Industry Terms: Basis Points

September 26, 2012

This is the latest installment in The Official Merchant Services Blog’s Knowledge Base effort. Well we want to make the payment processing industry’s terms and buzzwords clear. We want to remove any and all confusion merchants might have about how the industry works. Host Merchant Services promises: the company delivers personal service and clarity. So we’re going to take some time to explain how everything works. This ongoing series is where we define industry related terms and slowly build up a knowledge base and as we get more and more of these completed, we’ll collect them in our resource archive for quick and easy access. Today’s term is Basis Points, a term used frequently in the industry and one that is pretty simple to understand but very important to all merchants that take credit cards because they apply to every pricing structure out there.

Basis Points

Basis Points are a unit of measurement with a value equaling one one-hundredth of a percent ( 1/100 of 1%). Basis Points, typically denoted as bp, are sometimes referred to colloquially as “bips” or “beeps.” The same unit of measurement is rarely called a permyriad — literally meaning ‘for every myriad ten thousand’ — and will have a strange looking symbol that looks like a percent sign with two extra zeroes at the end.

It will look like this: 100‱

Basis points are frequently used to express differences in many financial and economical areas such as yield differences between bonds, changes to interest rates, equity indices and fixed-income securities. In a lot of news stories from the media, basis points are used to refer to reports from a central bank’s changes to prevailing interest rates.

The term basis point has its origins in trading the “basis” or the spread between two interest rates. Since the basis was very small, the numbers are quoted multiplied up by 10000, and so a full point movement in the basis is a basis point.

The measurement helps in financial analysis because it avoids the ambiguity between relative and absolute discussions about interest rates by dealing only with te absolute change in numeric value of a rate.

But What About Credit Card Processing?

The term basis point in reference to credit card processing and merchant accounts is typically used to refer to the percentage of a sale that a merchant pays to the service provider to process a credit card transaction.

They tend to be used to refer to the discount rate that merchants pay to process plastic. Since credit card processing discount rates are typically less than 5% — with most being less than 2.5% — fractions of a percent often come into play. So basis points make it easier to discuss these tiny amounts without having to resort to extended decimals or fractions.

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