It took the client 10 days to get a copy of the rate presentation. Bob doesn’t like to leave the facts behind on a piece of paper. That way he can’t get found out. He just blab’s “Savings of $300” over and over again and hopes the prospect bites.
Well, we looked at Bob’s handiwork and the new proposed rates were 50% higher than the rates our client was currently paying! The savings of $300 was a scam! The small print in Bob’s presentation exposed this scam. He was taking an average effective interchange rate for all restaurants in the United States, (ignoring the actual effective rate of this particular restaurant), and adding his markup, which came up to less than what the client was paying currently. This fine dining restaurant takes lots of rewards cards and corporate cards which have a higher interchange rate than low interchange debit cards used primarily at a fast food establishment. So the effective rate for a fine dining establishment will always be higher than the effective rate at a $10 burger place and will also always be higher than the average interchange rate for all restaurants lumped together. Too bad you have to lie to get business, Bob. You might fool some of the people some of the time but not our clients, because we give honest, full disclosures and educate our merchants.