Payment processing 101:Flat Rate vs Interchange Plus

PointOS Blog

Choosing the right credit card processor for your business can be a difficult task, especially when there are a variety of factors to consider. At the top of this list are the different pricing models payment processors can offer-some being more transparent than others.

If you are unaware of what you need to look out for, you could be costing your business more money than is necessary. To understand how payment processing affects your business’ bottom line, you need to look more closely at your processing rates to understand not just the rate alone, but also the pricing model that shapes this rate and which can either work to your benefit or against it.

The two most common payment processing pricing models are flat rate and interchange plus. While seemingly simple enough, truly understanding the two can be enough to make you scream.

So that’s where we come in.

We’ve laid out the important pieces of this daunting puzzle below so you can make the right choice for your business. But we’ll give you a hint… it’s most likely interchange plus.

First & foremost: lets find out whos involved?

Behind every credit card swipe you will find the following involved:

Issuing Bank– this is the financial institution that issues a credit card to a consumer on behalf of the credit card company. For example, Chase, Citibank, and Wells Fargo etc.

Credit Card Associations– These are the companies that create credit cards. Examples include Visa, Mastercard, American Express and Discover.

The Acquirer– Most commonly referred to as the “processor,” this is the middleman that processes the credit or debit card payments on behalf of a merchant. The acquirer communicates with the issuing bank to approve or decline a credit card transaction. These are also called merchant service providers (MSPs) or Independent Sales Organizations (ISOs).

The basics of credit card fees:

Wholesale Rate – The wholesale rate, also known as the interchange rate, is a fixed per transaction percentage and is set by both the issuing banks and the credit card companies like MC and Visa. This makes this aspect of the rate non-negotiable and standardized for all merchants. The rate does however differ depending on the type of transaction. For example, a typed-in transaction will always have a higher fee than a swiped one.

Processor Markup – This is a per transaction fee that processors will add on top of the interchange rate. This becomes the “plus” in interchange plus. Usually, it’s around $0.10 per transaction, but this can vary between processors and transaction types. A company like PointOS works with businesses by negotiating on their behalf to provide lower mark ups.

Now we move onto comparing the two most popular processing rate models.

Flat Rate Pricing
Many processors today advertise great flat rates with no fees or hassles, and that’s how they draw you in. What you need to understand is that this comes at a high price to you.

We get it, flat rate pricing is appealing. You pay a certain rate on every card transaction, which seems simple and to the point, but did you know that each type of card has a different rate? So, you could be offered a flat 3% rate on all credit card transactions, but if your customer is paying with a debit card and the interchange rate is around 1.2%, you actually end up paying 1.8% more on those transactions than you should be.

Interchange Plus Pricing
Interchange plus pricing, also known as cost-plus, is a transparent pricing model that helps you understand the real cost of credit card processing to get the lowest possible rate. Cost-plus pricing is based on the actual interchange rate plus a markup the processor charges. The “plus” component of interchange plus pricing may be a percentage or a flat fee per transaction.

With interchange plus pricing, you can better understand the true cost of merchant services. This pricing method is simple and shows you how much of your processing fee goes toward interchange fees and how much goes to your payment processor. The only drawback to cost-plus pricing is it can make your statements a bit more confusing until you understand the different rates you pay for different transactions.

In the past, interchange plus processing was only offered to high-volume merchants, but it’s now available to even new and small businesses. With its more transparent and cost-effective processing rates, interchange plus is the clear choice for most businesses.

By now you must be curious about what fees you are being charged and how you can save on processing. PointOS offers free rate consultations with payments experts who can walk you through your current statement and help you explore their more competitive interchange plus processing options. To get you own individualized statement review with a PointOS Payments expert, just email or call 857-250-2719.

You can also find out more on how PointOS Payments can save on your bottom line here.

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