In recent years, flat-rate merchant accounts have gained popularity. There can be some advantages to this pricing model but in most cases it likely isn’t the most cost effective for your business. In an industry as nuanced as payment processing, payment service providers like Square, Stripe and PayPal are making a fortune by playing to business owners’ desire for simplicity.
What is flat-rate pricing?
Business owners are familiar with the fact that they pay a percentage rate for accepting a credit card. What is less apparent are the actual costs associated with each transaction which is what can make credit card processing so confusing. Briefly, all card processors must pay a percentage-based fee to the bank that issued the card called interchange fees. It would be far easier to understand if these fees were consistent, but they are not and vary widely based on several factors. There are literally hundreds of different interchange rates that might apply depending on elements of the transaction such as the type of card, the business, where the transaction occurs, and the product purchased. Any markup above these costs is the profit margin for the processor.
With the potential variance in actual costs on any given transaction, the goal of flat-rate pricing is to eliminate confusion. It provides predictability for the business owner to know exactly how much they are going to pay on every transaction. This typically includes both a percentage and a fixed transaction fee. For example, a swiped transaction with Square would always cost 2.60% and $.10 cents while a sale on your website with Stripe would cost you 2.90% and $.30 cents.
While this simplicity can be nice, the disadvantage is that the processing rates are high. As mentioned above, the interchange fee for a particular transaction varies but for this comparison, we’ll use the average for swiped transactions of 1.40% and card-not-present of 1.90%. Compared to the Square and Stripe rates, it’s obvious you are paying a much higher rate for each transaction. The rates are set this high because these providers are not going to lose money on any transaction, even those less common cards with the highest interchange fees. Therefore, most of these types of payment providers all have nearly identical rates.
Even worse with flat-rate pricing are those businesses that accept a high percentage of debit cards, even when swiping them like a credit card without a PIN number. Because the money is coming directly out of a checking account, the risk to the bank of a customer not paying their credit card bill is eliminated. As such, the government limits what they can charge for interchange fees, and it averages well under 1.00%. Flat-rate pricing doesn’t take the card difference into account, so you’ll pay the same rate, but the providers profit margin just increased exponentially.
What is interchange-plus pricing?
Hopefully you have been able to see that the predictability and simplicity of flat-rate pricing is costing your business a lot of money. For this reason, you may want to consider an alternative.
Interchange-plus pricing is our preferred model because it is the most cost effective for your business and provides the highest level of transparency. We pass through the exact interchange fee on a particular transaction to you PLUS a small, fixed percentage markup and authorization fee. An example quote would be Interchange + 0.40% + $0.10 cents per transaction. Using our average interchange fee for a swiped transaction of 1.40%, this works out to an average effective rate of 1.80% + $0.10 cents per transaction, far less expensive than a flat rate.
One thing to be aware of is that some providers may only quote you the markup in their rate quote. Don’t be misled into thinking you’re getting an extraordinary deal because you always must pay the interchange fees no matter what. The interchange fees are in fact the bulk of what you will be paying to process a transaction.
What option is best for my business?
With interchange plus pricing, you typically can expect to pay a monthly fee to have the account active. Having said that, if your business operates year-round and you process at least $5,000 per month in card payments, interchange plus is going to be the best option for you. While your monthly statement might be a little more complex to read with the different interchange fees listed, your bottom-line effective rate is going to be far lower than a flat-rate program.
If you have a small business that rarely accepts credit cards or a very small amount every month, a flat-rate program could be a better solution for you since you won’t have to pay a monthly fee. As you grow your business, you can pivot to an interchange plus merchant account when the volume supports it.
Final Thoughts
For larger businesses, flat-rate pricing is not a good deal. Not having to pay recurring fees can seem appealing, but if your processing volume is high enough, the effect of paying higher processing rates will negate any advantage. You’ll pay significantly higher processing rates than what you’d get under most interchange-plus plans. The importance of the protections provided by a full-service merchant account also become more important as your business grows. If you’re not sure if your business is at the tipping point for switching to an interchange plus merchant account, we’re happy to consult with you to determine which pricing model is the best deal for your business.
If you would like more information on how D4 Payments can help you, feel free to reach out!
