Flat rate credit card processing is an expensive illusion based more on clever marketing rather than reality. What some companies advertise as competitive flat rate pricing is actually over-simplified, expensive pricing that conceals the true costs of processing.
- Flat rate pricing is an illusion
- Types of flat rate credit card processing
- Truly competitive pricing vs. flat pricing
- Arguments for flat rate pricing
Flat Rate Pricing is an Illusion
The fundamentals of credit card processing make it virtually impossible for a processor to charge a competitive flat rate and remain profitable.
Each time a business processes a credit card transaction it is actually paying three separate fees. It pays a fee to the bank that issued the customer's card, called an interchange fee. It pays a fee to the card brand (Visa, MasterCard or Discover) whose logo is on the customer's card, called an assessment. And it pays a fee to a credit card processor as a markup.
Interchange fees and assessments are fixed costs that remain the same regardless of which credit card processing company a business uses. Assessments remain fairly consistent across different types of transactions, but interchange rates fluctuate over about 280 different categories. See for yourself here: Visa interchange, MasterCard interchange.
The interchange rate assigned to an individual credit card transaction varies from 0.05% to 3.17% depending on several variables such as card type, card brand, processing method, settlement time, and more.
A processor that offers its clients flat rate credit card processing still has to pay interchange and assessments; it just does so behind the scenes without its clients knowing.
For example, Square charges its customers a flat rate of 2.75% for swiped and 3.50% for keyed transactions that only cost it about 1.40% and 1.95% on average. The difference between interchange and its flat rate is Square's markup.
Types of Flat Rate Credit Card Processing
Flat rate credit card processing is generally marketed in two different ways: as a flat percentage of volume or as a fixed monthly fee over cost.
Fixed Percentage of Volume
The most prevalent version of flat rate processing is where a company charges its clients based on a fixed percentage of volume. For example, PayPal Here uses this method and charges its customers 2.70% of volume for all swiped transactions.
Companies that offer this type of pricing are not actually "real" processors. Instead, they are aggregators that use one merchant account to process transactions for thousands of businesses.
As I'll explain in greater detail below, this type of flat rate pricing is inherently uncompetitive because an aggregator has to ensure its flat rate is high enough to cover all possible base costs associated with interchange and assessments as well as its markup, and base costs vary greatly.
Flat Monthly Fee Over Cost
Several years ago, some credit card processing companies began offering a new twist on flat rate credit card processing. Instead of charging a flat percentage of volume, these companies charge a fixed monthly fee over the base costs of interchange and assessments. Sometimes a small transaction fee is also charged by the processor.
In this scenario, a processor bases the flat monthly fee on a business's current or forecasted volume. For example, a business processing $10,000 a month may be quoted a $30 flat fee. The business will still have to pay interchange and assessments at cost, but the processor's markup is consistent.
This type of flat pricing is far more transparent and competitive than its percentage-based counterpart, but it is more complex.
Truly Competitive Pricing Vs. Flat Pricing
Flat rate credit card processing is not meant to be competitive; it's meant to be easy to understand. Merchants that become fed up with trying to decipher credit card processing statements often gravitate toward flat rate pricing simply because they feel they have a better handle on charges.
A pricing model called Interchange plus pricing allows businesses to have the best of both worlds — a flat, fixed markup from the processor and competitive pricing.
Interchange Plus Pricing
We've explained interchange plus pricing in great detail at CardFellow: Interchange Plus Pricing. Our credit card processing guide covers the finer points of why interchange plus is more competitive and transparent than other forms of pricing, including flat rate.
Arguments for Flat Rate Pricing
Flat rate pricing has two redeeming qualities; it's simple and it is sometimes offered without a transaction fee.
It's relatively easy to forecast what charges will be with fixed-rate pricing — simply multiply gross sales by the processor's rate to calculate charges.
Simplicity seems like a small comfort considering flat rate pricing is typically 20% more expensive than other forms of pricing, but nonetheless, some businesses are willing to pay to have a flat rate.
Some flat rate credit card processing is offered without a transaction fee, which makes it an ideal pricing model for businesses with very low average tickets.
For example, 2.75% of a $3 sale is only $0.0825, which is lower than what the processor pays in interchange charges. So, aggregators that don't charge a transaction fee actually lose money by processing for businesses with very small average tickets.
Don't be fooled by simplicity. Instead, side step fancy marketing ploys like flat rate pricing for truly competitive rates and fees like those offered by processors here in CardFellow's marketplace. CardFellow only allows processors to use interchange plus pricing, making it easy for our clients to compare and select an exceptionally competitive processing solution.