Most small business owners have a lot more to worry about than how they are being charged for merchant services. Yet this integral part of your business might determine how profitable credit card and debit card sales are in the long run. Consider a coffee shop with razor thin margins being slapped with a per-transaction fee each time a customer pays for a $2 coffee with their American Express.
So what options are out there? Today, we will explore the “big four” pricing models which are generally available for payment processing agreements. Each model has its own benefits and drawbacks, and it is important to understand which might suit your business’ needs best.
Interchange-Plus Pricing Models
Interchange-plus pricing models are sometimes also referred to as cost-plus pricing or pass through pricing. While interchange-plus is most likely going to be the most difficult pricing model to understand, that complexity comes with the benefit of being the most informative.
For example, other pricing models may simply tell you a flat rate per transaction or even just your monthly charges. Interchange-plus statements provide information on the actual interchange charges and processor fees. In this way, you can understand if you are being overcharged by the issuing bank, credit card association, or merchant service provider (hopefully none of the above).
The transparency of interchange-plus generally leads to lower rates all around due to the fact that there are no hidden fees. Companies can’t bury higher rates into a blended model with cost-plus pricing.
Payment Processing by Membership
The “markup” or “plus” pricing we spoke about within interchange-plus are per-transaction fees being charged by a merchant service provider. Membership pricing models eliminate these rates and instead charge a flat rate for payment processing.
Think of this option as a way to pay for merchant services wholesale rather than per item. This simplifies monthly expenses and works towards a flat payment each month. As with all of these payment processing models, it is important to calculate your effective rate to understand if you are getting a good deal.
Membership pricing models for payment processing has a lot of advantages, but they are also less informative and reactive than say, an interchange-plus pricing model. Each business owner and operator must determine whether these options are more cost effective or if the simplicity is worth a potentially higher cost.
Flat Rate Pricing for Merchants
In recent years, flat-rate pricing models have become more and more common. Unfortunately, the perceived perception of flat-rate merchant services belies a much more complex underbelly of inflating prices and fees. Where interchange-plus pricing models provide detailed information about which fees are coming from which organization, flat-rate billing blends the data together into a singular, opaque, per-transaction rate.
It is common for flat rate pricing to include either a percentage rate for each transaction, a per transaction fee, and in some cases both. Services like Square are appealing to small business owners, but they are not always the best choice. The cost of simplicity is often high rates and a big chunk of the profits.
This isn’t to say that flat-rate payment processing pricing does not have its rightful place at the table. It is just important to understand that the convenience of flat-rate pricing and amenities like mobile payment solutions can sometimes blind business owners to the underlying costs of operation.
Tiered Payment Processing Models
Tiered pricing models for merchant services is the granddaddy of pricing models. Tiered pricing relies on breaking transactions into tiers such as non-qualified, qualified, and mid-qualified (although there may be many more tiers depending on the situation). Merchants are then charged differently per tier depending on their merchant services processing agreement.
The tiered method of charging businesses is known for complex statements, high fees, and hidden charges. What was initially intended to provide greater transparency has instead led to a situation where credit card companies and merchant service providers bury fees in hard to read language.
Much like flat-rate pricing, this does not mean we should throw the baby out with the bath water. There are advantages to tiered payment processing models when working with a reputable merchant services provider. We recommend exploring all of your payment processing pricing options with a qualified industry professional to find the solution that will fit your business’s needs.
Flexible Payment Processing Options from True Merchant
Payment processing can be needlessly complex. That is why at True Merchant we strive to simplify the process and choose payment processing solutions which fit the individual needs of our clients and their businesses. Our payment processing professionals are able to provide flexible pricing options which fit the budget of just about any business. We are proud to offer a wide range of services including payment processing, CardPointe, CardSecure, EBT payments, and much more.
For more information, feel free to contact our sales team today and find out how True Merchant can go to work for your small business!
