Choosing the right credit card processing structure is crucial for any business. The debate between Flat Rate credit card processing and Interchange (variable) processing rates is ongoing. In this article, we’ll delve into the nuances of both to help you determine the best option for your business.
The comparisons shown are for “card present” transactions (transactions where the customer taps or inserts their card into a card reader) versus manual entry transactions (such as phone orders). For manual entry transactions, the flat rates are slightly higher than shown in this article but the interchange rates are significantly higher.
Understanding Flat Rate Credit Card Processing
Flat Rate Processing means that a merchant pays a fixed percentage fee for every transaction, regardless of the card type or transaction details. For example, a flat rate of 2.29% would be applied uniformly to all transactions no matter what type of card is being processed.
Benefits of Flat Rate Processing
- Simplicity and Predictability: With a flat rate, you always know exactly what you’re paying. This makes budgeting easier and eliminates the confusion of varying rates.
- Ease of Reconciliation: Monthly statements are straightforward, showing a consistent percentage fee, which simplifies accounting.
- No Hidden Fees: Flat rate plans typically do not have additional fees, making costs more transparent.
Understanding Interchange (Variable) Credit Card Processing
Variable Rates, also known as “Interchange Rates” are variable fees set by card networks (like Visa and Mastercard) and depend on the type of card used, the transaction amount, and the transaction details. Rates vary, often ranging from 1.5% to 3.5% or more.
Benefits of Interchange Processing
- Potential for Lower Costs on Certain Transactions: Some transactions might incur lower fees than a flat rate, particularly with non-reward cards or debit cards.
- Customizable Pricing: Businesses can potentially negotiate better rates based on their transaction volume and type.
The Rise of Reward Cards and Their Impact
In recent years, reward cards have surged in popularity. Consumers prefer using these cards because they offer benefits such as cashback, airline miles, hotel stays, and rental car perks. This preference means that a significant portion of transactions involves reward cards, which typically carry higher interchange rates because the actual entity paying for those rewards is the merchant.
Comparing the Two: Flat Rate vs. Interchange
To effectively compare these two models, let’s consider a few examples:
- Transaction with a Base Non-Reward Card or Debit Card:
- Flat Rate: 2.29%
- Interchange Rate: 1.5% (for a base non-reward card or debit cards)
- Winner: Interchange Rate (lower fee)
- Transaction with a Reward Card:
- Flat Rate: 2.29%
- Interchange Rate: 2.9% or higher (reward card with higher fee)
- Winner: Flat Rate (lower fee)
- Transaction with a Premium Reward Card:
- Flat Rate: 2.29%
- Interchange Rate: 3.5% or higher (premium reward card with extensive perks)
- Winner: Flat Rate (much lower fee)
- High-Volume Merchant:
- Flat Rate: Consistent 2.29% regardless of volume
- Interchange Rate: May vary significantly, potentially averaging higher or lower depending on the card mix
- Winner: Depends on the card mix, but Flat Rate offers predictability and usually saves over interchange.
Why a Flat Rate of 2.29% Could Be More Advantageous
- Consumer Preference for Reward Cards: With more consumers preferring reward cards, the chances of encountering higher interchange rates increase. A flat rate of 2.29% can help businesses avoid these higher fees.
- Stability in Fluctuating Markets: As interchange rates can fluctuate based on card usage trends, a flat rate provides stability and predictability.
- Ease of Financial Planning: Fixed costs make it easier to plan your financials and avoid unexpected spikes in processing fees.
- Consistency Across Transactions: For businesses that handle a variety of card types, a flat rate ensures that there are no surprises at the end of the month.
- Simplified Management: With fewer variables to consider, managing your merchant account becomes more straightforward, saving time and reducing administrative overhead.
- Avoiding High Fees from Premium Reward Cards: Interchange rates for reward cards can be significantly higher, especially for premium cards offering extensive perks. These fees can often exceed 3.5%, making the flat rate of 2.29% a more cost-effective choice.
Conclusion
While interchange rates can sometimes offer lower fees on specific transactions, the complexity and variability often make flat rates more attractive, especially for businesses that value predictability and simplicity. With the increasing use of reward cards by consumers, the likelihood of encountering higher interchange fees is greater. A flat rate of 2.29% ensures that you always know what you’re paying, allowing for better budgeting and financial management.
For some businesses that process primarily customers with debit cards (this is not a typical merchant), an interchange rate program may be best.
But for most businesses, especially those with diverse customer bases and transaction types, a flat rate can be the more advantageous choice.
When choosing between flat rate and interchange rate credit card processing, consider your transaction volume, the types of cards most frequently used, and your tolerance for variability in fees. Ultimately, the predictability and simplicity of a flat rate of 2.29% can provide peace of mind and potentially lower costs over time, particularly in a market where consumers favor reward cards.
Use our “Rate Calculator” to see which is better for your business
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