Basis Points

Basis Points β€” often abbreviated as bps, bp, or bips β€” are a unit of measure used in the financial sector to describe the percentage change in a financial instrument. In the payment processing industry, basis points are commonly used to express the fees charged for transactions.

One basis point is equivalent to 0.01% (or 0.0001 in decimal form). If a merchant is charged 200 basis points on a transaction, they are being charged a fee of 2% of the transaction value.

Basis points provide an easy way to express small percentages and are commonly used when discussing changes to interest rates, equity indexes, and the cost of a transaction forΒ payment processing.

Understanding how basis points influence the cost of transactions can significantly affect a merchant’s bottom line. For instance, a decrease from 250 bps to 200 bps on a transaction fee might seem small, but for a merchant processing $1,000,000 in transactions annually, this reduction translates to a savings of $5,000 per year. Therefore, it’s crucial for businesses engaging in large volumes of transactions to negotiate the best possible rates in basis points with their payment processors. Knowing the ins and outs of how these fees are calculated and what they represent in real dollars can empower merchants to make informed decisions that directly impact their profitability.

Whether it’s negotiating the fees for payment processing or assessing the potential returns on an investment, the ability to calculate and comprehend changes in terms of basis points is a valuable skill in the financial landscape. It enables individuals and businesses to make more informed decisions that could significantly affect their financial health.