Flat rate credit card processing is a relatively new term. More importantly, it is a very expensive illusion that is based more upon Tom Foolery than realistic business models. Sure, it looks great to you as a merchant. You likely have a vision of finally having a predictable monthly cost of credit card processing fees. However, what some companies are advertising and marketing as a simple flat rate is really a very expensive pricing system that masks the true actual cost to process a credit card. If you are thinking it might be a great fit for your company, let us share with you what you need to know about this pricing model.
What exactly is flat rate pricing?
Using this model, a merchant services provider will typically charge their clients based on a fixed percentage of volume. Common flat rates start at about 2.75% and cap out around 3.50% for in-person transactions where a card is chipped, dipped or swiped. Most of these also include a flat rate charge of .20 to .30 cents per transaction. Please note that this model is different than a subscription based flat rate pricing, where the costs of interchange fees are visible to the merchant.
Flat Rate – An Illusion Designed to Fool
The wholesale cost of processing a credit card are the same for all credit card processors. No credit card processor can negotiate the actual rates paid through the posted interchange and assessment rates. This makes it impossible for a processor to charge a competitive flat rate and remain profitable themselves without making up the money somewhere else. We call this an unsustainable model. Every time you accept a credit card for payment, your business pays three separate fees. The first fee goes to the bank that issued your customer’s card such as Wells Fargo or Chase. This fee is called an interchange fee and all processors must collect and pay the same exact amount. The second fee is called as assessment fee and that fee goes to the card brand (Visa, MasterCard, or Discover) whose logo is on the customer’s credit card. The last fee is called a Markup fee and it is the only part of the transaction fees that actually goes to your credit card processor such as Chosen Payments.
View Current Interchange Rates
The interchange rate that is assigned to an individual credit card transaction varies from 0.05% to 3.17% depending on many different variable conditions such as the card type (Rewards, Non-Rewards, Corporate, Government etc.), card brands (Visa, MasterCard etc.), the processing method (chip read, swiped, manually keyed, shopping cart etc.), the settlement time and other conditions. All processors must pay the same interchange and assessment fees. Under Flat Rate pricing, a processor simply keeps these costs hidden instead of using transparent pricing like Chosen Payments. As a simple example, Square charges a flat rate of 2.75% for swiped and 3.50% for keyed transactions that only cost Square about 1.40% to 1.95% on average. This means that Square charges $3.50 for a $100 transaction that is keyed. It costs Square $1.95 to pay the interchange. Square profits $1.55 on this transaction. In order for Square to offer flat pricing, they must charge a fee high enough to cover every single possible transaction. A typical American Express rate is 3.50% of the transaction. If the card is accepted in person and the chip is read, it cost the merchant $2.75 on the transaction but Square must pay American Express $3.50 and come out of pocket with .75 of their own money. Could you imagine coming out of pocket to sell your customer a product?
Looks Good but Not Competitive
Flat rate credit card processing was never intended to be competitive in pricing. It’s meant to be simple and easy to understand. It’s designed to fool you into believing that you have total predictability of your processing costs and are saving money. Reading a monthly credit card processing statement can be very confusing to most so having a single rate looks really good when in fact, it is really bad for your business. While you might believe that predictability is better for your business, the truth is, it never will be good. Why would you want to pay nearly double for anything? Your absolute best pricing model is known as Interchange Plus. This allows your business to have a fixed markup from the processor above the required non-negotiable fees. You get to see exactly how much your merchant services provider is marking up above and beyond the interchange and assessment fees. That’s competitive, honest and transparent.
While it might be easy to forecast processing charges with fixed-rate pricing, this small comfort comes with a hefty price. Flat rate pricing is typically 20% more expensive than any other form of pricing in the payment processing space. Paying more for this convenience might make sense for your business based on small ticket sales or low overall volume but just remember that in most cases you will be paying more. A lot more! Don’t confuse simplicity with low cost.
Some processors do offer flat rates that might work good for the merchant that processes small ticket sales such as a $3 sale. If you used Square for a $3 transaction and were charged the flat rate of 2.75%, that’s only $0.0825 to you and that is actually lower than what Square will pay in interchange and assessment fees. As the processor for Starbuck’s, Square took a loss of $30 million in 2016 on those small transactions. Guess who paid for that loss? Other Square users and Starbucks who grossly overpaid on Visa and MasterCard transactions.
Don’t be fooled by good marketing and simplicity. Flat rates are not a good fit for your business. They are especially not a good fit for your bottom line profitability. The best price for you to pay is the true cost of the transaction for the individual card you accepted for payment. Use a credit card processor that shares those numbers with you. Don’t leave money on the table that should be put in your wallet. If you feel you might be paying too much right now, let us do a free comparison for you by clicking HERE.