Why Flat-Rate Credit Card Processing Works Great For Some Businesses (And Not Others)

So, you’re a first-time small business owner, and you want to be able to accept credit and debit cards from your customers. After all, you’re bound to get a lot more sales – and make more money — right? Well, this is generally true. However, credit card processing is also a mysterious and rather complex subject, and getting an account with a payment processor often ends up being a more expensive proposition than most business owners expect.

One of the more confusing aspects of credit card processing is figuring out exactly how much your processor is going to charge you for each credit or debit card transaction. Reading through your monthly processing statement can become an exercise in frustration, and it can often seem that your costs vary widely (and seemingly randomly) from one transaction to the next. Wouldn’t it be nice if you just paid the same amount for each sale? Your costs would be predictable, and it would be easier for you to anticipate how much you’re going to pay each month for credit card processing.

Well, it is possible to enjoy this kind of stable, reliable pricing. The flat-rate pricing model is predicated on the idea that you’ll pay a fixed rate for each transaction, thus allowing you to anticipate your processing costs each month. However, we should point out that we have yet to see a true flat-rate pricing model being offered by any processor. Even small business-favorite Square (see our review) has at least three different rates, mostly depending on whether you’re accepting a card in person, over the internet, or manually entering the card information.

Another important consideration with flat-rate pricing is that it involves an important tradeoff – it’s usually significantly more expensive on a per-transaction basis than other pricing models. However, this disadvantage is offset by the fact that most providers using a flat-rate pricing model don’t charge a monthly account fee, or any of the other fees that most traditional providers tack onto your bill. For this reason, flat-rate pricing is often the least expensive option overall for very small or seasonal businesses.

In this article, we’ll analyze how flat-rate pricing works and how you can use it to save money on your processing costs. We’ll also show you how it compares to interchange-plus pricing, another popular pricing model that is actually less expensive for some businesses. Finally, we’ll show you how to analyze your processing costs to determine which pricing model is going to be a more affordable option for your business.

What Is Flat-Rate Credit Card Processing?

By now, you’ve figured out the obvious fact that credit card processing isn’t free. Although many consumers don’t understand this, all business owners are acutely aware that a certain percentage of any credit card transaction will go toward covering the costs associated with processing the transaction. Unfortunately, that percentage isn’t really certain at all, which is why the subject of credit card processing can be so confusing.

In a nutshell, here’s how it works: Your credit card processor has to pay percentage-based fees to the bank that issued the credit card (called, unsurprisingly, the issuing bank). These fees are called interchange fees, and they vary widely based on several factors, such as the type of card used, the type of transaction, the nature of the item purchased, etc. There are literally hundreds of different interchange fees, any one of which might apply to a given transaction. There’s also a network fee, which is paid to the card association sponsoring the card (i.e., Visa, Mastercard, etc.). Network fees typically run around 0.05%, so they won’t be a significant expense for your business. Finally, there’s the markup, which is the fee that your processor keeps for itself after it’s paid out the other fees. No matter what type of processing rate plan your processor uses, there will always be a markup – even if you have no idea how much it really is.

Flat-rate pricing aims to eliminate some of the confusion surrounding interchange fees and give you a simple, predictable set of rates that you’ll pay every time. The primary advantage of flat-rate processing is that you’ll always know in advance exactly how much a given transaction will cost to process. Most flat rates include both a percentage and a fixed per-transaction fee.

Let’s use Square (see our review) as an example of how flat-rate pricing works in actual practice. The company offers three primary processing rates:

• 75% for all card-present transactions
• 90% + $0.30 per transaction for all ecommerce (i.e., card-not-present) transactions
• 50% + $0.15 per transaction for all manually entered (also card-not-present) transactions

What does this type of pricing mean for your business? In a word: predictability. If you’re solely a traditional brick-and-mortar retailer, you’ll always pay 2.75% for every transaction, unless the customer’s card isn’t working, and you have to key in the information manually. Likewise, if you’re ecommerce-only, you’ll always pay the same 2.90% + $0.30 per transaction every time you process a payment. Mail order and telephone order businesses will almost always pay the same 3.50% + $0.15 per transaction. Omnichannel businesses will have a little more variability, but with only three possible rates available, it won’t be too hard to figure out how much you’re paying.

Flat-rate processing is the rate plan of choice for payment services providers (PSPs) like Square, PayPal, and Stripe that don’t offer you a true merchant account. Instead, you’ll be aggregated in with every other business using the company’s services. For small business owners, the primary advantage of signing up with one of these PSPs is that you usually won’t pay a monthly account fee, or any other recurring fees, for that matter. This can save you a lot of money, especially if you’re a seasonal business owner or only accept the occasional credit or debit card transaction.

The main disadvantage of flat-rate pricing is simply that the processing rates are high – often higher than what you’d pay under any other type of processing rate plan. As we’ve mentioned above, there are hundreds of possible exchange rates that might apply to a given transaction. However, for comparison purposes, let’s assume that the average exchange rate is roughly 1.4% for card-present transactions and 1.9% for card-not-present transactions. Compare this to Square’s rates quoted above, and it’s obvious that you’re paying a much higher rate for each transaction. Why is this? Well, your processor is not going to take a loss on any transaction, so they’re going to set their flat rates high enough to cover even the most expensive exchange rates. This is one reason why the processing rates offered by the most popular PSPs are almost exactly identical.

Where flat-rate pricing really starts to cost you money is with debit card transactions. Because these types of payments come straight out of the customer’s bank account and don’t require the issuing bank to cover the full cost of the transaction, interchange fees for debit transactions are much lower than they are for credit cards – typically less than 1.0%. Unfortunately, a flat-rate pricing plan doesn’t take this into account, so you’ll pay the same full price regardless of whether the customer uses a debit card or a credit card.

Interchange-Plus VS Flat-Rate Pricing

By now, it should be apparent that the simplicity and predictability of flat-rate pricing come at a cost. If you don’t like the idea of paying much more than the basic interchange fees (especially on debit card transactions), you might want to consider an alternative.

An increasingly popular processing rate plan is interchange-plus pricing. Under this type of pricing, your processor will charge the basic interchange rate plus an additional markup. For example, a typical interchange-plus rate quote might be something like interchange + 0.30% + $0.15 per transaction. In this case, interchange fees are passed on at cost, and the processor’s markup is clearly disclosed as being 0.30% + $0.15 per transaction. If we again assume an average interchange fee of 1.4% for card-present transactions, this works out to an effective average rate of 1.70% + $0.15 per transaction. In most (but not all) cases, this will be much less expensive than what Square or any other PSP charges for the same type of transaction. Remember, however, that interchange rates vary quite a bit, so if your particular transaction has a higher interchange fee, there might not be that much of a difference between the two processing rate plans.

You should also be aware that some providers will offer you an interchange-plus rate quote that only mentions the markup. Don’t be misled into thinking that you’re getting a really good deal – you’ll always have to pay the interchange fees. In fact, interchange fees constitute the bulk of your processing costs for almost all transactions.

Of course, processing rates are only one part of your total costs. Providers offering interchange-plus pricing will be signing you up for a traditional, full-service merchant account. This is a lot more stable and secure than what you’ll get with a PSP, but it does come at an additional cost. Expect to pay a monthly account fee at an absolute minimum. There are also a host of other fees you might have to pay, increasing your costs even more. For this reason, a full-service merchant account with interchange-plus pricing works best for year-round businesses that accept credit and debit cards on a daily basis, and process at least a certain amount (typically around $5000 per month) in credit and debit card transactions.

For more information on interchange fees, see our article, What Are Interchange Fees For Credit Card Processing?.

When Does Flat-Rate Pricing Work Well?

The simple answer to this question is that flat-rate pricing works best for small or newly-established businesses that don’t have a high monthly processing volume and don’t want to be burdened by additional account fees. If you’re just starting out or your business is a side gig that isn’t expected to grow significantly over time, flat-rate pricing makes it easy to accept credit and debit cards without the commitment and expense of a full-service merchant account. Yes, you’ll pay more on a per-transaction basis for credit card processing. However, you also won’t have a long-term contract or have to pay all the additional fees that typically come with a true merchant account. Flat-rate pricing can save you money overall by eliminating most, if not all, of these additional fees. The lack of a long-term contract makes switching to a full-service merchant account when the time is right easy and painless.

Can You Get A Better Deal Than Flat-Rate Pricing?

It should be obvious from the above discussion that flat-rate pricing isn’t for everyone. Yes, it’s simple to understand, and you won’t have a long list of confusing extra fees on your monthly processing statement. However, you’ll still be paying more for each transaction, and at a certain point this reality will catch up with you. Once your business grows large enough, it’s imperative that you switch to a full-service merchant account with interchange-plus pricing. We’re always a little disappointed to see businesses still using Square when they’ve obviously grown to the point where they’re losing money by not switching to an interchange-plus plan.

Where exactly is the “tipping point,” beyond which you should upgrade to interchange-plus pricing? Unfortunately, there’s no simple answer. We’ve seen vendors that claim that you need to process at least $10,000 per month to benefit from interchange-plus, while other providers put this point as low as $1500 per month. The truth is that there is no hard and fast rule. You’ll have to analyze your actual processing costs under flat-rate pricing and compare it to what your estimated costs would be for the same transactions under an interchange-plus pricing plan. Remember that there’s nothing stopping you from keeping your Square account as a backup even after you sign up for a full-service merchant account under a different provider. Many businesses keep their Square card readers in case of technical problems with their primary account’s processing hardware.

Final Thoughts

Is flat-rate credit card processing right for you? As we’ve seen in this article, it depends. As a general rule, flat-rate pricing is the best option for a small or newly established business with a low monthly processing volume. While the processing rates themselves are on the expensive side, the lack of other monthly account fees usually more than makes up for this disadvantage. Of course, this assumes that you sign up with a vendor who offers flat-rate pricing on a per-transaction-only basis and doesn’t charge you any additional recurring fees. Beware of providers who offer flat-rate pricing, but then tack on a variety of monthly fees or try to lock you into a long-term contract. Flat-rate pricing only works well if you don’t have a host of recurring fees and you can close your account at any time without penalty.

For larger businesses, flat-rate pricing is not a good deal. You’ll pay much higher processing rates than what you’d get under most interchange-plus plans, particularly for debit card transactions. Not having to pay recurring fees might seem appealing, but if your processing volume is high enough, this advantage will be negated by the cumulative effect of paying higher processing rates. You also won’t have the stability and protection of a full-service merchant account – something that will become increasingly important as your business grows in size.

As we’ve mentioned above, determining the point at which it makes sense for your business to switch to a full-service merchant account is complex and varies from one business to the next. You’ll have to compare what you’re currently paying for payment services against quotes from providers offering interchange-plus pricing to determine which method offers the lowest cost overall. Our Cost Analysis Workbook is an invaluable resource for helping you “do the math,” as we’ve included spreadsheets that allow you to plug in the relevant information and quickly determine which pricing model is the best deal for your business.

For a much more in-depth discussion about rates, fees, and processing rate plans, please see our article, The Complete Guide to Credit Card Processing Rates & Fees. If you’ve decided that switching to an interchange-plus pricing plan is right for you, you’ll want to consult our Merchant Account Comparison Chart for an overview of the best merchant account providers in the industry. Good luck!

Our Top-Rated Merchant Services Providers