How Flat Fee Credit Card Processing Affects Profitability

From inventory management to handling operations and everything else in between, there is a lot that a business owner needs to manage. When a processor offers a flat-rate credit card processing fee for accepting credit card payments, it's hard to say no. After all, a simple pricing model is easy to understand and implement.

However, it may not be the best option for high-volume merchants, especially businesses that process over a million dollars in credit card transactions every month. While flat-rate processing may seem affordable, it can have a negative impact on profitability.

The worst part? Most business owners have no clue about the unnecessary fees they're paying for accepting credit card payments. As the volume of transactions grows, a lot of complexities may arise, leading to higher payment processing costs.

Momentum Growth Partners works with high-volume businesses to assess payment structures, identify problem areas, and deploy effective strategies to save money. Our payment processing consultants have the skills, knowledge, and expertise to bring more control to your payment ecosystem.

In this blog, we will cover what flat fee processing is and how it can affect your profitability. Keep reading until the end, as we will also go over better pricing model alternatives and how a payment processing consultant can maximize savings.

Let's get started!

What Is Flat Rate Processing and How Does It Work?

When you accept a credit card payment, you're using the credit card network and infrastructure to execute a transaction. For such services, there is a processing fee that you must pay.

Also referred to as a single-rate pricing model, flat-rate credit card processing is incredibly popular among merchants. It's the simplest fee structure whereby a business pays a flat percentage plus a small transaction fee for each transaction (for example, 2.9% + $0.30 per transaction).

Unlike variable fees that fluctuate depending on several factors, including the type of card, a flat rate is an attractive option for many businesses. That said, there are a lot of fees that are hidden behind this simplistic pricing structure. They include the following:

• Interchange Fees: Set by Visa, Mastercard, Discover, or Amex, interchange fees are what you pay the cardholder's bank. They are non-negotiable and constitute a huge chunk of the processing costs. Interchange rates vary based on:
• The card type (debit, rewards, corporate)
• The transaction method used (card-present transactions vs. card-not-present transactions)
• The industry in which the business operates
• Assessment Fees: When a business accepts card payments, it must pay assessment fees for using the infrastructure. These are paid to the card networks and are somewhat similar across different payment processors.
• Processor Markup: Your merchant services provider offers services to make a profit. They include a processor markup in the flat-rate processing cost. While the processor fees can vary from one company to another, business owners can negotiate better rates.

So, how does this pricing model work? Before subscribing to such services, your payment processor will calculate your flat rate. It does this by calculating the average of all the variable interchange rates and adding assessment fees and markup to it.

How Flat Rate Credit Card Processing Fees Can Destroy High-Volume Businesses

While it may seem like a straightforward pricing model, flat-rate payment processing fees can affect your bottom line. Here's how:

Overpayments on Low-Cost Transactions

Whether it's a small or a big purchase, every transaction is charged according to the agreed-upon flat percentage. The actual cost of accepting a particular card payment may be lower, but you end up paying more instead.

What do we mean by that? The rate that your processor charges includes interchange fees, which are often lower for debit cards. However, if you choose the flat-fee pricing model, you agree to pay a fixed percentage, regardless of the type of card being used.

Typically, the interchange fee for accepting debit card payments is around 0.05% plus an additional $0.22 for every transaction. Under the flat-fee pricing model, you agree to pay much more than that on each transaction. While the rates may vary, you're overpaying on every purchase made.

When a business processes millions in debit and credit card payments, it's paying much more than it should for every transaction. This could amount to hundreds of thousands of dollars in annual fees.

Missed Saving Opportunities on Enhanced Transaction Data

Processing payments with Level II and Level III data can lead to lower interchange rates. It requires merchants to provide detailed information about each transaction, including the following:

• Customer codes
• Invoice numbers
• Tax amounts
• Line-item details

In exchange for additional information, the processor rewards the merchant with lower interchange rates. However, if your merchant account is on a flat-rate processing model, you can't enjoy these reductions and continue to lose money every year.

Zero Pricing Transparency and Control

When you receive a flat-rate pricing statement at the end of the month, it'll typically show the total volume of transactions and the applied flat rate. You won't be able to identify interchange fees, assessment fees, or processor markup.

This lack of transparency can harm your business. When you can't identify where your money is going, it can become next to impossible to:

• Analyze your true effective rate
• Find cost-reduction opportunities
• Negotiate a better rate

Scalability Problems as Volume Grows

If you're running a growth-oriented, high-volume business, flat-rate processing can get expensive. As the transaction volume and average transaction size increase, you end up paying more.

Assume that your month-end debit and credit card transactions are $500,000 each. Under the flat-rate processing model, you're typically paying 2.9% plus $0.30 for every transaction. You're overpaying on every debit card transaction, as debit card sales usually have much lower fees.

When Should You Choose Flat Fee Merchant Services?

Flat-fee processing isn't all that bad. While it's not the best option for large, high-volume businesses, it does have its perks for small business owners and low-volume merchants.

The flat-rate credit card pricing model is simple and predictable. It's great for budgeting, as you know the exact rate that you need to pay each month. Think of it as a fixed cost.

Setting up a flat-rate processing model is a quick and hassle-free process. Some processors may not even charge a monthly fee for their services, making the flat-rate pricing model a great value for small business owners.

Flat-rate pricing works well for businesses that prefer cash payments and implement cash discount programs. Encouraging cash payments can help offset the processing fees while improving cash flow.

Businesses that choose to pass credit card fees onto their customers may opt for a flat-rate processing method. This way, they don't have to worry about incurring expenses for accepting card payments.

High-volume businesses or merchants can outgrow the flat-rate credit card processing model. The convenience of paying a fixed percentage becomes a financial burden, adversely impacting profitability. While incremental costs may seem low at first, they can erode profit quickly as the volume of transactions increases.

Are There Alternatives to the Flat-Fee Processing Model?

To reduce unnecessary fees and optimize profits, high-volume businesses should adopt a more transparent and efficient pricing model that provides greater control over transaction costs. There are various options to choose from, some of which include the following:

Interchange-Plus Pricing

For businesses with high-volume transactions, interchange-plus pricing can offer significant savings. It includes the interchange and assessment fees plus an agreed-upon markup.

Depending on the card and payment method, interchange fees can vary. This model ensures that you pay exactly what you owe on every transaction instead of a fixed rate on total payments.

There are many benefits of adopting interchange-plus pricing, including the following:

• Complete transparency with every line item visible
• Lower overall costs by paying actual interchange rates
• Direct benefits from optimizations like Level II/III data processing
• Greater negotiation power with full cost visibility

Monthly Subscription Pricing

Merchants also have the option to pay a monthly subscription fee instead of a fixed or variable rate on every transaction. This model is referred to as monthly subscription pricing.

Under this pricing plan, processors process transactions at actual interchange and assessment fees without including their markup. In return for offering services, it charges a flat monthly fee.

The monthly subscription pricing model is a fantastic option for merchants with consistent and high

transaction volumes. They don't need to pay the variable processor markup associated with other alternatives, making this plan a cost-effective one.

Tiered Pricing

Another alternative available to merchants is tiered pricing. This model categorizes transactions into different buckets, including "qualified," "mid-qualified," and "non-qualified," allocating a unique rate to each category.

If the majority of the transactions qualify for a lower rate, tiered pricing may be a great option. That said, your processor has a huge say in determining the rates for each tier. Plus, the lack of transparency may lead to unexpected costs.

Tiered pricing may be a suitable option for businesses with a membership pricing structure.

How to Identify If a Flat Rate Fee Is Hurting Your Profits

Here's how you can know if the flat-rate pricing model is hurting your profits:

Step 1: Analyze Your Processing Statements

Take the time to review your credit card statements. Find out the effective rate to determine whether you're overpaying. To do that, simply divide the value of all of the transactions processed by the fees paid.

The average flat-fee processing rate for high-volume businesses is between 2% and 2.5%. If your effective rate is greater than that, you're paying your processor more than you should.

Step 2: Recognize the Warning Signs

When analyzing credit card statements, you're looking for the following red flags:

• Statements lack detailed breakdowns of interchange fees, assessment fees, and processor markup
• You can't differentiate costs between card networks and processor profit
• Flat rate percentages consistently at or above 2.5%
• Unexplained rate increases without clear processor explanations

Step 3: Conduct a Professional Payment Processing Analysis

For actionable insights, analyzing a credit card statement should go beyond calculating the effective rate. Most merchants don't have the time or expertise to conduct a deeper analysis, which is why it's crucial to work with an experienced payment processing consultant.

At Momentum Growth Partners, our financial experts know the ins and outs of credit card processing and can help your business unlock significant savings. We provide the following services:

• Detailed interchange fee analysis to identify optimization opportunities
• Processor markup evaluation to uncover excessive or hidden fees
• Custom pricing structure implementation tailored to your volume and transaction types
• Direct credit card processor negotiations to secure favorable terms and rates
• Payment provider benchmarking against industry best practices
• Complete payment ecosystem assessment for cost-efficiency

Partner with Momentum Growth Partners and Take Control of Your Payment Processing Profitability!

While flat-rate merchant services have their perks, they're not a suitable option for high-volume businesses. This simple yet deceptive model can lead to higher fees and overpayments, which can gradually eat away at your profit.

By partnering with Momentum Growth Partners, our experts can optimize your payment processing, helping you regain more control over your payment ecosystem.

Call us at (517) 730-1751 to schedule a consultation with a skilled payment processing consultant for a deeper audit of your credit card processing statements today!