Flat Rate Credit Card Processing Explained: All You Should Know

August 10, 2021/ Posted in Credit Card Processing

When trying to run a successful business, each owner will want to understand the outflow of money. Flat rate credit card processing services are made with that goal in mind for charges you need to pay for accepting cash-free payment methods. If you’re wondering whether to try this pricing model, follow our guidelines and make sure to weigh all pros and cons before you decide.

Plastic money became the preferable payment method for most American citizens, with a constantly growing number of followers each day. That is why different types of businesses more often choose to offer contactless payments to their customers, neglecting the headache credit card processing (CCP) would bring them. However, if you are trying to avoid the interpretation of hieroglyphs in the statements provided by your processor, fixed costs could be your salvation – find out everything there is to know about them.

How Do Credit Card Processing Services Operate?

People who are just diving into new businesses have to deal with complex issues such as whether or not to apply a POS system and start paying POS fees, but also with learning how a small business pays taxes and what you need for a small business tax deduction in order to reduce your business expenses. However, if you want your customers to be able to make purchases without cash, you must also know how credit card processing works and be prepared to lose a certain percentage of money with each purchase made.

Average credit card processing charges often do not come cheap, which is not surprising if you keep in mind the hardware and software needed for non-cash transactions to work. However, that is not all – there are few parties involved in each transaction, and each side needs to be paid a certain amount for their services. It might look like a breeze, but the process that enables you to get money on your account after a purchase is a lot more complex. It implies several different steps:

  • A customer makes a payment,
  • The acquiring bank (processor’s financial institution responsible for setting up a merchant account) sends it to the issuing bank to approve it or decline it,
  • When approved, the payment goes to the merchant’s account.

Merchant Services Credit Card Processing Expenses – Know What You’re Paying

Having in mind everything said above, it’s understandable why non-cash transactions come at a cost – a certain percentage of transactions goes for:

  • Interchange fees (IF) for issuing banks – they represent the main expense in the procedure. Note that they are not set in stone – there are literally hundreds of variations, depending on the card’s type, the type of the transaction, purchased goods, and so on, which makes them pretty unpredictable. They could go anywhere from 0.05% to 3.17%.
  • Network fee – they are a minor expense, usually around 0.05%, paid to the card’s brand, such as Visa, MasterCard, Discover, and so on (on the statement, they are typically listed as Acquirer Processor Fees, for Visa, or Network Access and Brand Usage, for MasterCard). Keep in mind that the brand plays a part in determining the rates based on your merchant category code, among other things.
  • Markup fee – the money you paid to your processor for its service. This fee depends on the provider and pricing model you chose.

Are You Obligated to Pay CCP Charges?

If you want to add the possibility of customers paying with plastic money, it is only natural to repay every party that made that kind of exchange possible. However, there could be another way to reduce your CCP expenses – by encouraging cash payments or by transferring the expense to your customers.

Establishing a credit card convenience fee that will be paid by customers will take all CCP charges off your back. However, it could add more disadvantages than benefits to you, so be careful when thinking about this option. Also, don’t forget to check which states allow this and where it is prohibited by law.

CCP charges could be paid either by you or by your customers - be careful with your decision

What Is Flat Rate Credit Card Processing (FRP)?

How does flat rate merchant credit card processing work? The main idea behind this pricing model is the possibility of providing more predictable and straightforward costs for merchants. It implies that pricing will be the same for each transaction, usually around 2.75% + transaction fee ($0.2-0.3) per each payment.

However, even in this pricing model, expenses could be different when it comes to e-commerce payments or manually entered transactions. The price goes up in card-not-present transactions (like in both examples from above) because of the greater risk that those payments present. For example, for manually entered data, charges could go up to 3.5%.

What Are the Benefits of Fixed Charges?

People who choose the FRP model are often driven by the need for predictability – for each one of the payments you get, you are charged the same percentage to cover your CCP expenses. Another important advantage is that providers who offer this model usually have one account for all businesses. You won’t have to discover just yet what a merchant account is and make a long-term obligation to the service provider, meaning you won’t need to pay additional monthly fees.

With FRP, you won't need to stress out about understanding the statements

Which Credit Card Processing Is Cheapest for a Small Business – Different Pricing Models

What is a good rate for credit card processing, and does the FRP model offer it? While costs that you can anticipate sound pretty good, you should know that the predictability doesn’t come cheap – companies that use this FRP model need to set higher rates so that the most expensive IFs are covered. That is why it is, in general, around 20% more expensive than other merchant services rate models.

The tiered (bundled) model implies that numerous different IFs are put in several different categories (tiers). However, they are easy to manipulate, so if you don’t want to spend all your time decoding your processor’s statements to see if you are getting scammed, listen to experts who often advise the interchange-plus option as the best and cheapest out there.

The interchange-plus model indicates that you’ll need to pay basic IFs for every one of your payments alongside an additional markup for the processor’s service. Its advantage lies in transparency – you’ll know the exact amount that goes to issuing bank and network, on the one hand, and to your processor, on the other. Transparency is one of the benefits when having an open commercial account – it gives you the possibility of going carefully through each monthly statement and seeing all the data. With FRP and tiered models, you can’t know how much of your money goes to IFs and what percentage goes to your processor, which is why they are the first choice of scammers.

The interchange plus model is usually a more affordable option

Flat Rate Merchant Services vs. Interchange-Plus CCP – How to Choose?

When choosing between different rates, you must take into consideration a few factors, such as:

  • Do your customers make payments with plastic, and are they usually credit or debit cards?
  • Is your work seasonal or permanent?
  • Do you sell high-value products?
  • Are you looking to start an e-commerce business or do you already have one?

In general, fixed rates could be an excellent option for small or seasonal businesses or if a person is just starting a company. Why is that? Well, this service doesn’t require you to apply to a merchant account, so high expenses are mitigated by the absence of regular, monthly fees. In addition to that, at the end of the season, there will be no early cancellation penalties because you won’t be obliged with a long-term contract to start with. However, if you have a high monthly CCP volume, costly products, or a thriving online store, you would pay more on a monthly basis than you would if you opted for interchange-plus rates.

Flat Rate and Interchange Plus CCP With Debit and Credit Cards – Is There a Difference?

IFs for a debit card are much lower than with credit ones (usually lower than 1%) because the issuing bank does not cover the cost of purchase – the customer pays directly from their bank account. FRP, unfortunately, doesn’t recognize this difference, so with this model, the same percentage needs to be paid by merchants for both types of cards. If you have way more transactions with debit than credit cards, interchange plus will bring you a better effective rate for CCP.

Infographic 1 – Comparison of different rate models

 Flat rate CCPInterchange-plus CCP
Cost of CCP per transactionhigherlower
Transparency lowerhigher
Demand for additional costs lower (transaction fee)higher (monthly fees)
Predictability higherlower

Choose Only the Best Flat Rate Credit Card Processing Companies

Like with almost any other field out there, CCP companies you can choose from will be divided into those that are trustworthy and those whose only purpose is to get more money from you. When choosing a credit card processing company with an FRP system, ensure to read the contract carefully. This model can be very inviting for small businesses, but with scammers, it could be only a trick to lure you in, only for you to end up with a long-term contract and hefty monthly fees that need to be paid.

Don’t make the mistakes many business owners make – take your time and explore different offers and companies so you can pick the best one. Be sure to compare quotes and choose an option that is most suitable for you. And when you finally strike a deal with your preferred provider, don’t waste time on in-office notarization – contact a mobile notary and make your deal official.

Asses When Your Business Is Ready for a Change

If you aspire to expand your company someday in the future but are not ready to open an account just yet, the FRP model could be a good start. However, if you reach a higher monthly CCP volume or decide to conquer the online world, too, know that the time for a change is nearing. Recalculation will become a necessity – don’t hesitate to switch to a full-service and interchange-plus model if you deem FRP too expensive for your new circumstances.