Over the last couple decades, I’ve fielded thousands of questions about pricing models and written countless blog posts to help clear up confusion about processing fees. But payment processing is a constantly-changing landscape. Over the years new models have joined the fray, such as flat-rate pricing and subscription-based pricing. So it’s worth revisiting a classic question: Which pricing model is best?
Pricing Models
When I started writing about credit card processing, there were two dominant pricing models: interchange plus and “tiered” pricing. The choice between those is clear: interchange plus is more transparent and sets the stage for competitive pricing. By contrast, tiered pricing is opaque, easy to manipulate, and often resulted in very high processing fees. Fortunately, these days, it’s less common to see tiered pricing. (Not gone, mind you!) I wrote a whole article on pricing models, so I won’t bore you with the full details again here, but I will give a short overview to give context for the rest of this post.Interchange Plus
Briefly put, interchange plus pricing is a model where you processor charges you the three costs of processing fees (interchange, assessments, and markup) separately. That allows you to see the “wholesale” cost of processing - the sum of interchange and assessments - separate from the processor’s markup, or the amount that the processor makes on your business. Why does that matter? If you can’t see the markup separate from wholesale, you don’t know whether your pricing is actually competitive. Wholesale cost in credit card processing is like anything else - the closer you are to wholesale, the better the deal. This transparency is a key factor to why I’m a big promoter of interchange plus pricing. You see exactly what your processor makes and can negotiate competitive pricing.Tiered Pricing
On the opposite end of the transparency spectrum is tiered or “bundled” pricing. Instead of separating interchange, assessments, and markup, a processor using tiered pricing bundles them all together and then sets its own “rates” for your transactions. It’s common for processors to use three tiers (known as qualified, mid-qualified, and non-qualified) but they can actually use more or fewer at their discretion. From there, they will decide which of your transactions are “qualified” or not, and route them to the various tiers. With tiered pricing, it’s impossible to separate your processor’s markup, so you won’t know how much they’re profiting from your business. Tiered pricing benefits only your processor.Flat Rate
Technically a form of tiered pricing but without some of the shadiest tactics, flat-rate pricing offers you a single rate for all transactions. This still means it bundles together interchange, assessments, and markup, but the goal is simplicity. Flat rate doesn’t route your transactions to different tiers; it simply charges everything according to the one flat rate. Flat rate really came into the spotlight in 2009, when Square launched as a simpler and more affordable credit card processing solution. Back then, Square was a straight 2.75% with no per-transaction cents-based fee. The company succeeded in making processing look simpler, as there were no complex statements showing interchange, and no confusing “qualifed” and “non-qualified” charges. Instead, a business could simply see how much money it had processed and that 2.75% of that amount would go to processing fees. Unfortunately for Square, that meant they actually lost money on small transactions. It took the company 10 years to fully adjust its pricing model to move to a cents-based transaction fee, but in 2019 they did away with the flat 2.75%. Today, you’ll typically see Square’s flat rate at 2.6% + 10 cents per transaction. Overall, flat rate is still simpler for business owners. The statements aren’t as lengthy or complex. However, simpler is not the same as cheaper. Flat rate pricing is still a form of “tiered” pricing, which bundles all of the costs of credit card processing together, and then sets a rate higher than that for your business. It’s once again impossible to see just the processor’s markup, so you don’t know how much the flat rate processor is making off of you.Subscription Pricing
A relative newcomer, subscription-based pricing appeals to businesses because of its promise of no markup. In reality, every processor has a markup. (If they didn’t, they wouldn’t make any money!) But what they mean is that there is no percentage-based markup, as there is with interchange plus, tiered, and flat rate pricing. Instead, with subscription pricing, you’ll pay a monthly subscription fee and the “wholesale” cost of processing (the sum of interchange + assessments) without any other transaction fees. The monthly fee replaces the percentage-based markup. Some businesses like subscription models because paying just a monthly fee as a markup seems more palatable. Depending on the monthly fee you’re eligible for, it can be cost-effective to replace your transaction fee markups with a flat monthly fee markup. Additionally, as with interchange plus, you’ll see the processor’s markup separately (as the flat monthly fee) from the “wholesale” cost.Why has CardFellow recommended interchange plus?
As noted above, a main reason is transparency. At the end of the day, processing companies are in it to make money, just as you are. But you want to find a processor that is making a small amount from your business, not taking you for all you’re worth. Interchange plus makes it easy to see what your processor makes off of your business. That’s not the only reason I suggest it, though. It’s also the most direct apples-to-apples comparison when deciding between different processors. Interchange plus can be a win-win. You get competitive pricing, and your processor makes a small profit. However, at CardFellow, our goal is always to help you find the right solution for your business. I acknowledge that there are times when other models will actually be a better fit. For example, businesses with small average transaction amounts or low monthly volume will still often find flat rate to be lower cost than interchange plus, even with a per-transaction fee. Subscription pricing is also a good option for some business profiles, and it has the benefit of separating out the processor’s markup.Is interchange plus the fairest pricing model?
Fair is a relative term here. Interchange plus is fair in the sense that it’s transparent, so you know what you’re getting. But subscription pricing is also fair, as long as the monthly fee is appropriate for your specific volume. Flat rate can also be fair, depending on your business. Really, the only model that is not particularly fair to business owners is tiered pricing. In all of my years reviewing credit card processing statements, I found that tiered pricing was almost always responsible for the most egregious overcharging or gouging. At the end of the day, a few different pricing models may make sense for your business. The key is to compare apples-to-apples by understanding what you’re paying over wholesale. A processing comparison marketplace like CardFellow can make that easy. We show you fully disclosed quotes from real processors, in one place. It’s free, private, and no-obligation, so give it a try! If you’re unsure whether to go with interchange plus or flat rate, you’ll still be able to compare using effective rates instead of processor’s markup. Sign up for your free account and give us a call if you need assistance.So.. Is interchange plus still the gold standard?
Yes, but with caveats. Interchange plus is still the most transparent model with the best chance of securing competitive pricing. It’s worth a look for businesses with steady volume or multiple locations, and for any business that values transparency. But it’s not the only game in town. For some businesses, a subscription-based model might edge out interchange plus in terms of cost. The key is to find the “gold standard” for your business. Keep in mind that your business needs will change over time. You may find that what worked best and cost the least when you started out is no longer the right fit as your business grows. It’s okay to outgrow processors, seek out more competitive pricing, or change models. If it’s time to consider a change, start by creating your free CardFellow account today.
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
