Flat-rate credit card processing is attractive for its simplicity. Although the per-transaction percentage rates are higher for this type of plan than for other pricing models, there are usually no monthly fees, PCI-related fees or monthly minimums so you only pay for the processing you use.
This straightforward structure also makes it easy to budget for since the processing fee is tied directly to your credit and debit card sales. While this pricing model can be the most affordable option for many small businesses, it's not the best option for every business.
Depending on your monthly sales volume, average ticket size and the type of cards you accept most, interchange-plus or tiered pricing may be a better fit for your business.
How Credit Card Processing Charges Work
When your customer pays you using a credit or debit card, a portion of the payment goes to the credit card processing company. It then pays a portion of that amount to the bank that issued your customer's credit card – this is the interchange fee. A second portion, called the assessment fee, goes to the credit card company. The processor then keeps the rest as profit.
The interchange and assessment fees are non-negotiable and every credit card processing company pays the same amount for these fees. However, these fees vary depending on the card brand (Visa, MasterCard, etc.) and the type of domestic payment card you use: credit or debit, regular or rewards, consumer or business.
With a flat processing rate, you're charged a specific percentage of the transaction, no matter what the interchange or assessment fees run. So, for example, if you have a credit card processing service that charges three percent, and your customer spends $100, $3 goes to your credit card processor. It then pays the interchange and assessment fees and pockets the rest as profit. This can be a good deal for you if your customer uses a premium rewards card, but if your customer uses a regular debit card, you're paying more for this transaction than you would with other pricing models.
For many small businesses, the biggest benefit of these types of plans is that they typically don't charge many of the fees you can count on paying with other pricing models, such as a monthly statement fee, gateway fee or an annual PCI-compliance fee. Thus, the only costs you have are directly from processing.
When Is Flat-Rate Processing the Cheapest Option?
A general rule of thumb is businesses that process less than $3,000 per month or that have small ticket sizes on average (for example, less than $25) may profit from a flat-rate pricing. Even though the percentage you pay for each transaction is higher, you save because you don't have the per-transaction fee, which can add up quickly on small tickets, or monthly and annual fees.
Infrequent or seasonal vendors also stand to get a better deal from a flat-rate credit card processing service, as they again avoid paying fees for the months they don't need processing, and the amount they do pay for the service grows in direct proportion with their sales. Seasonal merchants should be wary of flat-rate processors that require a minimum monthly transaction volume, however.
Finally, if you're in a business where your customers are use premium credit cards, you may end up paying less with a flat-rate plan, because premium cards are often considered "mid-qualified" or "non-qualified," which means that you're charged a higher per-transaction percentage rate than regular credit and debit cards that lack rewards.
Signs That Flat-Rate Processing Is Not For You
Flat-rate processing plans aren't a good fit for every business. Generally, these are signs that you should seek out a more traditional processor that uses an interchange-plus or tiered pricing model:
• You process more than $3,000 each month.
• Your average sales ticket is higher than $50, and you process more than $2,000 each month.
• Your customers mostly use debit cards or low-end credit cards that often have cheaper processing rates under an interchange-plus or tiered pricing plan.
Also, if you accept cards in person and your business is in a high-fraud area or industry, you should have a card reader or terminal that accepts EMV chip cards. This is important, because if a customer presents an EMV chip card but you don't have an EMV reader and you swipe the card with your regular mag stripe reader, you're liable if counterfeit fraud occurs at your point of sale. At this writing, many mobile credit card processing services that offer flat-rate pricing don't yet have EMV-capable mobile card readers available. Despite this, you are still held liable. Check our reviews on mobile credit card processors to see which have this technology available.
Conclusion: Do the Math
Flat rates are attractive because they're simple, you avoid paying monthly and annual fees, and it can be cheaper for many businesses, particularly those that are seasonal, have a low monthly volume of credit card sales or accept a high volume of rewards cards.
Before selecting a flat-rate service, determine your average sales ticket size and monthly volume, and consider which types of payment cards your customers use most. Call several processors that offer different pricing models and do the math to figure out which credit card processing service provides the best value at the lowest cost for your specific business.
Contributing Reviewer: Karina Fabian