Running a business is expensive, and the hidden fees you encounter as an entrepreneur can be staggering. From a sky-high electric bill to maintaining equipment, it can sometimes feel like you’ve got a giant hole in your bucket where all your hard-earned dollars leak through.
Credit card fees can also eat up a significant amount of your profits. Small businesses tend to pay about 3% of their sales volume in these fees. On the one hand, accepting credit cards is convenient, and it can even give you an edge if your competitors are cash-based. However, it can also add considerably to the cost of doing business.
In this article, we’ll explore the concept of flat-rate credit card processing fees and discuss some alternatives that could potentially save you money.
As the name suggests, flat-rate credit card processing (also called flat-rate pricing) means that your credit card processor takes a fixed percentage from each of your transactions. This amount stays steady regardless of daily fluctuations in interchange rates.
The cost of these fees ranges from 1.3% to 3.5%, though 2.75-2.9% tends to be a more typical range for small businesses. Sometimes, (almost always) there’s an additional per-transaction fee that averages .20 to .30 cents.
| PAYMENT NETWORK | AVERAGE CREDIT CARD PROCESSING FEES |
| Visa | 1.29% + $0.05 to 2.54% + $0.10 |
| Mastercard | 1.29% + $0.05 to 2.64% + $0.10 |
| Discover | 1.48% + $0.05 to 2.53% + $0.10 |
| American Express | 1.58% + $0.10 to 3.45% + $0.10 |
To give you some more context about where these fees come from, they start with a baseline interchange rate. Interchange rates are transaction fees set by the credit card companies charged to a merchant’s bank account for any debit or credit card transaction. In the industry, they’re also called swipe fees. These fees cover the cost of processing the transaction and include padding to account for fraud, bad debt, and other risks.
With flat-rate pricing, instead of having your transaction fees vary by the interchange rate, you’ll always pay the same amount. On the plus side, this gives you some consistency. On the negative side, the credit card processor is marking up those interchange rates by quite a large margin.
Use this calculator to find out how much you’re being charged in interchange fees.
Though the fees may seem high, they are designed to compensate the numerous parties involved in the transaction. Though it seems like wizardry to have a customer swipe a card, and money magically appears in your account, a lot happens behind the scenes. To move this money back and forth can require a merchant bank, a payment processor, an ISO (independent sales organization), an issuing bank, and credit card companies (Visa, Mastercard, Discover, and Amex).
Despite flat-rate pricing maintaining a constant rate, there may be variations in what you pay, depending on the type of transaction. For example, for a card that’s physically swiped or has a chip or a PIN, the transaction fee may be lower than if a merchant enters the card information manually.
The reason for this variation has to do with the risk involved. For example, a transaction at a local coffee shop where the person presents their card to a barista is considered less risky than someone from another city, state, or country calling your business and giving you their credit card information over the phone.
The biggest advantage of a flat-rate pricing model is that it offers a predictable fee structure with no surprises. The disadvantage is that it can be relatively expensive, especially as your business starts to grow.
– Consistency: You pay the same rate no matter how many sales you have or what the transaction amount is.
– Predictability: Knowing your expenses can help you budget
– Lack of other fees: Usually, a flat-rate pricing model means there are no monthly fees. Again, all you have to do is pay a percentage of your sales processed by a credit or debit card.
– Higher than average transaction fees: Other pricing models have dramatically lower fees.
– More beneficial to small businesses: A business with a large number of transactions may be overpaying
– Not ideal for high-ticket transactions: Businesses that sell high-cost products may get the short end of the stick.
Overall, this model is not well-suited for major enterprises with high transaction volumes or those that sell high-value products or services. However, the flat-rate pricing model is ideal for smaller businesses because there are no costly monthly fees to consider.
To understand whether flat-rate pricing is right for your business, it’s helpful to be aware of the different options available to you. Here’s a high-level overview of the most common:
– Flat-rate pricing: A fixed percentage for a transaction (we’ve been discussing this).
– Membership pricing: The merchant pays the exact interchange fee (no markup) plus a monthly or annual fee.
– Tiered pricing: Pricing tiers for a transaction vary based on the policies of the credit card processor (generally not recommended).
– Flat per transaction fee: A merchant pays a fixed payment amount for a transaction.
Of course, you have multiple options for structuring your payment acceptance options and the resulting fees. An alternative to the flat-rate pricing model is paying a flat fee per transaction.
Like flat-rate credit card processing, flat-fee processing involves a cost per transaction. However, the difference is in how this cost is calculated. While flat-rate pricing will charge a percentage of your sale, flat-fee processing means that you pay the same fee no matter how big or small a transaction is.
Though you’ll likely pay less per transaction, you will incur a fixed monthly fee. Instead of paying a percentage from each sale, the amount you pay the processor is the same, no matter how large or small the transaction is.
Flat-rate pricing remains a popular option for businesses who need payment processing services because it’s easy to wrap your head around. You can readily plan to pay two to three percent of your sales in processing fees and build that into your pricing model.
If you’re a smaller business with a limited volume of transactions, this can be the best deal. You get the convenience of processing credit and debit cards without headaches or complications. However, if you process a large number of transactions each month or your average order value (AOV) is high, you might do better with flat per-transaction fees. It can be helpful to compare various alternatives to see which is best for you.
There’s no single answer for whether you should switch from flat-rate pricing to an interchange plus or flat per-transaction fee model. Some businesses set a threshold of $10,000 per month, while others claim that it’s economical to make the switch sooner.
As you compare options, don’t forget to consider not only where your business is today but whether it will grow significantly over time. This careful planning will allow you to choose a solution that grows with you.