In relation to merchant accounts, basis points are the percentage charged to a company that accepts credit cards by the issuing bank on any credit card transaction. They are commonly denoted as a lower case bp or in the form of an altered traditional percentage symbol (‱). The exact value of one basis point is equal to 1/100th of one percent. Or, simply put, a basis point is exactly 1% of 1%. For example, a rate of 3.27% is equivalent to 327 basis points.
Basis points are largely used to indicate rate changes that are less than one percent in order to identify, as concretely as possible, the absolute value of such rates. A 1% increase on an 8% interest rate could mean an increase of the initial 8% to as low as 8.1% or as high as 9%. What banking institutions do, of course, is reflect these changes more minutely with basis points. At the same time, what may seem like substantial rate savings that are bandied about by banking representatives in seemingly large basis point numbers are, in actuality, a tiny savings to the merchant or client.
In the financial industry, basis points are also used to show the difference between two interest rates. Basis points are used in reference to surcharge discount rates, also called mid-qualified and non-qualified, that are added to a qualified rate. For example, the mid-qualified surcharge rate may be 75 basis points. This is the same, of course, as saying that a rate 0.75% applies. This means that the mid-qualified rate will be 0.75% higher than the qualified rate.
They are also used to denote rate changes in financial instruments that are determined by market values, such as cash loans or deposits, because of the very sizeable effect of small changes to these financial instruments. The basis point is also used to calculate changes in equity indexes – to compare a rate against the overall market state – as well as the yield of a fixed-income security, such as stocks or pensions.
How to Convert Rates
The simplest way to convert basis points into traditional percentages is by taking the number of basis points and multiply by 0.0001, which will render the percent in regular decimal form. If 125 basis points must be converted into a percent, simply multiply 125 by 0.0001. This renders 0.0125, which is of course 1.25% (0.0125 x 100).
The reverse of this process can also be done in order to determine the number of basis points that a percent represents by simply dividing the percent – in decimal form – by 0.0001. For example, if the rate on a bond has risen 3.08%, simply take 0.0308 (3.08% / 100) and divide by 0.0001 to get 308 basis points.