As a business owner, you have to deal with a lot of things that are far from simple: inventory management, taxes, and accounting, just to name a few. So when it comes to what you pay in processing, a simple calculation that doesn’t change can be an attractive option for your business. But is it the best one?
What is Flat Rate Processing?
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 fluctuating interchange rate (interchange rate = set by card brands and based on card type, i.e. Visa Gold vs. Amex OptBlue).
The flat rate remains constant for all types of cards but may change based on the type of transaction being processed. For example, when a card is inserted and uses chip and PIN (a card-present transaction) merchants will usually be charged a lower flat rate, than say, when the card details are entered manually into a POS or POS app (card not present transaction). These different flat fees are associated with the respective level of risk associated with each sort of transaction.
Summary: all cards charge the same single flat rate, but card-not-present and card-present transactions can have different flat rates. Contrary to interchange plus pricing, the rates are not dependent on card interchange rates.
Is Flat Fee Processing a Good Deal?
The appeal of flat rate credit card processing, of course, lies in its simplicity and predictability. But what a lot of merchants—especially new ones—may not understand is that in the case of flat rate pricing, simplicity does not necessarily equal savings.
If your business has a low monthly processing volume, or if many of the transactions you process are quite small (think a cup of coffee), flat rate pricing can result in some savings. As soon as your processing volume increases, however, or once you start selling high-value products, the flat fee begins to lose its shine.
When this happens, payment processors who bill using interchange plus or interchange pass-through pricing may offer you a better bang for your buck. 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 much more than the actual transaction cost to process that payment.
In this instance, the processor’s margin on that transaction would be 1.4%, a considerable amount higher than the interchange rate. For reference, Helcim’s margin for card-present transactions on top of the interchange is only 0.25% and does not increase – in fact, it decreases as processing volume increases.
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What is a Typical Flat Rate Fee?
Typical flat rate pricing runs around 2-3% + a few cents. It’s important to remember two things when shopping for a flat fee provider:
- The rate you are getting will not fluctuate, but it is higher than interchange
- You will still pay an additional x cents per transaction.
With Square for example, who currently charge a 2.6% fee, you will also pay an additional 10 cents per transaction.
The Canadian payment processing giant Moneris, will also charge somewhere in this range, but you will be paying additional monthly account fees and have a bona fide merchant account. Check out this article to find out whether or not you need a merchant account.
PayPal will charge 2.9% on transactions that aren’t QR code payments, plus a fixed fee.
Flat Rate Merchant Service Providers
Square – the original mobile card reader company, getting started with Square is simple; they are great for small retailers with basic needs.
Stripe – a developer focused payments processor that is a great option for online merchants.
PayPal – the first big name in internet payments, PayPal is also a good option for taking payments online. They have an especially competitive QR code rate. What are QR code payments?
Moneris – a traditional payments processor used by many professional services businesses and retailers, including restaurants.
Is Flat Fee Processing Right for My Business?
If your business mostly processes a low monthly volume of small-ticket transactions (that are card-present or in-person), 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 where the customer pays in person, can 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 in monthly savings. So as your business grows, it may be worth your while to conduct a rate comparison just to ensure you’re still getting the best deal for your business.
Where flat rate can get really expensive is when you start processing all of your transactions online. All credit card processing companies charge a higher rate for card-not-present (online) transactions due to increased risk of fraud, but because flat fee processors do not base their fees on the interchange rate, they need to bump their cushion up further to protect themselves from potential losses. This means you will now be paying significantly more than interchange (more so than you were before) for all of the transactions you process online.
In sum, when it comes to deciding whether or not a flat rate provider is best for your business, consider how you will be accepting payments, the number of transactions you process every month, and the average dollar amount of each transaction.
Is There an Alternative to Flat Rate Processing?
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 you can save your business money! So flat rates are simple, but is there another pricing structure you could use?
While interchange plus pricing undoubtedly involves more to wrap your head around than flat rate pricing, it can mean significant savings for your business.
When it comes to interchange plus pricing, the interchange rate is passed directly on to your business, so you see exactly what the card rate is for each transaction you process, and benefit whenever a card with a lower interchange rate (most standard credit cards with few “perks” will have a low interchange rate) is used by your customer. For this reason, interchange plus pricing is often seen as the most transparent pricing model in credit card processing and can be by far the most cost-efficient way to process credit cards.. We’ve gone ahead and written an in-depth article on how interchange plus and flat rate pricing compare if you want to check it out. Or watch our video below.
Flat rate credit card processing is a popular and feasible option for many businesses. It can be great for small businesses who process low monthly volumes and is a winner also when it comes to easy-to-understand processing agreements. However, flat rate is not always the best deal, and it can be worth doing some more research into how pricing agreements that use interchange plus work to see if the best option for your business lay outside the realm of flat fee pricing.