Basis points are units of measure most often used for talking about fractions of a percent. Merchants encounter them a lot in payment processing because merchant fees are often measured in fractions of a percent. You will sometimes see them abbreviated as “bps” or “bips.”
While it might sound confusing at first, it’s really just a different way of talking about percentages so you won’t need a special basis point calculator to work with them. Keep reading to learn more about how to calculate basis points and everything merchants need to know to accurately compare fees across different payment processors.
What Are Basis Points?
One basis point is equal to 0.01% or 1/100 of 1%. It’s a unit of measure found across finance, especially when you’re dealing with small fees and charges. Merchants usually see it in a breakdown of fees from payment processors that use an interchange-plus pricing structure. For example, if a processor says it charges 25 basis points per transaction, that means you’ll pay 25 basis points in addition to the interchange rate set by the card issuer.
Visa, MasterCard, and other card issuers each set their own interchange rates which can range from 1.4% to 3.5%. So with interchange-plus pricing, merchants pay the actual interchange rate charged for the transaction plus that 25 basis point markup.
“No Basis Points” Does Not Mean No Markup
Not all processors use interchange-plus pricing, and some advertise this fact by offering “no basis points” processing services. But this doesn’t mean merchants don’t have to pay fees. All it means is that the processor doesn’t use basis points to calculate the fees. It could still use flat rates or percentage markups.
It doesn’t mean it’s more affordable, either. In fact, simpler fee structures can often end up being the most expensive because the processor can conceal the exact markup they’re charging you by using blanket rates across all transactions. PayPal has one of the simplest pricing models, for example, but also some of the highest fees in the industry.
If a processor charges you 3.75% across all credit and debit transactions even though interchange rates vary between 1.4% and 3.5%, the markup you are paying ranges from 25 basis points to 235 basis points per transaction, depending on the card used. Just because the processor doesn’t calculate it that way doesn’t mean you aren’t paying that markup.
How Do You Calculate Basis Points?
Interchange-plus pricing where processors show you the exact markup they charge is a more transparent pricing model that allows merchants to benefit from lower interchange rates and see exactly how much extra they are being charged. But it can also be a little more confusing to calculate.
With that said, you don’t need a special basis point calculator to figure out processing fees. You can use simple math and your phone’s calculator to estimate how much you would end up paying in fees. Here’s a breakdown of how to calculate basis points.
Remember that one basis point is equal to 0.01%. So if you want to convert them into a percentage, you just have to multiply the points by 0.01. For example, if a payment processor charges 25 basis points, you would use the following formula to convert those points into a percentage:
25 x 0.01 = 0.25%
If you want to find the actual dollar amount you’ll be charged on a transaction, though, you need to convert basis points into a decimal instead so you can input it into your calculator. To do that, you divide the basis points by 10,000.
25 ÷ 10,000 = 0.0025
Why 10,000? Because that’s how many basis points are in 100%. If one basis point is 1/100 of a percent, then there are 100 basis points per 1%. So multiply those 100 basis points by 100 to get the total number of basis points in 100%.
Now that you have a decimal, you can easily calculate the dollar amount your processor is charging by just multiplying the decimal by the transaction amount. If a customer paid $100, for example, you would calculate the fee as follows:
$100 x 0.0025 = $0.25
How Basis Points Help Merchants Compare Payment Processors
Picking the right payment processor is one of the most important decisions you need to make as a merchant. To compare accurately across options, you need to figure out the monthly effective rate you would pay. For example, let’s say you’re comparing two plans:
Plan A charges the interchange rate plus a 10 basis point markup and a $0.05 flat transaction fee. The monthly account fee is $10. Plan B charges the interchange rate plus a 30 basis point markup and a $0.10 flat transaction fee. But there is no monthly account fee.
If you average $10,000 in sales volume per month with an average transaction size of $50, you’re processing about 200 transactions per month. The total average base costs that you would pay regardless of plan—like interchange, dues, and assessments—is $190.
To get your effective rate, you’ll leave out the interchange rate since that would be the same regardless of which plan you go with. Just use the basis points, transaction fee, and monthly account fee to figure out the difference in pricing between Plan A and Plan B.
So the formula to calculate your effective rate for Plan A looks like this:
($10,000 [monthly sales volume]) x 0.001 [10 basis points in decimal form]) + ($0.05 [transaction fee] x 200 [number of transactions per month]) + $10 [monthly account fee] + $190 [monthly base costs] = $220
Divide the $220 per month that you would pay with Plan A by your $10,000 monthly sales volume to get an effective rate of 0.022% or 2.2 basis points.
The formula to calculate your effective rate for Plan B looks like this:
($10,000 [monthly sales volume]) x 0.003 [30 basis points in decimal form]0 + ($0.10 [transaction fee] x 200 [number of transactions per month]) + $190 [monthly base costs] = $240
Divide the $240 per month that you would pay with Plan B by your $10,000 monthly sales volume to get an effective rate of 0.024% or 2.4 basis points. In this case, Plan A is the most cost-effective plan for you, even though you’re paying that extra $10 monthly account fee.
At National Processing, you can skip all of this math and use the processing fee savings calculator to calculate how much you would save by switching to National Processing.