A very popular way to process cards is by using Square. They have a simple product that allows you to process a credit card from any device, and they even throw in a free card swiper. Their easy setup*, efficient user interface, and sleek brand image makes them an easy decision for start-up companies. Now, if you are thinking this is all too good to be true, you’re on to something. The one item everyone seems to overlook is the flat rate pricing structure.
Ever wonder how Square is able to give away all of those little card scanners for free? It’s a legitimate question. They aren’t free to produce – even if they aren’t the highest quality mobile card reader on the market. The secret is in the “simple pricing” structure of 2.75% for a swiped transaction and 3.5% + $0.15 for a card-not-present transaction. It sounds great. No need to worry about interchange fees, discount rates, FANF fees, etc. Lord knows, this industry can get hazy and confusing in a hot minute. So, with all of the other moving parts involved with getting a new business off the ground, business owners choose simplicity over due diligence. Let me go ahead and do the work for you…
If you are swiping cards and selling a retail product (any product sold to a consumer), the chances of your customer using a regulated debit card are highly probable. A regulated debit card is any debit card issued by a large U.S. bank (i.e. Wells Fargo, Chase, US Bank, Bank of America, etc.). Why is this significant? Well, according to the interchange rates mandated by Visa and MasterCard, these card types qualify at a 0.05% + $0.21 interchange rate. As mentioned before, interchange is not the only fee involved with credit card processing. So to take a look at the other fees you would incur on a typical “interchange-plus” structure:
- Interchange (depends on card type, majority is Regulated Debit POS – 0.05%)
- Transaction fee (average of $0.10, but can be as high as $0.22)
- Gateway Transaction fee ($0.10)
- Assessment Fee (0.12% of every transaction)
- Discount rate (industry average is 0.55%)
Average Total Per Retail Transaction: 0.72% + $0.32
Now, I’m no mathematician, but I can see that 0.72% is significantly lower than 2.75%. But let’s take this and apply it to a real situation. Let’s say you make a sale for $20.00. With Square, you pay $0.55 ($20 X 2.75%) for your $20.00 sale. Not bad.
If you were to use a processor who offers interchange-plus, you would have paid $0.14 ($20 X 0.72%) plus $0.32. That’s a total of $0.46. That means, you would have overpaid by $0.09 if you were using Square. There’s a small difference there, but let’s see what that looks like on a larger scale.
Let’s say that you had a client base that used 100% Regulated Debit cards and you processed an average of $50,000.00 each month with 1,000 transactions. If you were to use square, you would have a total of $1,375.00 taken from your credit card sales. But if you were to use a processor that used interchange-plus, you would only pay $680.00 in merchant fees. That’s a HUGE difference! Guess where that $695.00 difference is going? Right into Square’s pocket.
Take the time to use a merchant processor who offers a product that has similar functionality without gouging you for merchant fees.