Basis points are hard for people to understand, and even when given a clear demonstration of them, people still get the math wrong. The issue is that if you can’t confidently differentiate between 2% and 0.2%, you’re going to be paying a lot more or less money than expected.
You certainly wouldn’t be happy if your raise turned out to be 0.2% instead of 2%.
What are Basis Points (BPS)?
Basis points (BPS) are used in merchant services and most anything to do with interest rates and percentage in finance. When a basis point is stated, it means 1/100th of 1%, or for those good at math, 0.01%.
For example, if your rates are going up 10 basis points, this means that the rate is increasing by 0.1%.
However, you must note that the 100 basis point difference is equal to 1%.
Basis Points and Merchant Services
Credit card processing deals heavily with basis points because there are fees for payment processors, sponsoring banks and others. Of course, every transaction has these fees, but they can be very confusing for anyone that doesn’t have a background in accounting or math.
Interchange BPS Fluctuations
Interchange rates are the most common area where you’ll find basis points change. Costs for processing a specific card type may fluctuate, primarily if the card is considered:
Non-qualified types have the highest risk of chargebacks or issues, so the BPS is higher to cover the risk. If both a qualified and non-qualified purchase of $100 were made, the qualified purchase would end up netting you more money because the BPS is higher for non-qualified transactions.
Basis Point Calculator Basics: BPS to Percentages
Confusion occurs when mentioning specific currency values and basis points. For example, there’s a difference between 1/100 of a penny and 1/100 of a dollar, right? Basis points are 1/100th of 1%, or 0.0001 in decimal form.
So, if 1 basis point equals 0.0001 and your processor charges 100 basis points for a certain transaction, they’re really charging 1%, or (0.0001*100), which is 0.01 (or 1 percent).
Convert from Percentages to Basis Points
You can also convert from percentages to basis points if you know the math. Thankfully, the math is the opposite of what we just learned above. For example, if your processor is charging you 2%, you would divide 2%/100 and then divide this by 0.0001, which equals 200 BPS.
If it’s confusing to understand BPS, percentage and decimal points, the table below should help you better visualize everything:
Since the financial industry deals with small percentage changes, basis point calculation is used. While you may think paying a 10 BPS difference is negligible on a single transaction, imagine large ticket transactions and then processing thousands of them per month.
When You’ll Notice Changes in BPS the Most
Remember when we mentioned the different types of transactions? Often, merchants will have a certain BPS attached to these transactions. For example, let’s assume that a mid-qualified transaction has a +50 BPS.
What this means is that you’ll pay an additional 0.50% on the transaction price compared to the qualified rate.
So, you’ll be paying a slightly higher rate because the card isn’t qualified, although it’s not a major risk either.
Why Some Transactions Are Not Charged at the Qualified Rate
As a merchant, you want to do everything in your power to save money on fees and put more money in your bank account. No one wants to pay more in fees than they have to, and even if you have $100 million in sales, this sentiment remains the same.
Understanding why some transactions do not meet the qualified rate is crucial.
A few of the many reasons a charge may not be deemed as “qualified” includes:
- Card type doesn’t meet qualified requirements
- Batches of transactions are not settled in 48 hours
- The card is issued offshore
- Sales price and authorization price differ
- Customer address doesn’t match on the Address Verification System
- Issues with the magnetic strip not sending complete data
However, there are a lot of other reasons that a card may not be qualified. Therefore, it’s crucial to consider all of these reasons when trying to determine BPS.
Basis Points and Interchange Pricing Models
Interchange pricing models will have a basis point fee that you know ahead of time. Since you’ll break free from tiered pricing, your rates will remain steady and you can worry less about BPS, although it does have its place in interchange pricing, too.
Rates per transaction still use BPS.
However, the rate is set in stone, so it remains the same for each transaction unless mutually agreed upon in your contract. Because the interchange model requires high volumes of sales or high dollar volumes each month, it can be difficult for smaller merchants to secure a merchant service provider agreement with the interchange model.
We offer an interchange-plus pricing model where we’re clear on all fees that you’ll be assessed so that you have a better understanding of how much you’ll pay for each transaction.
Transparency is key when working with any merchant services provider because it can be frustrating to know what may trigger a transaction to be unqualified with something like tiered pricing.
Basis points are complicated at first glance, but we hope that the above guide will give you a better grasp of the fees you’ll be assessed.