Deciding whether flat-rate pricing is for you

Deciding whether flat-rate pricing is for you

Let's face it. Flat-rate pricing is tempting. It's simple. It's easy to understand. But that's not all there is to it. There are other fees to consider, boosting costs by as much as 20 percent by some estimates.

Here are the perks, drawbacks and little-known facts you should know before you sign on to flat-rate processing:

The perks

Flat-rate pricing is simple and easy to understand. It's true. Instead of having transaction fees for a number of categories, cards and processing, you now have one reliable fee that you can calculate as you measure your possible profits. Many new business owners find it easier to deal with.

Also, the flat-rate model is not based on percentage of sales. This means the vendor typically charges a set monthly maintenance fee, regardless of how much volume your business generates. Some people consider this a big advantage when starting a business.

Some flat-rate credit card processing is offered without a transaction fee, a definite perk for businesses with very low average transactions. Braintree, for example, offers zero transaction charges on the first $50,000 of sales volume on your app or website. Afterward, it charges 2.9 percent plus 30 cents per transaction.

The drawbacks

Flat-rate pricing can be 20 percent more expensive than other forms of pricing, CardFellow.com claims. The credit card processing marketplace claims there can be hidden fees as well.  

For example, until February, Square had a monthly $275 flat rate pricing plan that only applied to swiped transactions less than $400, according to CardFellow.com. Transactions of $400 or more were billed at Square's swiped rate of 2.75 percent, in addition to the $275 flat rate. The flat rate also did not cover keyed transactions, which were billed at Square's typical rate of 3.5 percent plus 15 cents, in addition to the flat fee. That said, customers told The Wall Street Journal they loved the plan.

(Now, Square offers 2.75 percent per swipe or online sales and 3.5 percent plus 15 cents per manually entered transaction. And it promises no hidden fees. The move was a response to customers' concerns that the "caps and limits" of the flat fee were inhibiting growth, the company says.)

What you might not know

Flat-rate processing is usually offered as either a flat percentage of volume, or as a fixed monthly fee over cost. Processors such as PayPal  use the fixed percentage of volume method. Customers pay 2.7 percent of volume for U.S. swiped transactions. (Keyed transactions are 3.5 percent plus 15 cents.)

Other companies charge a fixed monthly fee over the base costs of interchange and assessments. It may include a transaction fee. The flat monthly fee is usually based on a business's forecasted volume, and the business will likely still have to pay interchange and assessments at cost. CardFellow.com gives this example: A business that is processing $10,000 a month might be given a $30 flat rate. Although the merchant will have to pay interchange and assessments at cost, the markup is consistent.

CardFellow.com notes that companies that offer flat-rate pricing are often aggregators, which means that they are the middlemen to the processors of your transactions. They forward your transaction to the financial institution. This also means they may pool merchant transactions into one large account to process the transactions of thousands of businesses. Your price must accommodate this.  

At the end of the day, you want to look at the convenience of flat rates versus the possible savings of other rate schedules. Are you a small enough operator that the flat fee is to your advantage? Are there hidden costs that will eat away at your savings? Take the time to research what you are paying for and read the processors' reviews.  

Published: May 19,2023