For all types of businesses, there are specific costs linked with the process of accepting credit cards. A majority of these costs is derived out of interchange fees -heading directly to the banks offering credit cards to the end consumers. You can understand the calculation of these charges with the help of basis points in the process of credit card processing. This understanding will help your business in effectively analyzing and controlling the overall expenses involved in typical credit card processing.
An Introduction into Basis Points in Credit Card Processing
Basis Points or BPS serve to be crucial components in the field of modern accounting. Basis points apply to a wide range of financial products as well as tools -especially in the domain of credit card processing. The term ‘Basis Points’ is used extensively. Still, a number of finance and accounting professionals are still now aware of the term and its meaning.
It is quite simple to understand the concept of Basis Points in credit card processing. A BPS can be regarded as a smaller portion of the total used for calculating charges or fees on different financial transactions. Basis points are regarded as whole numbers (like 1 bps or 5 bps). At the same time, they can be expressed as well as calculated in the form of decimals or percentages.
Basis points help in offering a common language for consumers and professionals across the entire finance domain to be used while discussing charges, value changes, and fees. Basis points turn out to be particularly useful while discussing changes in the respective interest rates.
What are Basis Points?
A basis point can be regarded as a specific unit of measurement -particularly 1/100 of one percent. Therefore, it implies that a single basis point is 0.0001 of the total. 100 bps will equal to 0.0001 multiplied by 100 -also known as one percent.
How Do Basis Points Work?
Basis points are commonly utilized across instances wherein tiny percentages are used for defining rates, charges, and fees. These also apply to a wide range of financial instruments like treasury or corporate bonds, interest rate and credit derivatives, credit card processing fees, and equity and debt securities.
Some of the common uses of basis points in the analysis of financial transactions are:
- Calculation of value in the form of interest rate changes: As interest rates keep changing, basis points can be utilized for tracking the changes in an asset in terms of total value. A single change in the basis point represents the interest rate having a major impact on the investment value. Therefore, it is crucial for analysts to utilize the tiny percentage during the calculation of these charges.
- Comparison of Fees of Different Funds; Leading financial instruments like exchange-traded or mutual funds feature their own fees -contributing to the overall costs of owning a particular share in the respective fund. Due to this reason, the concept of basis points can be used for calculating the percentage of the total cost the investor is expected to pay in the form of fees for every fund. This will allow for in-depth comparison for costs within disparate funds.
- Credit Card Processing of Fees: For calculating the fees involved with credit card processing, basis points turn out to be specifically useful in the model of interchange plus pricing. In the given pricing model, the payment processor goes ahead with separating diverse processing costs for ensuring maximum transparency while ensuring that every transaction qualifies for the minimum possible price. This practice is referred to as interchange optimization.
In the given context, the concept of basis points refers to the markup of the payment processor upon every transaction. Some of the other common pricing models are fixed rate pricing -setting the fees in the form of a fixed percentage, or tiered pricing -assigning rates for fees on the basis of tiered categories for different payments.
Understanding Basis Points Vs. Percentages
Basis points are typically expressed in the form of whole numbers -usually 1 bps, 5 bps, and so more. However, these numbers can correspond both to the decimal and a percentage. Either form can be used for calculating basis points.
What are the Benefits of Basis Points?
Basis points makes the process of easy for calculating the cost of transaction in a specific way or owning a specific financial product. The calculation enables consumers to understand what they are paying for and comparing a wide range of financial products.
The basis points on grounds of common language will help in providing help to professionals in discussing fees, changes in value, and charges -also including while comparing relative to absolute interest rates. When the interest rates will rise from 5 percent to 6 percent, the absolute calculation process will be identifying the increase of one percent. With the help of the relative calculation method, it can be said that the respective interest rates have increased by around 20 percent. It is because one percent if 20 percent of the original rate of 5 percent.
The utilization of the concept of basis points helps in preventing confusion about which method you are typically using. It is provided that the basis points are expected to align with the absolute process of calculation. In the given example, it can be said that the rate has increased by around 100 bps or basis points -equaling to one percent.
How will Basis Points Apply to the Field of Credit Card Processing?
Fees related to credit card transactions are typically calculated with the help of the basis points -particularly in the field of interchange plus pricing model. The given pricing model will involve breaking down transactions in the form of assessment fees, authorization fees, and interchange fees. Consumers and merchants can utilize the available information to analyze the most affordable way of facilitating transactions.
Payment processors that help in supporting interchange optimization will enable merchants to modify the conditions of every transaction for lowering the respective interchange rates. These rates comprise the most significant portion of the respective processing fees. It will typically involve sending extra data with every transaction towards qualifying for reduced rates.
Basis points serve to be the reference points for ensuring discussions around the concept of minimizing interchange fees. Merchants who would like to minimize the respective interchange fees would observe the minimization of basis points as an important way to assess the savings they wish to achieve.
Are Basis Points Important?
Indeed, basis points tend to be significant -especially with respect to credit card processing. However, basis points only serve to a single piece of dedication equation that can turn out to be quite complicated. Most companies involved in the field of credit card processing domain tend to depend on dialogue -attempting to signify customer attention on the number of basis points provided. Usually, most business owners will come across significantly low numbers -typically, 5, 10, 25, and so more, while assuming that they are receiving access to the best possible prices available out there.
After some research, you will realize that minimum advertised rate is available with some tacked-on prices. If you wish to evaluate reliable merchant service providers for your ease, you should aim at obtaining a dedicated billing statement to go through the fees that are charged along with the interchange rates and wholesale costs for processing credit cards.
Understanding the Benefits of Basis Points
- It helps in minimizing the overall confusion while dealing with smaller changes in the respective percentage points. You can leverage the same to obtain an accurate estimate of changes in the existing percentage of different instruments.
- The tools also assists in clearly demarcating and differentiating between relative and absolute changes taking place in the respective interest rates. There is no ambiguity while using the same.
- Basis points will permit individuals as well as investors to track the respective changes taking place in stock indices.
- It is simple to understand as well as communicate all changes that take place in the asset’s value with the help of points-centric Basis Points or BPS system instead of percentages. Clear and well-defined communication in any financial domain is significant for the seamless functioning of the core fundamentals.
Conclusion
The basis point serves to be an effective way or a crucial financial metric that helps in measuring the respective changes that take place in interest rated for credit card processing, loans, and other forms of debt-related instruments. It helps in clearing all ambiguities in association with the respective rate changes. Market analysts and investors leverage the given calculation method rather than using percentages for conveying the ongoing change in values seamlessly.
