Credit Card Processing Tip: Watch Out for Flat Credit Card Processing Rates

Credit Card Processing Fees - Be Aware of Flat Rates and Fees!

Due to complicated credit card processing fees structures, some merchants may hire a consultant for help in deciphering them. Usually, merchants pay anywhere from 1.90%-4.30% depending on what cards they accept, whether the card is accepted via swipe, keyed-in, or eCommerce, and how much profit margin the processor has built in.  The confusion has caused the flat rate processing fees to become more popular in recent years.

Flat rates offer simple understand fees originally created for small companies, startup restaurants and independent contractors. Processors are also pushing the flat rates to merchants as  the profitability is very high, so much so that some larger processors are starting to offer flat rates to mid and large sized companies.

Flat rate hide the true costs of processing credit cards behind an over-simplified fee structure. Standard or non flat rate credit card transactions are comprised of three types of fees:

1. Card Issuer Fees – Typically labelled interchange fees & network fees - these pay the card brands
2. Card Brand Fees- Typically labelled assessment fees - these pay the card brands
3. Processors Fees – Typically labelled discount or rate - these pay the processor

While flat rate credit card processing fees still pay card issuer and card brand fees, it's not broken out on the statement so that the credit card processing fee’s are not obvious.   It is hard to use flat rate processing as competitive advantage and make it still as profitable. If the processor offers a very low flat rate (i.e. 2.50%), there may be some transactions that will be less than that fee which will mean the processor taking a loss. On the other hand, most transactions have much lower card issuer and card brand fees, which will earn the processor a great deal of profit. Here is an example:

1. Per Swipe - $1,000 sale x 2.75% Flat Rate = $27.50 fee
2. Per Keyed - $1,000 sale x 3.50% + $0.15 = $35.15 fee  

Regulated debit cards are one of the lowest cost cards for merchants to accept.  Here is the breakdown of fees when accepting this type of card:

1. Card Issuer Fees – 0.05% + $0.22
2. Card Brand Fees – 0.11%
3. Processor Fees – Varies (Negotiated)

Say that a processor is offering a flat rate of 2.75% per swipe for regulated debit cards, the processor would earn 2.59%! This is just one example, but does illustrates the profit margin that a flat rate transaction will earn a credit card processor. Understanding credit card processing fees will help you make a good decision and working with an industry expert about different fee structures can demystify your choices and what is best for your company. Earning well over 2.00% of all of their clients’ transactions is not required for a credit card procesor to run a healthy company. Choosing a processor that will has competitive rates coupled with excellent service, hardware and software is what is important.

Simplicity does not mean you need to settle for higher rates.

Another version of this article was posted on January 4, 2016 - The Danger Behind Flat Credit Card Processing Rates

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