In this 5-minute read:
- What’s the lowest-cost option for processing credit cards
- Flate-rate processing vs. interchange plus
- Subscription flat-rate processing pros and cons
- Examples of credit card processing fees for different business models
One reason that many small business owners are reluctant to get set up to accept credit cards is that the fees for the service eat into their profits. Depending on your business model, your processing agreement, and the number and amount of your transactions, these fees can be significant.
However, today’s customers expect every business—even super-small, local businesses and roadside carts—to accept credit cards, so not having a credit card payment option can prevent your small business from growing and staying profitable.
Let’s go over what credit card processing really costs so you can determine a good fit for your business.
The “interchange plus” credit card processing pricing model is usually the lowest cost overall
A lot of small businesses use one of the newer payments services providers or “aggregators” (like Square, Stripe, Clover, etc.) because they seem simpler and people can easily understand “flat rate” processing.
What is flat-rate processing?
In typical flat-rate processing agreements, you pay a simple percentage for each card transaction (typically between 2.4% and 3.5% of the total purchase price) plus a fee per transaction (usually between $.10 and $.30). That’s it. This may seem like a good deal, especially when most of these payments providers will give you a simple card reader for free and get you set up to accept payments relatively quickly.
However, you may get the lowest rates and pay the least overall if you opt for a traditional processor who offers competitive “interchange plus” pricing.
What is interchange plus processing?
Every credit card network (Visa, Mastercard, American Express) charges an interchange fee that your processor pays to facilitate each transaction. Providers that use “interchange plus” pricing model charge the interchange rate plus a markup. So for interchange plus pricing, you pay the current interchange rate, plus your processor’s markup, plus a transaction fee (similar to the transaction fee added to flat-rate purchases discussed above), plus sometimes an additional monthly fee.
This may sound complicated, as interchange rates are subject to change so you might not always be paying the exact same fees for processing card transactions. But the fact is the interchange rate doesn’t vary much, and most businesses find that a reliable processor charging interchange plus will save them around 20% on processing costs (or more) compared to the flat-rate aggregators.
What is subscription or “zero markup” flat-rate processing?
Subscription flat-rate processing is gaining in popularity for a couple of reasons: it’s simple to understand, and it sounds like it would be cheaper than either the interchange plus model or the typical flat rate model. Some providers pump up the “zero markup” angle to imply that you will be paying less per transaction than with other pricing models.
In a subscription flat-rate processing agreement, you pay a fixed monthly cost to maintain your processing capability, plus a set fee per transaction. Since the monthly costs and transaction fees for various providers vary widely, it’s not practical to estimate what you might expect to pay for this type of processing from an average provider. Depending on how large your transactions are and how often you transact, a subscription flat-rate processor might be competitively priced with a traditional interchange plus processor, or it might be quite a bit more expensive.
Let’s look at a couple of examples, as elucidated in this article by Ben Dwyer at CardFellow:
Let’s say that you sell furniture. You’re likely processing higher average ticket transactions, but fewer transactions per day than some other types of businesses. You’ve decided to take credit cards, and you have an offer from Processor A using interchange plus pricing with a markup of 0.10% and 10 cents per transaction and from Processor B using subscription flat rate pricing with a markup of 0% and 25 cents per transaction. Processor A has a $10 monthly fee, and Processor B has a $29 monthly fee.
You sell a couch for $2,000.
With Processor A, you’d pay $2.10 to the processor for their markup. (2000 x 0.001 + 0.10) With Processor B, you’d pay 25 cents. On the surface, it looks like a no-brainer in favor of the subscription pricing. However, to get the most accurate number, you’d also include your monthly fee divided by your number of transactions for that month. If you only sell that one couch all month, you’d be paying $12.10 to Processor A as a markup or $29.25 as a markup to Processor B.
If you sold 10 of those couches in a month, you’d pay Processor A $21 (20,000 x 0.001 + 10 x 0.10) and Processor B $2.50 (10 x 0.25). Again it looks like a big savings with the subscription pricing, but the monthly fee changes that. The monthly fee would add another $1.00 per sale with Processor A for a total of $31 or $2.90 per sale with Processor B for a total of $31.50. Those costs are pretty close, but it’s important to remember that the disparity could be even greater if you have a higher monthly fee for your subscription pricing. Memberships from some processors start as high as $69 for a basic plan.
But what if you sell smaller-ticket items but process more transactions daily? Let’s look at another example from Ben’s article:
Now let’s say that you own a shoe store. Your average sale is $50 and you have 10 sales per day for a total of 300 transactions per month. With Processor A, that’ll cost you 15 cents per transaction (50 x 0.001 + 0.10). Adding in our monthly fee of $10 adds 3 cents per transaction for Processor A, bringing the total to 18 cents per transaction. With Processor B, it’ll cost you 25 cents per transaction, plus the monthly fee of $29 split over 300 transactions, equaling 35 cents per transaction. (29 / 300 + 0.25). For the month, you’d pay a total markup of $55 with the interchange plus pricing (300 x .15 + 10) or $104 with the membership pricing. (300 x .25 + 29). Guess what? That 0% processing just cost close to double as much as the competitive interchange plus processing. It’s easy to disregard the monthly cost because it doesn’t seem like it’s part of your processing costs, but these examples illustrate that it’s important to take it into account. When searching for the lowest cost processing, 0% markup doesn’t automatically equal lowest cost.
Additionally, Ben points out that, while the subscription flat-rate model may be a cost-effective option for new and growing businesses, you need to understand that many subscription pricing processors set a limit on the number of transactions you can process at each membership level. If your business processes more transactions, you might need to change to a more expensive monthly membership, which of course means you’re averaging more in overall costs per transaction.
The bottom line is that you need to discuss your needs and options with your merchant level sales agent or processor, and determine whether you value simplicity, or the absolute lowest processing cost, or personalized customer service, or useful value-added options that come with many processor agreements.
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