Having a flat rate may sound like a great idea because you always 'know' what your rate is. In the majority of cases, flat rates are actually more expensive. Service providers often like to hide their fees within the flat rate so your effective rate is typically much higher. In addition to other added expenses depending upon whether the card was a rewards or business card and how that card was taken.
This blog post will break down the differences between flat rate and cost-plus, or also referred to as interchange-plus pricing to depict the differences to help you make a decision between the two so you will know the best option for your business.
What Does Flat Rate Mean?
Flat rate processing is when businesses will pay their processing fees based on the set percentages. Typically those rates are around currently around 2.75% – 2.9% for swiped transactions with an additional per-transaction fee which is usually around 20 – 30 cents per transaction.
Your flat rate is actually 3 rates, not typically disclosed to the merchant. Merchant is under the impression that this flat rate percentage will be for everything across the board, in reality, there is much more that goes into it such as whether the card was in person or not, transactions via phone, a corporate card and even hand keyed.
How Does It Work
How can they offer a great deal or free equipment and not go under? Flat rate pricing is how. Once you see the difference between the two options you will question why you even thought a flat rate was a good idea.
Statistics show that at least 70% of purchases are made with a debit card, would you rather the majority go through at 0.05% or the 2.75%?
While you may not have any standard monthly account fees, the higher transaction fees offset that cost for the service provider so they are able to be highly profitable.
For example, let's say that Mr. Merchant does 50 transactions a day at 25 cents per transaction. With 22 open business days that month, he will be paying $12.50 a day or $275 a month in transaction fees. I have yet to see a monthly statement fee that is above $15, which means there is a $260 dollar difference that was paid out in transaction fees alone.
That is a LOT of profit margin allowing them to be profitable while still covering the costs of the equipment they offer, I can't say that it is free because, with flat rate, you will buy that thing 3x over plus more in fees.
What is Interchange-plus and why it matters to you?
With the interchange-plus pricing structure, the interchange fees will fluctuate depending upon what you are processing while you are still saving money on eligible transactions vs the flat-rate model.
Interchange-plus allows for a regulated debit card, which is primarily the type of payment used, to go through at 0.05%, so why would you want to pay the 2.75% Flate Rate fee?!
Interchange-plus has much lower per-transaction fees, commonly under 15 cents. If we take the example from above and this Mrs. Merchant is paying 15 cents per transaction with the same 22 business days and 50 daily transactions, she is paying $7.50 a day, or $165 a month. Mrs. Merchant saves $110 a month.
We understand that interchange-plus seems scary and more complicated when you are used to the simplicity of flat-rate pricing, we assure you it is not. Our payment professionals will take care of everything to help you decide which pricing structure is best for your type of business.
Talk to us today to learn more about how Interchange Optimization paired with the interchange-plus pricing can drastically reduce your fees.