Understanding Basis Points and the Cost Structure of Payment Processing

By Whitney Troxel

To optimize payment operations, manage costs effectively, and maximize your bottom line, it’s crucial to understand the cost of payment processing. One important concept in understanding how fees are charged by card issuers and financial institutions is basis points.

This blog post takes an in-depth look at what basis points are and how they factor into the overall cost structure related to payment processing. We’ll discuss how basis points are calculated, evaluate their impact on expenses, assess scalability, and determine the overall value and quality of service provided by payment processors. By understanding these important nuances, you can streamline your payment operations, enhance customer experiences, and drive business growth.

What are basis points and why do they matter?

Basis points — often abbreviated as bps — are a standardized unit of measurement that represents a percentage change in financial transactions. One basis point equals 0.01%.

Payment processors utilize basis points to offer flexible pricing structures. While each basis point represents a minuscule fraction of a percent, a difference of even a few basis points can add up to significant savings or costs over time. As such, understanding how basis points play into payment processing is a key factor in maximizing profitability and minimizing expenses.

How are payment processing fees calculated?

Rates for processing credit card payments are actually determined by card networks (i.e. Visa, Mastercard, American Express, and Discover). Payment processors add fees for the equipment and additional services they provide. This results in a combination of fixed fees and basis points to calculate transaction fees. Fixed fees are a flat rate applied to each transaction, while basis points represent a percentage-based component.

For example, your payment processor may charge you 200 basis points (2%) plus a fixed fee of $0.30 per transaction. In this case, the fee for each transaction is determined by adding the basis points fee (based on the transaction value) to the fixed fee. Therefore, the higher the transaction value, the higher the basis point fee.

Because the card networks contribute to the cost of processing credit cards, pricing is fairly standard across the industry. Fluctuations in price are typically due to extra services payment processors provide, including the following:

Payment acceptance methods and industry risk considerations

In addition to understanding basis points, it’s important to recognize that other factors can influence the costs associated with payment processing. Here are a few examples:

  • Card Present vs. Card Not Present — Accepting payments in a physical store (card present transactions) typically have lower processing costs compared to accepting payments online or over the phone (card not present transactions). Card present transactions usually involve lower risk and lower processing fees due to the reduced likelihood of fraud.
  • High-Risk Industries — Certain industries are considered high-risk due to factors such as increased chargeback rates, regulatory complexities, or reputational risks. Payment processors often categorize businesses in these industries as high-risk, resulting in higher fees and stricter underwriting requirements. Examples of high-risk industries include travel, subscription-based services, and nutraceuticals.
  • International Payments — Accepting international payments can involve additional costs such as currency conversion fees, cross-border transaction fees, and potential compliance requirements. Payment processors may charge higher fees for international transactions due to the increased complexity and associated risks.

Understanding the cost differences across payment acceptance methods and the impact of industry risk is crucial when selecting a payment processing partner. If you work in a high-risk industry, you should be prepared for the possibility of higher fees due to the unique challenges you face.

Consider the net cost of your payment processing

The total cost of your payment processing solution depends on multiple factors such as transaction rates and fees, processing volume, payment terminals, etc.

Many businesses mistakenly believe that rates and fees are the most expensive aspect of payment processing and assume cheaper rates will automatically equate to more revenue. This isn’t true. Businesses lose substantially more money dealing with:

  • Fraud — Every dollar lost in a fraudulent transaction actually cost your business $3.75.
  • Chargebacks — Each chargeback typically costs $20-$50.
  • Declined Payments — Visa reports that 24% of subscription credit card payments are declined.

Lower rates and fees don’t always save you money. You should assess the total cost of payment processing, including all additional services your payment processor provides. Additional features can help you streamline your payment operations, enhance customer experiences, and grow your business.

Costs will change as your business scales

Payment processors charge fees based on the number of transactions processed, meaning that the cost of payment processing can rise significantly as a business grows. Consider selecting payment processing partners that offer volume-based pricing, which provides discounts as transaction volume increases. By selecting the right payment processing partner, you can support your business growth without experiencing significant spikes in payment processing costs.

Final Thoughts

Understanding the importance of basis points is critical for you to make sound business decisions around payment processing. Understanding how basis points are calculated, assessing their impact on costs, and considering scalability requirements, will help you select a processor that facilitates your payment operations in the best way possible. Don’t forget to consider the overall value and quality of service when making your decision.

At Nexio, we have years of experience in specializing in payment processing and are dedicated to helping you understand the role basis points play in payments, so you can discover a solution that fits your business processes and budget for maximum performance. Contact us today for tailored assistance on your journey towards perfecting your payment operations!