Flat Rate Credit Card Processing

Updated Addition: 10/20/2009

A new merchant pricing model is emerging that's threatening to dethrone interchange plus, the current king of transparent merchant account pricing.

A few merchant service providers have begun to offer a flat rate merchant account pricing model. The revolutionary aspect of this pricing model is that the provider's profits are independent of interchange charges. That means that a provider's profit won't increase as a merchant's processing volume grows.

Providers that offer a flat rate merchant account pricing model pass exact interchange charges right through to the merchant. They then charge the merchant a set monthly fee to maintain the merchant account.

The benefits to the flat rate model are less expensive processing charges, more transparent statements and a fixed mark-up regardless of processing volume.

Visit CardFellow to get quotes for flat rate credit card processing.

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A flat rate merchant account would make the lives of business owners and accountants much easier, but they eventually come to realize that there's nothing flat about merchant account fees. Fortunately, there is something close. While it still won't boil processing charges down to a single rate, interchange plus pricing does apply a flat mark-up to all discount fees.

Most merchant accounts are based on tiered or bucket pricing with qualified, mid-qualified and non-qualified discount rates. This model is slowly but surely giving way to something called interchange plus that applies a direct mark-up to the actual cost of a transaction. This type of pricing is the closest thing to flat rate credit card processing that a business will be able to achieve.

Merchant processing charges are based on Visa and MasterCard's interchange reimbursement schedules. These schedules dictate the percentage of a credit card transaction that a merchant's acquiring bank must pay the cardholder's issuing bank. The inner workings of the this system are pretty complex so I won't get into the details in this article, but suffice to say there are many different interchange charges that can be applied to individual credit card transactions.

Because there are so many different discount categories, there can never be a true flat rate merchant account. Well, that's not entirely true. If a merchant agreed to pay the highest possible interchange category on every transaction, they could conceivably have a flat rate merchant account. Of course, the cost of this account would be unnecessarily astronomical to say the least.

Interchange plus merchant accounts with their single mark-up are the closest thing to a flat rate merchant account. The other option is a tiered account that groups all of the various fee categories into just a few buckets. This method results in sporadic mark-ups and lost money for the merchant.

The CEO of a merchant service company that quotes exclusively interchange plus pricing once said to me, "tiered rates are the biggest joke going in this industry." I understood what he meant, but the joke is on the merchants that are paying fluctuating mark-ups and losing money while doing it. Once they learn the benefits and transparency of interchange pricing, they won't be so amused - especially with their current merchant account provider.

Now that I've preached the benefits of interchange, I need to pull back on the reins a little bit to be fair and balanced. Merchant service providers have real costs and risks associated with their business and interchange pricing leaves them a much narrower margin to operate within than tiered pricing. No one is in business to lose money, and they can't feasibly offer interchange pricing to everyone.

Some businesses, especially new establishments, probably won't be able to obtain interchange pricing. If this sounds like your situation, it's not that big of a deal. There are very competitive tiered accounts to be had. Check out our sister site, CardFellow, to get a few different quotes to help find the best merchant account. Even if you don't get interchange quotes right away, you can always switch once you begin processing.

Questions & Comments

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On October 21, 2010 Joseph said:

I own a small business and currently use two credit card merchant accounts. Is there a federal law or regulation that forbids businesses from owning more than one?

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On October 22, 2010 said:

Hi Joseph,

There is no law or regulation that prevents a business from having more than one merchant account. In fact, sometimes it's necessary for a business to have more than.

For example, online businesses that have more than one web site selling different types of products and services should have a separate merchant account for each product category as defined by SIC and MCC codes.

Another common reason why businesses will have more than one merchant account is if they have different divisions of the same company with different DBA (doing business as) names. A merchant account can only be assigned a single DBA name, so businesses with more than one DBA will need a multiple merchant accounts.

For example, online businesses with multiple web sites often prefer to have a merchant account for each site so that the domain name of each site appears on their customers' credit card statement. This is a recommended best practice and helps to decrease the likelihood of charges backs due to an unrecognized purchase.