Flat rate pricing is becoming a more common way of billing merchants for credit card processing.
Its appeal, of course, lies in its simplicity. But a lot of merchants, especially new merchants, may not understand that in the case of flat rate pricing, simplicity does not equal savings. So if you’re looking to sign up for credit card processing, know somebody who is, or if you’re currently benefiting from interchange plus pricing and haven’t looked back, it helps to understand the current payments ecosystem and your place within it, relative to what other merchants might be paying.
Flat Rate pricing simply means that the credit card processor is charging you one flat rate for all of your credit card transactions, regardless of the interchange rate fluctuating based on the card type.
The flat rate refers to the type of card a customer is using for the transaction and may still change based on the method of payment used. For example, swiping the card, chip and pin, or manually entering the card details are all different methods of processing the transaction, and may carry different flat rates.
Why Merchants Choose Flat Rate Pricing
Unfortunately, the payment industry is well known for its confusing pricing structures which can make it difficult for merchants to understand their statements and calculate what they’re actually paying for each transaction. Wanting to keep things as simple as possible when statements come around can make selecting a payment processor who offers flat rate pricing seem more appealing.
Merchants who are new to payment processing or who have had a negative experience with a payment processor exploiting a complex pricing structure in order to tack on additional hidden fees may consider switching to a flat rate payment processor. This way they may feel like they can better predict what they will be paying for their payment processing.
How Flat Rate Pricing May Cost You More
Transaction fees can add up quickly and with flat rate pricing, this may mean that you end up paying more than you would with other payment processors who bill using interchange plus or interchange pass-through pricing. This is because the actual cost of each transaction fluctuates based on the interchange fee. So, if you’re being billed a flat rate of 2.9% each time you process a transaction that has an actual interchange rate of 1.5%, then you’ll end up paying more than the transaction cost to process and the payment processor will benefit from a higher margin on that transaction. And in that same example, the processor’s margin that they’re pocketing would be 1.4%, which is very high. For reference, Helcim’s margin for card-present transactions on top of the interchange is only 0.25% and never increases – in fact, it decreases based volume processed.
How do Flat Rate Payment Processors Determine the Transaction Fee?
The interchange fee that you’re charged for processing a transaction is determined based on several factors including the industry your business is in, the method you use to process the transaction and the type of credit card the customer is using. Because payment processors do not know exactly which cards customers will use for each transaction up front, the rates in a flat rate pricing structure need to be high enough to be able to cover the cost of the transactions that will be processed, even if they’re transactions with high interchange fees. If they set their flat rate too low, then whenever you process a high-end rewards card (which cost more to process due to their higher interchange rate) the payment processor could potentially lose money on the transaction. Therefore, the payment processor needs to set a flat rate that will be high enough to cover the cost of the costlier transactions that your business may be processing. The problem with covering their bases with a high flat rate in order to accommodate the potential for high-cost transactions is that for all the transactions that aren’t using those higher end cards, the merchant is paying a lot more than they should.
Who is Flat Rate Pricing Best for?
If your business mostly processes a low monthly volume of small average ticket transactions that are card-present, then flat rate pricing could be the best option for your business. For example, a small coffee shop where most transactions are under $15.00 and the customer pays in person when they place their order might be a good fit for the flat rate pricing model. However, as your business grows, and you begin processing a higher monthly volume of transactions, then a small change in the percentage you pay can make a big difference once it’s applied to a month’s worth or a year’s worth of processing. So as your business grows, it may be worth your while to request a rate comparison just to ensure you’re still getting the best deal for your business.
What are the Other Options?
If it’s simplicity you want, then the other options available to you in tiered pricing or interchange differential pricing will not offer simplicity or much in the way of savings.
While interchange plus pricing undoubtedly involves more to wrap your head around than flat rate pricing, it can mean significant savings for your business if you’re a small or medium sized business. With interchange plus pricing, the interchange rate is passed directly on to your business and the processor margin sits on top, so you will save money on transactions that you should save money on.
To Flat Rate or Not to Flat Rate?
While flat rate pricing may be appropriate for a small number of businesses with low monthly volumes, there are a lot of businesses who would greatly benefit a from a more transparent billing arrangement. So, if a friend or family member is starting a business and they default toward simplicity when it comes to pricing, it might be worth asking them if they really understand what they’re going to be paying. The unfortunate reality is that credit card processing will likely never be simple, but that doesn’t mean it can't be understood to the point where it can save your business money.
Helcim offers interchange plus pricing to all of our merchants because we believe it is the most transparent and cost-effective pricing structure. If you’re like to learn more about interchange plus pricing, or request a rate comparison, you can contact the Helcim Gurus for help.