The Illusion of Flat-Rate Pricing for Merchant Processing
Pricing
Both Stripe and PayPal/Braintree charge flat-rate pricing, an increasingly popular cost structure for processors. And it’s easy to see why – simplicity is attractive. Flat rate pricing is easy to understand and it saves merchants from the annoyance of sifting through complex credit card processing statements. There’s no risk of missing some fine print and — at least on the surface – it appears to be totally transparent.
The flat rate pricing illusion
Flat rate pricing is simple. Credit card processing is not. In fact, flat rate pricing isn’t designed to be competitive at all–the attraction comes from the ease in which merchants can understand the structure. It’s a marketing tactic. With all the intricacies involved in credit card processing, it’s all but impossible for processors to charge a flat rate that is competitive while still remaining profitable as a company. Here’s why.
Whether they’re aware of it or not, every transaction a merchant processes incurs three fees:
1. A fee to the issuing bank, e.g., Chase (interchange)
2. A fee to the card brand, e.g., MasterCard or Visa (assessment)
3. A fee to the credit card processor
While assessments are fixed costs, the interchange rate is not. This rate can vary from as low as 0.05% to over 3%. Processors that charge a flat rate need to account for every possible interchange rate. The good thing about flat rate pricing is that there’s no guesswork and it’s easy for a merchant to figure out how much it’s going to cost them to process their payments. Unfortunately this convenience comes at a cost of spending about 20% more than they have to on processing costs.
Stripe and PayPal/Braintree use a fixed percentage of volume pricing structure of 2.9% + $0.30 per transaction. This is on the higher end in comparison to interchange rates, and for merchants with low-ticket transactions that extra $0.30 can be a real burden.
“Interchange Plus” pricing optimizes costs
Quite simply, “interchange plus” pricing means the merchant pays the interchange rate plus a fee to their credit card processor. That fee is usually measured in basis points. Each basis point is 1/100th of a percent.
For example, let’s say you’re a retail business working with a processor that charges 70 basis points for a fee of 0.70%. If you ran a card-present transaction of $50 with an exempt Visa check card, the interchange fee would be 0.80% + $0.15 for a combined rate of 1.5%. That gives you an interchange rate of $0.75 + $0.15 for a grand total of $0.90 for the transaction. That same transaction through Stripe or PayPal would cost $1.75!
Funding
Another cost of processing with many flat rate processors is the funding timeline. Since companies like Stripe are technically payment aggregators, it’s not cost-effective for them to maintain the reserve required to fund their clients in a timely manner.
Through PayPal/Braintree, it takes 48 hours to receive your money. With Stripe, it takes eight business days. That’s seven days between purchase and funding, which can become a huge burden for many merchants, and can complicate accounting long-term.
Another thing–aggregators may process payments under one large merchant account rather than having separate accounts for each of their merchants. In this scenario, the money your customers pay through these services does not belong to you. Since the aggregator is the one with the merchant account, it technically owns the money being processed. The service provider then issues a payment to you for the amount of the transaction.
Other payment processors, like Aperture Payment Solutions, will always have you open and own your merchant account, a process that can be as quick as a few hours. For this reason, any money that your customers pay only ever belongs to you, and you’ll receive your money in as little as one day.
With a little education on pricing, business owners don’t have to settle for a flat-rate structure. Even smaller, low-volume businesses and startups should expect transparency, access to their money when they need it, and a full suite of developer tools. Expect more from your processor – you deserve it.