Contactless terminals. QR code scanning to pay for dinner at your favorite restaurant. Interest free online shopping on credit. A lot has changed over the past year due to protocols during the pandemic to keep staff and customers safe and other changes due to the economic impact of businesses shutting down and more people going online in order to survive to see better days.
That is what customers see on the front lines… but what about all of the costs subtracted on the merchant bank statement or general summary reports pulled from the backend of the business owner’s new life line, their ecommerce website? The two most popular pricing models are flat rate and interchange plus. What are these and why do they make a difference to the business owner?
Every credit card transaction requires a fee, called Interchange (or Cost-Plus Pricing), set by Visa/Mastercard. Visa/Mastercard charges interchange reimbursement fees which are the transfer fees between the merchant (or acquiring bank) and the issuing bank for each Visa card transaction. Visa/Mastercard is very transparent with these fees and has them published online based on multiple factors such as card type (personal or business for example), if the card is or is not present for the transaction (for online shopping it is a card-not-present transaction). Also called Interchange Rates, they can be complicated as they are based on the type of card, method of transaction, item purchased, and more. Interchange is separate from the processor’s fee, which is also an added charge per transaction.
With flat rate merchant services, the rate is simply a flat percentage for each transaction. Of course, this flat rate has to be high enough to account for the variation in Interchange rates, and still leave room for the processor’s fees. Flat-rate processing appears to be simple and easy to use because the fees are easy to understand and predictable for the merchant. However, the business owner (or merchant) never knows the actual cost each month versus the amount of margin earned by the processor. And if the business is a business-to-customer (B2C) with low dollar transactions, this can really cut into the profit margins.
Flat rate credit card processing is the usual go-to for new merchants looking for an entry-level solution. Aggregators like Paypal, Square, and Stripe offer flat-rate processing without requiring a merchant account. Many new or very small businesses can’t meet the underwriting requirements for a merchant account; therefore, going with an aggregator may be their only choice
Businesses that qualify for merchant accounts may still choose flat-rate processing. They may prefer the simplicity and stability of paying a flat rate.
As a side note, there is also tiered pricing which hides interchange pricing and “appears” to be as simple as flat rate pricing. Tiered pricing allows the payment services provider to mark up by consolidating your pricing into three tiers and rounding up to the highest tier. Like flat rate pricing, the statements look easy to read, but easy to read statements tend to be less transparent.
Unfortunately, not many merchant services providers actually explain how credit card processing works, and business owners end up paying too much.
Interchange Plus pricing is the best alternative to flat rate. With Interchange Plus, the business pays the Interchange fee specific for each transaction type, plus a pre-negotiated margin for the processor. While flat rate may seem more straightforward, Interchange Plus is actually much more transparent: the business owner can see the exact Interchange cost for each transaction.
The Interchange Plus model can also save a merchant money. For example, the cost difference of a debit card transaction flat rate vs Interchange Plus is dramatic. Debit transactions are lower risk because funds are taken directly from a checking account. As a result, the Interchange rate is typically below 1%. Given that a common flat rate is 2.9%, merchants give away a significant amount of their profit to the payment processor on each flat rate debit card transaction.
Interchange Plus is ideal for established businesses that qualify for a merchant account. The underwriting process does take time (2-3 days), but it can be worth the wait. Benefits are not only in the potential cost savings, but also the flexibility and improved customer service that can accompany the right merchant account. An experienced payment processor, like eMerchant, can break down the numbers and show you the savings.
2.9%+ .30/transaction is a pretty standard rate for flat rate payment services company. But let’s see what this looks like if a business owner sells $25 t-shirts and the customer pays by a debit card. Let’s see what that looks like per customer and what it looks like if you had 100 customers buy a t-shirt:
Common Flat Rate : 2.90% + .30/transaction
1 customer/ 1 t-shirt @ $25.00 = .725 + .30 = $1.025
100 customers / 100 t-shirts @ $25.00 = $1.025 x 100 = $102.50
Sales less Processing Fees : $2500 - $102.50 = $2397.00
Effective Rate % = 4.1%. The merchant is actually paying 4.1%.
Card Not Present/ e-Commerce Basic: 1.65% (interchange rate per Visa) PLUS let’s say 25 basis points (for example only) + .10/transaction:
1 customer/ 1 t-shirt @ $25.00 = .4125 + .0625 + .10 = .575
100 customers / 100 t-shirts @ $25.00 = .575 x 100 = $57.50
Sales less Processing Fees : $2500 - $57.50 = $2442.50
Effective Rate % = 2.3%
This is a savings of $45.00 for 100 t-shirts for 100 customers or a reduction of 1.8% in processing fees. If our t-shirt company processes 100 orders per day, 1 t-shirt per order, every day for a month (30 days), that is a savings of $1,350.00 a month or $16,200.00 in a year.
Think about it. What can you do with the money you can save? Increase your ad spend. Improve your website. Have a few pizza parties in the office. Increase profit sharing to your hard-working employees. Using money that would have otherwise been paid in excess to a flat rate payment services provider could be used to improve products, improve your website's UX, reduce employee churn, build your brand, and help you create the company your entrepreneurial dreams are made of.
Physical storefronts are opening up again and many retailers are updating their point-of-sale (POS) terminals not only to contactless solutions in order to keep their customers and staff healthy, but the new terminals also have EMV. EMV is an acronym for “Europay, Mastercard and Visa”. This is for added security to use the microchip that is now on most credit cards to reduce fraud. Not only is it important to reduce ecommerce fraud, but also card present fraud to reduce inventory and revenue loss. With an increased number of credit cards that have an EMV chip and ever changing card technologies, it is important for stores to have EMV compliant terminals. Flat rate payment services companies have many different EMV compliant terminals to choose from, however, you still have flat fee rates to pay that are usually the same as your card-not-present (ie. ecommerce). Card Present fees using Interchange are significantly less than flat rate services.
For example, our ABC T-Shirt Company.
Common Flat Rate: 2.90% + .30/transaction
1 customer/ 1 t-shirt @ $25.00 = .725 + .30 = $1.025
100 customers / 100 t-shirts @ $25.00 = $1.025 x 100 = $102.50
Sales less Processing Fees: $2500 - $102.50 = $2397.00
Effective Rate % = 4.1%. The merchant is actually paying 4.1%.
Card Present/ Brick and Mortar Store: .80% (interchange rate per Visa) PLUS let’s say 25 basis points (for example only) + .15/transaction:
1 customer/ 1 t-shirt @ $25.00 = .20 + .0625 + .15 = .4125
100 customers / 100 t-shirts @ $25.00 = .4125 x 100 = $41.25
Sales less Processing Fees: $2500 - $41.25 = $2499.59
Effective Rate % = 1.65%
This is a savings of $61.50 for 100 t-shirts for 100 customers or a reduction of 2.45% in processing fees. That is, you are cutting the processing fees by over half. If ABC T-Shirt Company processes 100 brick and mortar store orders per day, 1 t-shirt per order, every day for a month (30 days), that is a savings of $1,845.00 a month or $22,140 in a year. This savings can literally be the cost of an employee.
If you have flat rate merchant services, now may be the time to switch. Do you have 12 months of processing history? Do you generate more than $50,000 in processing annually? Do you have a lot, or very few, chargebacks? There are many merchant account services agencies, or ISOs (Independent Sales Organizations) that have bank relationships as well as banks that can help you determine if your business would qualify. Keep in mind that some banks are conservative and others are happy to service high risk businesses.
Some ISO’s are agnostic, and have multiple bank and gateway relationships to best suit your business’ unique needs. Using one gateway across your ecommerce website, brick and mortar POS, and possibly your order/warehouse management system and ERP is convenient and time saving. There are many factors to consider when choosing a merchant account services provider but at the end of the day, the money you save and the more personal customer service will be well worth the switch.