by Ben Dwyer Flat rate credit card processing is an expensive illusion based more on clever marketing than reality. What some companies advertise as a competitive flat rate is actually oversimplified and expensive pricing that conceals the true costs to process.
- What is flat rate pricing?
- Flat Rate Pricing is An Illusion
- Truly Competitive Pricing vs. Flat Rate Pricing
- Arguments for Flat Rate Pricing
What is flat rate pricing?
Flat rate is an increasingly popular pricing model for credit card processing. The most prevalent version of flat rate processing is where a company charges its clients based on a fixed percentage of volume. Common flat rates are currently around 2.75% – 2.9% for swiped transactions. Some flat rate models also include a per-transaction fee, often in the range of 10 – 30 cents per transaction.
Note that this is different than subscription flat rate pricing, where the costs of interchange are still visible to the business.
Read about Subscription 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:
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 famously charged 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.
Companies that offer this type of pricing are not actually “true” 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. If the processor doesn’t set its rate high enough, it will lose money – something that processing companies are not in the habit of doing.
Truly Competitive Pricing Vs. Flat Rate Pricing
Flat rate credit card processing is not meant to be competitive; it’s meant to be easy to understand. Businesses that get fed up 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 detail before. 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. In short, interchange plus pricing separates the costs of interchange and assessments from the processor’s markup.
Arguments for Flat Rate Pricing
Flat rate pricing has two redeeming qualities; it’s simple and it is sometimes offered without a transaction fee, which can be beneficial for businesses with lots of transactions. With flat rate pricing, you’ll also have known costs that don’t change, making it easier to calculate what you’ve paid or can expect to pay based on your volume and ticket size.
Known Costs
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. Paying more for convenience may make sense for your business, just remember that in most cases you will be paying more. Don’t confuse simplicity with low cost.
Small Tickets
Some processors offer flat rate without a transaction fee, though this is less common now. If you can find it, that type of pricing is 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. Square lost $30 million processing for Starbucks because of the low average transaction total, which is why it now charges a transaction fee.
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 true pass-through pricing, making it easy for our clients to compare and select an exceptionally competitive processing solution.
Curious what you’ll pay for processing if you don’t use a flat rate solution? Find out now.
I have a credit card processor that gives me a flat rate of 1.9% and 12.95 a month in fees. I have been doing a lot of research on the interchange plus model and based on my calculations I am unclear how they manage to make money unless their costs for swiped transactions average around 1.4% like you mentioned above for Square. So when I got some quotes here they are competitive, sure, but seem slightly more expensive. I just don’t get it yet I keep doing the math again and again with all the docs I have in front of me.
Hi Matt,
There can be times when a flat rate processor like Square is a better choice for businesses, but those situations are fairly limited. If your average ticket is small (~$10 or less) flat rate is sometimes a very competitive option. A lot of times, however, it’s not the most competitive pricing a business can get because you’re always charged the same no matter how much a transaction costs to process. When you’re on an interchange plus model, you pay the true cost to process it, and a small markup. So you see the savings on your transactions that cost less to process.
There are also situations where we see businesses that are on what they think it flat rate processing, but it’s actually just a form of tiered or bundled pricing, which is very misleading and expensive. If there are any notes about “qualified” or “non-qualified” card types, that’s the first red flag.
If you’re interested, I’d be happy to look into the quotes you received here at CardFellow to see exactly what (or if) you could be saving. We’ll always tell you if you wouldn’t save by switching, too. (It’s rare, but it does happen.) Feel free to shoot me an email if you’d like – ecunningham at cardfellow.com.
As for interchange plus and how they make money, when the processor charges you a true pass-through of interchange and assessments, you pay that wholesale cost of processing (the interchange and assessments) and then pay them their markup on top of that. It doesn’t matter to the processor what the costs for the transaction are, because you’re paying that, and then their markup. Because of that, competitive interchange plus markups are usually pretty small.
It’s also a lot more transparent when the actual cost of processing is passed directly to you, because then you know exactly what’s being paid in non-negotiable rates/fees, and what you’re paying as someone’s profit. With flat rate processing, you don’t necessarily see it, depending on how the processor chooses to structure your statement. And if you have a lot of low cost transactions (like, say, regulated debit cards, which are 0.05% + $0.21 at the interchange level) then you’re paying a TON to the flat rate processor in profit, which isn’t the case with an interchange plus processor.
So, there are a lot of factors that go into it, and it’s more complicated than most people care to get into, which is where we come in. 🙂
Who is the processor that you’re using (at 1.9% + $12.95) >
Yes do share.
Hi Matt, please share with the thread who offers a flat rate of 1.9% and $12.95/month. Thanks.
Have you heard of a company of OR called rate lock? The promise a flat fee with a 48 month equipment lease.
Hi Aline,
I’m not familiar with that particular company, but I’ll strongly caution against equipment leases. It’s likely to be a very expensive option. Here’s our article on why you shouldn’t lease equipment: https://www.cardfellow.com/blog/lease-credit-card-machine/
You didn’t mention who the leasing company is, but one of the common ones is Northern Leasing, who has been sued twice by the state of New York and by merchants. Here’s our article on them: https://www.cardfellow.com/blog/northern-leasing-systems-lawsuit-scam-review/
I’d highly recommend looking at a non-leasing option. You can also use the free quote request tool on our site to compare pricing from multiple processors all at once. All the quotes include a lifetime rate lock. The short (private) form is located here: https://www.cardfellow.com/sign-up.
Have you heard of Singular? I do about 25K a month in credit card business, almost exclusively swiped cards of Visa and MC. Can you recommend a good flat rate or other company? Thanks.
Hi Rhia,
I’ve heard of Singular Payments, though they don’t place certified quotes through CardFellow. Out of curiosity, why are you looking for a flat rate company? With $25k/month, it’s likely to be more expensive. What I’d suggest is creating a quick profile here at CardFellow to use the price comparison tool. It will show you the best pricing available to your company from leading processors and allow you to compare it with any company you’d like.
Additionally, the certified quotes you’ll see from processors in the CardFellow marketplace come with some great benefits, like our lifetime rate lock, no cancellation fees, and free statement monitoring to make sure you’re not overcharged. It’s completely free and no obligation: https://www.cardfellow.com/sign-up
Flat rate is much better. With an interchange price model, the processor is guaranteed to make money on every transaction. On the flat rate, the processor makes money on some and loses on some. So in the flat rate situation, the merchant passes the uncertainty of making money to the processor. I have 2 businesses running similar transactions. The interchange processing model consistently costs more than the flat rate model! My average ticket is $150.
Hi Howard,
It’s true that on some transactions, a flat rate processor could lose money. That’s what happened to Square when they processed for Starbucks.
However, the times that that happens are very limited. In general, a flat rate company like Square will be lower cost if your average transaction is under $10 or if you only take a few thousand dollars/month in credit cards. In other situations, competitive interchange plus processors are more typically lower cost. You mention a $150 average ticket – are you taking over $3,000 month in total credit card sales? If so, I’d be happy to take a look at your statement for you. In most cases, we find that businesses on flat rate are overpaying.
Hi Ellen,
Thanks for the info you shared in your article, well explained and organized.
I do have a different business model as I am in need of marketplace payment processors
I did my study, and totally agree with you that interchange+ is most effective even for ~ 10$, for our business model.
Most flat rates charge 2.9% plus 30 cents per transaction for marketplace processing. A company like Stripe even charge additional.5% for your total revenue as well 2$ for each vendor account. (Which addd a lot of fees and charges.)
The only payment processor offers intercharge for marketplace is Adyen.
What do you think about them and do you have any other suggestion for marketplace processing?
Thanks
Mohamed
Hi Mohamed,
I’m not as familiar with marketplace payment processors because it’s a somewhat less common situation. I don’t know much about Adyen personally, as we don’t currently work with them.