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March 04, 2024

Flat Rate Card Processing: Is it Right for Your Business?

Peter Voight

Written by:

Peter Voight

Flat Rate Card Processing: Is it Right for Your Business?

With credit cards, debit cards, and mobile wallets comprising more than 80% of payments in the United States economy, it's more essential than ever to accept card transactions. However, while most US businesses now accept card payments, many don't understand the pricing structures underlying their payment processing fees. In recent years, flat rate pricing has emerged as one of the most popular payment processing pricing models, especially with merchants using payment service providers (PSPs) such as Square and Stripe.

Flat rate pricing charges the same fees regardless of card brand and card issuer. While this makes payment processing fees predictable and easy to understand, it doesn't mean it's the best value. The pricing model best suited to your business depends on various factors, including customer payment preferences, transaction volume, average transaction value, etc. While payment processing commissions may seem small in isolation, they quickly add up. Choosing the correct pricing model for your company can help your business significantly increase its margins.

This guide explores flat-rate pricing, how flat-rate pricing works, typical flat-rate pricing fees, alternatives to flat-rate pricing, and other related topics. Read if your business needs to choose a new payment processing pricing model!

What is Flat-Rate Pricing in Credit Card Processing?

So, what is a flat rate? Flat-rate credit card processing is a pricing model that charges the same processing fees regardless of the customer's card type. Unlike other types of credit card processing, which charge different fees based on card brand and other factors, flat-rate pricing makes it simple to forecast payment processing costs. Many merchants enjoy flat-rate pricing because it doesn't incentivize them to restrict payments from credit cards with higher network fees (such as American Express).

However, while flat-rate pricing charges the same fees regardless of card brand, some factors still result in higher or lower processing costs. For example, many payment service providers (PSPs) still charge more for card-not-present (CNP) transactions, international transactions, and other high-risk credit card transactions.

How Does a Flat-Rate Program Work?

In payment processing, a flat-rate program simplifies fees by charging a fixed percentage and/or a flat fee for each transaction, regardless of the card type or issuing bank. For example, a payment service provider may charge 2.7% + $0.30 per transaction. This approach streamlines billing, offering predictability for businesses. While it may benefit smaller transactions, it may not be the most cost-effective for larger businesses with high-volume, high-value transactions. Overall, it simplifies the complex fee structure associated with payment processing, making it easier for merchants to understand and budget for transaction costs.

Typical Flat Fee Rates for Credit Card Processing

Flat fees vary significantly depending on the payment service provider, type of payment (in-person, online, etc.), and other factors. Let's explore the fees for some of the leading flat-fee payment processors:

In-person flat-fee rates

Check out the fees for in-person transactions (card-present transactions) from leading flat-rate fee payment providers:

  • Square: 2.6% + $0.10 per transaction
  • Stripe: 2.9% + $0.30 per transaction
  • PayPal: 3.49% + $0.49 per transaction

Online flat-fee rates

Check out the fees for online transactions (card-not-present transactions) from leading flat-rate fee payment providers:

  • Square: 2.9% + $0.30 per transaction
  • Stripe: 2.7% + $0.05 per transaction
  • PayPal (iZettle): 1.75% per transaction

Online fees are traditionally higher than in-person fees as they are categorized as card-not-present (CNP) transactions. Remember that the above fees are only the per-transaction fees for each payment processor. There may also be subscription fees applicable.

Different types of flat-fee rates

If you're comparing flat-fee rates, you might notice that major PSPs have two different rates available to merchants. Firstly, some PSPs will charge a fixed fee (for example, $0.30) plus a percentage (2.7%) for each transaction. On the other hand, some PSPs may charge only a percentage fee without any fixed costs.

So, which one is best for your business? If you sell high-ticket items, a fixed fee plus a percentage of each transaction may be more affordable. This is because payment processing pricing with fixed fees usually charges a lower percentage fee, making it more affordable for expensive products or services. However, if your business sells low-ticket items, working with a flat-fee payment processor with only a percentage fee is better. For low-ticket items, fixed fees reduce margins too much.

Who Benefits from Flat Fee Credit Card Processing?

As flat-rate pricing continues to be a popular fee model in the payment processing world, you might wonder: Who benefits from this pricing structure? Let's explore all the stakeholders that gain from this fee structure:

New businesses

Accessing a traditional merchant account can be challenging for new businesses without a credit score or processing history. Likewise, limited business history makes it difficult to find a payment processor willing to offer alternative pricing, such as Interchange Plus pricing. Therefore, many merchants benefit from PSPs offering flat-rate pricing with no underwriting process. Payments usually take a few days to accept with this pricing structure.

Low-volume merchants

Extremely low-volume merchants may benefit from a fixed-rate payment processor, as it provides quick and predictable access to payment processing. It's not until you process large volumes of transactions that flat-rate processing becomes a significant cost.

Merchants prioritizing convenience

Ignoring the benefits of flat-rate pricing is hard for merchants seeking to simplify billing and processing fee forecasts. This pricing structure is easy to understand and allows business owners to focus on what matters most: running their companies.

Payment service providers (PSPs)

While all the above market participants benefit from flat-fee credit card processing, one beneficiary reigns supreme: PSPs. Flat-fee pricing allows PSPs to hide their markups and retain more payment processing costs. While flat-fee pricing appears convenient, it's a strategy to help payment processors keep more fee commissions. This is why so many new payment processors entering the market are offering flat-rate pricing.

Advantages of Flat Rate Pricing

There are numerous benefits associated with flat-rate pricing. Let's explore the upsides in more detail below:

Simple and easy to comprehend

The primary benefit of flat-rate pricing is how easy it is to comprehend. With flat-rate pricing, your business is never guessing how much it will pay to process credit cards. Flat-rate pricing is a suitable pricing model to forecast your payment processing costs. You can factor your credit card processing costs into your product or service pricing.

Ideal for small transactions

Small businesses benefit from a consistent fee structure, eliminating the need to calculate complex percentages for each transaction. This straightforward model makes it easier for merchants selling low-value items to understand and budget for payment processing costs. Additionally, it reduces the impact of variable fees on small transaction amounts, making it a cost-effective and transparent option for businesses with lower transaction volumes.

Uniform rate for all card types

Reward credit cards make up a significant portion of credit cards held by American consumers. Around 60% of new credit card originations in the United States are reward cards. However, card rates vary depending on the card brand under some alternative pricing models, such as Interchange Plus pricing. Allowing all types of credit card brands is critical to ensure your business accepts your customers' preferred payment methods. With flat-rate pricing, there's no disincentive to accepting all card brands — processing fees are uniform for all card types. This makes it easier to offer your customers the payment methods they prefer!

Disadvantages of Flat-Rate Payment Processing

While the advantages of flat-rate payment processing are attractive for many merchants, it's critical to understand the downsides of this pricing model. Let's explore the drawbacks of using a payment service provider with flat-rate pricing:

Fees are typically higher

While flat-rate pricing is easy to understand, merchants pay a premium for the convenience. Payment service providers understand merchants want simple, predictable payment processing fees. Likewise, many merchants enjoy accepting all types of credit cards without paying extra fees for premium card brands. However, flat-rate pricing tends to be more expensive over the long run due to higher markups from payment service providers. So, while it's easier to predict processing costs with flat-rate pricing, many merchants retain less revenue by using this pricing model!

Lack of transparency

Flat-rate pricing is inherently murky — merchants have no idea how much their payment service provider is skimming off the top of their processing fees. As flat-rate pricing only advertises the overall price of processing each payment, merchants don't have access to the amount of money processors pay to card networks and other stakeholders. Without this information, it's impossible to know how much payment processors are retaining for themselves. Flat-rate pricing often hides huge markups, which cost merchants money.

Less suitable for high transaction volumes

Most flat-rate pricing providers charge markups on every transaction. This means the more your business transacts, the more it commissions to a payment service provider. For high-volume businesses, the markup value can quickly become significant. Worse yet, your business won't have access to details on the markup value, so it's impossible to know how much you're paying for the convenience of a flat rate. Businesses with high transaction volumes must consider other options for better processing fee prices.

Not always as cheap as advertised

Many PSPs advertise cheap headline rates to catch merchants' attention. However, as fees vary depending on the payment type — such as online, in-person, international, etc. — the provider's payment processing may not be as affordable as it first appears. Always look at the rates for various payment types before committing. For example, if your business only accepts online transactions, ensure both the online payment and in-person rates are affordable. Likewise, if you accept many overseas payments, work with a provider with reasonable international transaction fees. Just because you don't pay increased processing fees for different card brands or issuers doesn't mean there aren't hidden costs for other payment types.

Options Other Than Flat Fee Credit Card Processing

Now that you understand flat-rate fee credit card processing, you might wonder: Are there any viable alternatives? Fortunately, flat-rate pricing is just one of many credit card processing options available to business owners. Let's check out some alternatives and whether they're suitable for your business:

Tiered pricing

As a pricing model, tiered pricing categorizes transactions into different tiers based on criteria like card type and processing method. Each tier has a predetermined rate, often comprising qualified, mid-qualified, and non-qualified. Qualified transactions meeting specific criteria receive the lowest rate, while mid and non-qualified transactions incur higher fees due to factors like card type or processing method.

Essentially, the higher the transaction risk, the more a business will pay to process it. While providing some flexibility, tiered pricing can lead to complexity and higher costs. Still, it offers more affordable payment processing in many cases than flat-rate pricing.

Interchange Plus processing

Interchange Plus pricing is a transparent payment processing model where merchants pay the actual interchange fees set by card networks plus a fixed markup by the payment processor. This structure clarifies costs, separating interchange fees from the processor's margin. While it may seem more complex, it often offers businesses better rates and cost control. This is especially true for those with higher transaction volumes, as the markup remains constant, allowing for a clearer understanding of processing expenses.

If affordable payment processing and full pricing transparency are your priorities, Interchange Plus processing is the best option for your business. While this means pricing varies depending on the card brand and issuer, it's usually the most cost-effective pricing option.

Cash discount programs

If you want to reduce the impact of credit card fees substantially, you may want to encourage cash payments. One of the easiest ways to encourage cash payments is to offer a discount to cash-paying customers. This may reduce your overall credit card payment volume and lower the money wasted on fees. You must follow proper protocols when implementing this program, such as displaying the discount within your store.

Some businesses add surcharges to transactions using a credit card rather than a cash discount. While surcharging achieves a similar outcome in helping companies reduce credit card transactions, it may pose more challenges for business owners: Surcharging is illegal or regulated in many states. Check your state's cash discount program and surcharge program laws before implementing either pricing strategy.

Flat rate subscriptions

A hybrid option is available if you look at all the previously mentioned alternatives but still enjoy the thought of flat-rate pricing. With flat-rate subscriptions, merchants pay a monthly subscription to access flat-rate pricing. The subscription covers the processor's markup, so merchants benefit from a lower per-transaction price.

This is especially relevant to high-volume businesses. You reduce the per-transaction markup cost by paying a subscription instead of hefty markups on all transactions. Over time, this makes payment processing more affordable. Still, it's critical to dig deep when comparing flat-rate subscription options. You must ensure the payment processor offers a good value on per-transaction costs. Just because you pay a subscription doesn't mean you're getting value for money.

Final Thoughts

With more than 150 million credit card transactions occurring daily in the United States, it's critical to understand the various pricing models available to merchants. Now that you understand the flat rate and how it works, it's time to determine if it's the best pricing model for your business. There's no doubt flat-rate pricing makes it simple to understand and predict payment costs. For low-volume businesses requiring immediate access to payment processing, a payment service provider with flat-rate pricing may be a suitable option. However, if you operate a high-volume business, you may overpay for credit card transactions in the long run by using this pricing model.

Choosing a merchant service provider with alternative pricing models is essential to avoid the heavy markups of flat-rate pricing. Fortunately, plenty of merchant account providers offer tiered and Interchange Plus pricing. However, don't forget that pricing isn't the only factor to consider when choosing a payment processor. Also, assess available payment methods, software integration, customer support, hardware, and other critical payment factors!

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