Flat Rate Pricing vs. Pass-Through (Cost Plus) Pricing?

Pricing Model

Interchange and assessments are the same for all processors. The method the processor uses to pass these costs to you is what is important. The two most basic types of pricing are interchange plus and bundled. They're also referred to as pass through and tiered, respectively. Each pricing model is outlined below, and there's also a detailed post comparing interchange plus vs. tiered pricing here.

Interchange Plus or Pass Through

With interchange plus pricing the processor's markup isn't dependent on interchange qualification. This separation of costs keeps the processor's markup the same regardless of the type of card you accept, or how your process it. There are no qualified, mid-qualified or non-qualified rates with interchange plus.

The processor earns a fixed percentage regardless of the underlying interchange. For example, 0.25% is an example of an interchange plus rate quote. No fancy tiers, not qualification at the processor level -- just one simple rate that gets added to actual cost (interchange).

Interchange plus allows for interchange credits on refunded transactions. For example, when you issue a customer a refund, you are supposed to receive a partial credit of the interchange fee paid on the original transaction. This refund credit is not issued on bundled pricing models, but processors are capable of issuing interchange refunds on interchange plus pricing. However, just because a processor is capable of issuing interchange credits doesn't mean it will.

Important:

Like with bundled pricing, processors are capable of manipulating costs under an interchange plus pricing model, too. For example, interchange plus pricing does not guarantee that a processor will pass assessments at true cost, issue interchange credits, or refrain from applying a discount to refund volume.

This is yet another reason why it's important to have expert guidance, like that offered by National Merchant Advisors, to ensure you secure a truly competitive processing solution for your business.

Another benefit to interchange plus is that it allows for businesses to reap the benefits of decreases in interchange fees. For example, businesses with interchange plus pricing will benefit from lower debit card charges from the Durbin Amendment.

Interchange plus is the least expensive, most transparent form of credit card processing pricing. For these reasons, it's the only form of pricing that we offer at National Merchant Advisors.

Flat Rate pricing?

Flat rate is an increasingly popular pricing model for credit card processing. The most prevalent version of flat rate processing is where a company charges its clients based on a fixed percentage of volume. Common flat rates are currently around 2.75% - 2.9% for swiped transactions. Some flat rate models also include a per-transaction fee, often in the range of 20 - 30 cents per transaction.

Flat Rate Pricing is An Illusion

The fundamentals of credit card processing make it virtually impossible for a processor to charge a competitive flat rate and remain profitable.

Each time a business processes a credit card transaction it is actually paying three separate fees. It pays a fee to the bank that issued the customer's card, called an interchange fee. It pays a fee to the card brand (Visa, MasterCard, or Discover) whose logo is on the customer's card, called an assessment. And it pays a fee to a credit card processor as a markup.

Interchange fees and assessments are fixed costs that remain the same regardless of which credit card processing company a business uses. Assessments remain fairly consistent across different types of transactions, but interchange rates fluctuate over about 280 different categories.

See for yourself here:

Visa interchange

MasterCard interchange

The interchange rate assigned to an individual credit card transaction varies from 0.05% to 3.17% depending on several variables such as card type, card brand, processing method, settlement time, and more.

A processor that offers its clients flat rate credit card processing still has to pay interchange and assessments; it just does so behind the scenes without its clients knowing.

For example, Square charges its customers a flat rate of 2.75% for swiped and 3.50% for keyed transactions that only cost it about 1.40% and 1.95% on average. The difference between interchange and its flat rate is Square's markup.

Companies that offer this type of pricing are not actually "real" processors. Instead, they are aggregators that use one merchant account to process transactions for thousands of businesses.

As I'll explain in greater detail below, this type of flat rate pricing is inherently uncompetitive because an aggregator has to ensure its flat rate is high enough to cover all possible base costs associated with interchange and assessments as well as its markup, and base costs vary greatly.

Arguments for Flat Rate Pricing

Flat rate pricing has two redeeming qualities; it's simple and it is sometimes offered without a transaction fee, which can be beneficial for businesses with lots of transactions. With flat rate pricing, you'll also have known costs that don't change, making it easier to calculate what you've paid or can expect to pay based on your volume and ticket size.

Known Costs

It's relatively easy to forecast what charges will be with fixed-rate pricing — simply multiply gross sales by the processor's rate to calculate charges.

Simplicity seems like a small comfort considering flat rate pricing is typically 20% more expensive than other forms of pricing, but nonetheless, some businesses are willing to pay to have a flat rate. Paying more foe convenience may make sense for your business, just remember that in most cases you will be paying more. Don't confuse simplicity with low cost.

Small Tickets

Some flat rate credit card processing is offered without a transaction fee, which makes it an ideal pricing model for businesses with very low average tickets.

For example, 2.75% of a $3 sale is only $0.0825, which is lower than what the processor pays in interchange charges. So, aggregators that don't charge a transaction fee actually lose money by processing for businesses with very small average tickets. Square lost $30 million processing for Starbucks because of the low average transaction total.

Don't be fooled by simplicity. Instead, side step fancy marketing ploys like flat rate pricing for truly competitive rates and fees like those offered by National Merchant Advisors. We only offer true pass-through pricing, making it easy for our clients to compare and select an exceptionally competitive processing solution.

Tiered or Bundled

Tiered pricing, also referred to as bundled or bucket pricing, is named for the way a processor categorizes interchange fees into three pricing tiers called qualified, mid-qualified and non-qualified. Although three tiers are most common, this pricing model can have separate sets of tiers for various types of cards. For example, six-tier pricing where credit and debit cards each have their own three tiers is gaining in popularity.

On a bundled pricing model the processor uses something called an interchange qualification matrix to route interchange fees to the qualified, mid-qualified, or non-qualified tiers.

A big problem with tiered pricing is that interchange fees are often not disclosed on your merchant processing statement (although they sometimes are), and the processor doesn't tell you into which tier individual interchange fees are being routed. This leaves you with no way to calculate exactly how much you're paying above the actual processing costs of interchange and assessments.

Tiered pricing has played a big role in building the processing industry's shady reputation.

Inconsistent Buckets

Inconsistent buckets is the processing industry's term for, "there's no way to compare credit card processing quotes that are based on tiered pricing."

Tiered pricing allows a processor to manipulate charges behind the scenes. Essentially, they can raise your cost without having to raise your rates. They do this by routing more interchange fees to the mid and non-qualified pricing tiers. Since there's no consistency regarding interchange qualification, it's impossible to compare tiered pricing among different processors.

Let's look at an example to illustrate inconsistent buckets. Let's pretend that we have the following quotes from two different processors:

Processor A:

  • Qualified Rate: 1.49%
  • Mid-Qualified Rate: 2.59%
  • Non-Qualified Rate: 2.99%

Processor B:

  • Qualified Rate: 1.69%
  • Mid-Qualified Rate: 2.25%
  • Non-Qualified Rate: 2.49%

Look only at the qualified rate, Processor A is offering a much better deal. What you don't know is how many interchange categories are being routed to the qualified tier. Processor A may be routing the majority of transactions to the mid and non-qualified tiers making Processor B the better option. Of course, there's no way to tell just by looking at the numbers.

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