When merchants accept credit cards as a form of payment, they face various types of fees that can add up over time. Choosing the right payment processing pricing model is crucial for keeping costs low and maintaining transparency in your financial operations. Two popular pricing models in the credit card processing industry are flat-rate pricing and interchange-plus pricing. While both serve the same purpose—processing payments—interchange-plus is generally the more cost-effective and transparent choice for most merchants.
In this blog, we’ll explore why interchange-plus pricing is a better option for merchants, particularly those who process a high volume of transactions or seek to understand the real cost of payment processing.
What is Flat-Rate Pricing?
Flat-rate pricing is a model where the payment processor charges a fixed percentage fee (plus a small, fixed fee) for each transaction, regardless of the type of card used or the risk level of the transaction.
For example, a popular flat-rate processor may charge 2.9% + 30 cents for each transaction. With flat-rate method, this means that merchants will pay a substantially higher rate if a customer pays with their debit card.
- Debit Card: The average debit card interchange fee charged to merchants typically ranges between 0.5% to 0.9% of the transaction amount, plus a small, fixed fee of around $0.10 to $0.25 per transaction.
- Premium rewards credit card, or corporate card: These types of cards typically range from 2.0% to 3.5% of the transaction amount and are influenced by several factors:
- Card Network: Visa, Mastercard, and American Express each have different fee structures for premium rewards and corporate cards.
- Transaction Type: Fees may be higher for card-not-present (online) transactions compared to card-present (in-store) transactions.
- Business Type: Some high-risk or niche industries might face higher fees, while others can negotiate lower rates based on transaction volume.
Pros of Flat-Rate Pricing:
- Simplicity: It’s easy to understand and predict. Merchants know exactly what they’re paying on each transaction.
- Good for small businesses: Businesses with low transaction volumes and varying transaction types may benefit from the simplicity.
Cons of Flat-Rate Pricing:
- Higher costs: Flat-rate fees tend to be higher on average, particularly for businesses with higher volumes or for merchants processing low-risk transactions (e.g., debit cards).
- Lack of transparency: Flat-rate pricing does not disclose the actual interchange fee charged by the card networks, making it harder to know how much you’re paying in markups.
- Loss of Revenue: Over time, a large portion of your business revenue is lost because you are paying a higher flat-rate interchange fee to the payment processor.
What is Interchange-Plus Pricing?
Interchange-plus pricing separates the actual interchange fees (set by the card networks like Visa, Mastercard, Discover, and American Express) from the processor’s markup. This model gives merchants a more transparent and customized pricing structure.
An interchange-plus pricing structure might look something like this:
- Interchange fee (e.g., 1.70% + 10 cents) +
- Processor markup (e.g., 0.40% + 10 cents)
This means the fees are split into two parts:
- Interchange fee: Set by the credit card networks and varies based on factors like card type (debit, credit, rewards), transaction volume, and risk.
- Plus fee: A fixed percentage and/or flat fee added by your payment processor as their markup.
Pros of Interchange-Plus Pricing:
- Greater transparency: You see exactly how much goes to the card networks and how much is kept by your payment processor. This allows you to understand and negotiate the markup component.
- Lower fees for certain transactions: Since different types of cards and transactions have different interchange rates, you pay less when customers use cards with lower interchange fees (like debit cards).
- Better for high-volume businesses: As your transaction volume increases, you can negotiate lower markup fees with the processor, keeping your overall processing costs lower.
Cons of Interchange-Plus Pricing:
- More complex: It requires a better understanding of interchange fees and how they vary. This can make monthly statements more difficult to interpret.
- Small savings for low-volume businesses: For businesses processing very low volumes, the savings from interchange-plus may not outweigh the simplicity of flat-rate pricing.
The Key Differences Between Flat-Rate and Interchange-Plus Pricing
- Cost Savings:
- Flat-Rate Pricing: Merchants pay the same fee for every transaction, regardless of the type of card used. This can lead to merchants overpaying for payment processing fees, especially if many of your customers use debit cards or basic credit cards, which carry lower interchange fees.
- Interchange-Plus Pricing: The actual interchange fee varies based on the type of card used, allowing merchants to pay less for lower-risk, lower-fee transactions. For businesses with higher transaction volumes, this pricing model usually results in significant cost savings.
- Fee Transparency:
- Flat-Rate Pricing: You’re charged one flat fee for all transactions, but you don’t know how much is going to the card networks and how much is going to your processor. This lack of transparency can make it hard to understand your processing costs or identify areas where savings are possible.
- Interchange-Plus Pricing: You see the exact interchange fee for each transaction, plus the markup charged by your processor. This transparency allows for better cost management and the potential for negotiating lower fees.
- Suitability for High-Volume Merchants:
- Flat-Rate Pricing: Best suited for low-volume merchants or businesses with small ticket sizes, as it simplifies bookkeeping and budgeting. However, the higher percentage fees can hurt margins as transaction volume grows.
- Interchange-Plus Pricing: As transaction volume increases, interchange-plus pricing becomes more cost-effective because processors’ markups tend to be much lower than the flat-rate pricing structure. High-volume merchants, or those who process a significant number of debit card transactions, will benefit from lower overall fees.
- Flexibility:
- Flat-Rate Pricing: Offers less flexibility and customization. Merchants pay the same fee, regardless of how their business or customer base evolves.
- Interchange-Plus Pricing: Allows for more flexibility as your processor markup is negotiable, especially as your business grows. You can also choose to process lower-cost card transactions more strategically to save on fees.
Case Study: How Interchange-Plus Pricing Can Save You Money
Let’s consider an example to see how interchange-plus pricing compares to flat-rate pricing for a merchant processing $50,000 per month in transactions.
Flat-Rate Pricing Example:
- Processing fee: 2.9% + 30 cents per transaction
- Total cost for $50,000: $1,450 + transaction fees (30 cents per transaction)
Interchange-Plus Pricing Example:
- Interchange fee: 1.80% + 10 cents (for a standard credit card transaction)
- Processor markup: 0.20% + 10 cents
- Total cost for $50,000: $1,000 + transaction fees
In this example, the merchant saves $450 per month by using interchange-plus pricing instead of flat-rate pricing. Over the course of a year, that’s a savings of $5,400!
Conclusion
For most merchants—especially those with higher transaction volumes, a diverse range of card types, or a desire for transparency—interchange-plus pricing is the superior choice. It provides greater transparency, cost savings, and flexibility compared to flat-rate pricing. While flat-rate pricing may be simpler to understand, it often leads to higher processing fees, especially for businesses that process large volumes of transactions or those that frequently handle debit card payments.
By opting for interchange-plus pricing, merchants can take control of their payment processing costs, reduce unnecessary fees, and improve their bottom line. If you haven’t already, it’s worth evaluating your current payment processing setup and considering whether a switch to interchange-plus pricing could save your business money.