Payment processing rates might be the least discussed aspect of running a company. Even so, your payment services provider will charge you every time a customer makes a purchase.
What you will be expected to contribute depends on the pricing model you choose to accept, making it essential to understand your choices in this regard. Specifically, we will be discussing two of the main options: flat-rate and interchange-plus pricing.
Flat-rate pricing
In flat-rate pricing, every transaction is contained under one umbrella. This model is easy to understand, predictable, and affordable. However, transparency can be lacking, and this model can cost more.
As the name implies, flat-rate pricing means that all of your transactions are combined into one charge. It includes both interchange rates and fees and the processor’s markups. What you will pay depends on whether the transaction is card-present (in-person) or card-not-present (occurring online).
Flat-rate pricing is refreshingly simple. In fact, you pay the same cost for every transaction. As a direct result of this predictability, you can budget more intelligently. Moreover, you will not be blindsided by hidden fees and can accept elite cards without incurring additional costs.
There are downsides to this predictability. Because both the interchange and markup rates are hidden under the umbrella of the flat rate, merchants may not completely understand their costs and might not find the best deal. Additionally, because all transactions are charged equally, companies may miss out on the cost savings from less expensive transaction types.
Interchange-plus processing
This alternative involves paying the interchange rate along with the markup. Advantages include transparency, scalability, affordability, and easier bookkeeping.
As with flat-rate pricing, you are expected to pay both the interchange and markup fees. However, the difference is that all charges are clearly distinguished and described on your monthly credit card statement when you choose interchange-plus pricing.
With this model, your bill will be longer and more complicated than you might prefer. However, you always know exactly what you are paying for. This makes it possible to shop around for the most cost-effective provider based on this insight.
Additionally, this model is great for growing businesses since the markup remains consistent no matter how big your company gets. Moreover, you can benefit from the cost savings of processing more affordable transaction types and can be in better control of your financial analysis.
On the downside, the added complexity of interchange-plus leads to less predictability. This is due to variations in prices and transaction types. Consequently, budgeting can be more challenging, requiring you to put added focus on lowering costs.
Choosing the best pricing model for your business
Flat-rate pricing works well for businesses with multiple locations or that run on several channels. By contrast, the transparent fee breakdowns in interchange-plus pricing often benefit smaller enterprises.
Only you can truly understand the in-depth needs and strengths of your company. This makes choosing the best pricing model a very personal decision.
However, some generalizations might be helpful as you look over your options. For owners contending with multiple locations and high sales volumes, it can be much less stressful to pay a consistent rate for every transaction. You might even be able to negotiate with your provider to pay lower markup fees. Finally, the fact that you do not need to pay extra based on card types means that you can accept a wider variety of options, leading to a potentially broader customer base with flat-rate pricing.
On the other hand, smaller operations face different challenges. For companies just starting out or those with a single location or lower sales volumes, keeping costs down may be an overarching priority. In these cases, the granular quality of interchange-plus pricing can give you the precise financial details that you need to propel your store forward.
When you set out to launch your business, you probably spent little or no time considering the ins and outs of payment processing. However, as we have seen, the payment processing model that you choose can have a profound effect on how much you pay and even the role you play in the billing process. When you take the time to choose the pricing model that gels with your current and upcoming business needs, you will set yourself and your customers up for efficiency and success now and in the future.
North is a leading financial technology company that builds innovative, frictionless end-to-end payment solutions designed to simplify and grow businesses of all sizes. From the front door, to the back office, the developer world, and partnerships that expand the payments landscape, North offers proactive, comprehensive merchant services, in-house processing, and more.
