Comparing card processors: tiered, flat and interchange-plus

Woman holding credit cards

Selecting the right payment processing service is one of the biggest decisions a business owner will make. To avoid costly mistakes and find the payment solution that best meets your needs, you should know the available pricing models and how they impact your rates.

Understanding the different credit card processing fees and being able to recognize hidden charges buried in your merchant statements is important for all businesses, but especially ones with small margins and those that are considered high-risk, for which an affordable, efficient and straightforward billing model is even more vital.

Payment processing providers offer a variety of pricing structures, but the three main types are flat rate, tiered fees and interchange plus. We’ll take a look at all three to figure out which is best for your business. But first, some brief background on payment processing and fees.

What is a payment processor?

A payment processing company facilitates transactions by serving as a back-end intermediary between the customer and the merchant – or, more accurately, between the customer’s bank, where the payment comes from, and the merchant’s bank, where it goes. Processors can enable other methods of payment – including by contactless mobile wallet, voice or text, ACH and check – but credit and debit card payments are the most common.

Every business is different, and there’s no single, universally superior credit card processing solution, so it’s important to find a payment provider that fits your size, type, goals and budget. Some specialize in online processing, others on in-person transactions and POS systems, while still others focus on high-risk businesses that have a harder time finding a payment solutions partner.

What are card processing fees?

Depending on the processor and pricing model, credit card processing fees can vary. There are major differences between transaction rates and monthly fees, as well as other charges, but some of the processing costs businesses pay contain common components.

Interchange fee

All card-based payments are subject to interchange, which is the same rate regardless of which processing company is used because it’s charged by the card payment networks and banks to run credit and debit transactions. Interchange is determined by a number of factors – such as card type, issuing banks, card category, network (Visa, MasterCard, etc.), transaction size, method (swiped or keyed), etc. – and is a percentage of the transaction plus a flat rate.

Paired with a nonnegotiable assessment fee, together they comprise the interchange fee. When evaluating different credit card processors, you’re really assessing the charges on top of interchange.

Besides the interchange fee, there is usually a markup fee, which refers to the amount you will have to pay the actual processor per transaction on top of the interchange. Some credit card processing companies also charge a flat monthly service fee to use their platform and software.

Additionally, card processing companies may add other fees. These can include chargebacks for customer refunds, PCI compliance services and non-compliance fees, monthly minimum processing fees, terminal equipment leasing fees, batch payment fees and third-party payment gateway fees.

What are the three main pricing models?

Now that you have an idea of the various payment processing fees, you can better compare the different pricing models that credit card processors offer and how they could work for your business.

  1. Flat rate

With flat-rate pricing you pay the same fixed fee per transaction, including the interchange, and no additional charges. Simple and clear, the advantages of this model are that it’s stable, easy to understand and you always know how much each transaction will cost. There can be a monthly fee, though it isn’t typically very high. The disadvantage is you’re usually going to be paying more per transaction than in other pricing structures.

A flat-rate pricing model is a good option for merchants with low transaction volumes. But it may not be the best solution for growing or high-risk businesses, such as CBD shops, as clients can be dropped at the first sign of trouble. Credit card processors that use flat-rate pricing include PayPal, Shopify, Square and Stripe.

  1. Tiered

With tiered pricing, transactions are bundled into distinct categories – qualified, mid-qualified and non-qualified – and assigned a predetermined rate with a different transaction fee for each. Also known as bundled pricing, this model lacks clarity and standardization across vendors; each processor can choose their own tiers and how much they charge per tier.

Tiered pricing has been around almost as long as card processing itself and is still a popular option of legacy providers. Labeled the most confusing pricing structure by U.S. News, however, “it can be difficult to figure out why some transactions are categorized in a particular way, and therefore transparency is lost.” There aren’t a lot of advantages to the tiered model, except for businesses who already have it and don’t want to change. Flat-rate and interchange-plus pricing are better for most merchants.

  1. Interchange-plus

With interchange-plus pricing, every transaction is subject to the interchange rate, as well as a fixed-fee markup for the processor on top of it. Also called cost-plus, this model was once available only to large businesses with lots of sales volume, but more processors are now offering it to small businesses. Interchange-plus gives merchants a sense of transparency into the cost of each payment by providing an itemized breakdown of charges on your statement.

It’s considered the fairest, most honest pricing structure and can also produce low processing rates for merchants that pay close attention to their finances and have the right incentives in place. But credit card processing fees will vary month to month, as they’re dependent on card type and network. For small businesses that want to pay the same amount every month, a fixed rate might be more attractive. Processors that use interchange-plus include Intuit QuickBooks Payments and FLEX Payment Solutions.

A flexible payment solutions partner

Selecting a credit card processing solution for your business means considering not only costs, but also features like security, sales volume, customer support and more.

In addition, certain credit card processors may appeal to specific merchants that process a particularly high or low amount of transactions. A small business that does fewer sales has different needs than a larger business that does many. Your company’s transaction volume is one of the key things to be aware of when deciding on a payment processor.

FLEX Payment Solutions offers credit card processing for CBD shops and other high-risk businesses, as well as companies with larger transaction volume. Unlike some processors, we won’t drop clients overnight and will guide them through a thorough underwriting process, helping them operate efficiently, save money and grow their business.

Related Posts