The Danger Behind Flat Credit Card Processing Rates

Credit card processing fees can be difficult to decipher if you don’t have a consultant to help.  Most 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. Since processing fees have become difficult for most business owners to understand, flat rate processing fees have gained popularity in recent years. 

Flat rates were initially created by processors to attract small companies (independent contractors, startup restaurants) with simple to understand fees. It’s also gained popularity because of the sheer profit a processor earns on each transaction. Since the profitability is so high, some larger processors are starting to offer flat rates to mid to large sized companies. 

Flat rate credit card processing is an over-simplified, expensive pricing module that hides the true costs of processing. When businesses process credit card transactions, they are actually paying three separate 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

A processor that offers its clients flat rate credit card processing, still has to pay card issuer and card brand fees, it just does so behind the scenes, while pocketing the rest of the fees charged. Flat rate processing is not meant to be competitive. The most basic fundamentals of credit card processing make it almost impossible for a processor to charge a competitive flat rate and remain profitable. If the processor offers a very low flat rate (i.e. 2.50%), odds are there will be some transactions they will lose a great deal of money on. 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   

One of the lowest cost cards for a merchant to accept is a regulated debit card. 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) 

When a regulated debit card is processed on a flat rate of 2.75% per swipe, the processor would earn 2.59%! This is just one example, but hopefully it is enough to compel you to speak with an industry expert about different fee structures, and which one is best for your company. Processors do not need to earn well over 2.00% of all of their clients’ transactions in order to run a healthy company. Make sure you choose a processor that will have a competitive rate coupled with excellent service, hardware, & software. 

Don’t settle for higher rates with the illusion of simplicity. APS Payments offers a free analysis of your current merchant rates and fees, so contact us today!