If you find yourself hacking through a jungle of credit card processing pricing models, you may be wondering, “What is flat rate pricing?” There are enough pricing structures and models out there to make anyone’s head spin—every processor has different rates and fees, and it’s overwhelming to sift through all the possibilities, let alone decide which option is the best for your business.
To help ease the pain and demystify at least one part of the process, let’s explore one of the most straightforward credit card processing pricing models: flat rate pricing.
Definition of flat rate pricing
Flat rate pricing is a model where you pay a fixed percentage of your overall processing volume.
Flat rate pricing guarantees one flat rate no matter what. You’ll know in advance what your processing fees will be—no surprises ahead. And you won’t have to worry about downgraded cards because your processor will be responsible for ensuring there are no downgrades. (More on downgrades later.)
With flat rate pricing, your business will receive one simple statement each month with a predictable rate. Choose this plan to get a fair rate while also being less involved in monitoring your transactions.
The downside of flat rate? You won’t get the lowest price possible.
Pros and cons of flat rate pricing
Easy to understand
May not have to pay a transaction fee
No surprises on your monthly statement
Don’t have to worry about downgraded cards
You pay the same rate for every card processed—including expensive cards like business and rewards cards
You won’t get the lowest price possible
What are the other pricing models?
How do you know which pricing model is best for your business? It’s not an easy question to answer—the solution usually depends on your unique situation, including your average ticket cost, monthly processing volume, and other variables.
With that in mind, here’s a quick overview of interchange plus and tiered pricing, two of the most common pricing models.
With interchange plus, you pay a flexible percentage based on two factors:
The type of card processed
How it was processed
For example, business credit cards typically have higher interchange rates than personal credit cards, and swiped or card-present transactions usually have lower interchange rates than card-not-present transactions.
The way your business processes cards also matters. If you follow bad processing practices—leaving out addresses, preauthorizing cards and then capturing them for more than the original amount, etc.—you’ll drive your interchange rates up. The riskier a transaction seems, the higher its interchange rate. This is called a downgrade.
Merchants using an interchange plus pricing model have to monitor their transactions and follow best practices to ensure their cards aren’t downgraded. In contrast, merchants on a flat rate plan don’t have to worry about downgrades, as the processor is responsible for making sure they don’t happen.
An interchange plus model is usually the cheapest route, and you can be certain you aren’t being overcharged for processing. However, interchange plus is also more risky. There are a number of variables your business can’t control—like changes in the industry, a new card that costs more to process, or regularly rising interchange rates—that may be too tumultuous for you.
Tiered pricing systems bucket interchange rates into predetermined percentage categories. That is, each card has a preset price based on its category.
Tiered pricing is the most expensive and least flexible option for merchants. If you’re looking to negotiate a better deal for your company, we recommend sticking with an interchange plus or flat rate structure.
Unfortunately, there’s not much you can do to negotiate within a tiered system because the pricing is already determined. In fact, it’s the processor that typically decides which cards go into each pricing category, and the processor doesn’t always have the merchant’s best interests in mind.
How to negotiate a lower flat rate
Perhaps you’ve decided to go with a flat rate pricing structure. (Congratulations!) But now you want to get the best deal possible on your processing rate. Here are a few tips to negotiate a fair flat rate for your business.
First, determine your effective rate. If you’re currently processing credit cards, you can use your effective rate to get a comprehensive picture of your overall processing costs. Oftentimes, when it comes to processing fees, merchants get bogged down in details or particular percentages. The effective rate will give you a more holistic idea of how much you’re paying for credit card processing and a better sense of the overall cost.
To calculate your effective rate, divide your total processing fees by your total sales volume. For example, if your processing fees totaled $350 and your sales volume totaled $10,000, then your effective rate is 3.5%. You can use this number when negotiating with your current processor or switching to a new one.
To negotiate a low flat rate, take a look at your last three credit card statements. Find your average processing fee and then use this number to negotiate for a lower fee. If you can get a rate that’s lower than your historical average, then you know that you’ll save money each month. This is the only true way to guarantee savings.
Anyone who spends some time trying to learn about the credit card processing industry knows that it’s not easy. And picking apart the different pricing models can feel impossible. We hope these tips give you a foundation for understanding flat rate pricing and whether or not it’s a good fit for your business. And now you can finally answer that pressing question: “What is flat rate pricing?”