- March 1, 2008
- Posted by: anand
- Category: Education, General
A basis point is a financial unit of measurement. One basis point is equal to 1/100th of 1%, and is used to denote a change in a financial instrument. One basis point could be written as 1 basis point, or 0.01%, or .0001. Therefore, 100 basis points equals 1.0%. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. So what does a basis point have to do with merchant processing? Actually, a lot! Payment processors measure their profit margins by using basis points, and the pricing offered to merchants for credit card or check processing is often express in basis points. For instance, if a merchant is offered a retail qualified rate of 1.87% + $0.15 then the merchant is paying 187 basis points and $0.15 per transaction. How can a merchant use this information to their advantage?
That all depends on your average ticket. At $100 average ticket 1 basis point equals exactly $0.01 (0.01% x $100). If the average ticket is less than $100 then 1 basis point is less than $0.01. And if the average ticket is greater than $100 then 1 basis point is greater than $0.01. Since a merchant’s goal is to reduce their processing costs, they would be smart to minimize or negotiate the lowest possible per item rate if their average ticket is below $100. In this case, a penny is worth more than 1 basis point and a smart merchant would rather reduce his rate by $0.01 instead of 0.01%. Conversely, if the average ticket was greater than $100 then the merchant should negotiate the lowest point percentage rate. In this case, one basis point is worth more than one penny, and the merchant would be wiser to trade-off each $0.01 for each 0.01% reduction.
Make sense? Let’s see if you mastered this concept. If your average ticket is $65, which rate is lower – 1.85% + $0.20 or 1.80% + $0.25? If you answered 1.85% + $0.20 then you are correct. This rate will save you $0.052 per each transaction over the second rate. Now, multiply that times the thousands or hundreds of thousands transactions you process each year and you will save yourself considerable amount of money.�