There’s a new trend in the credit card processing industry and it’s a trend that isn’t necessarily a good one for your business. The trend is called Flat Rate Pricing. Regardless of what industry you work in, Flat Rate Pricing is nothing more than Tom Foolery. It looks good on paper. On the surface, it seems more consistent and predictable when in reality, it can cost you much more money than you should be paying.
How Rates are Determined
The wholesale cost of processing a credit card is based upon an interchange rate. Think of interchange rates as the wholesale cost of processing a credit card. All processors pay the exact same interchange wholesale rate. The Interchange rates are set by payment networks such as Visa and MasterCard. This is how the card brands earn their money. Typically, the bulk of the fee goes to the issuing bank such as Wells Fargo, Chase or Capital One. Issuing banks’ interchange fees are deducted from each merchant transaction as they submitted through an acquiring bank through the processor.
Interchange rates are set at various amounts based upon a percentage of the transaction and the specific type of card used for payment. As an example, a premium credit card that offers rewards generally has a higher interchange rate than a standard cards that offers no rewards. Transactions not conducted in person such as by phone or on a website are subject to higher interchange rates. It is important to note that interchange rates apply to all merchants and processors and cannot be negotiated by anyone.
Using a $100 transaction example, the merchant receives about $98 of the $100 transaction. Of the $2 given up by the merchant, about $1.75 goes to the card issuing bank (defined as interchange fee), $0.18 would go to the card brand such as Visa or MasterCard (defined as a brand/card assessment), and the remaining $.07 would go to the credit card processor. On average the interchange rates in the U.S. are about 1.79%.
Why Flat Rates are Bad
When Flat Rates are used, as a merchant, you only see the amount you got to keep. You have no idea what the interchange rate was or who got paid what. Let’s say that you have a $1500 transaction and a non-profit charity group uses their Visa card for payment. The interchange rate for this transaction would be 1.350%. This equates to $20.25. Using a Flat Rate model at 2.9%, this same transaction would cost $43.50. This is more than double what you should be paying. With Flat Rate pricing, you would only see that you did a transaction for $1500.00 and got paid $1456.50. If your processer is transparent, you would see the exact interchange fee plus the mark-up (your processor needs to make money too). Flat Rates allow you to be ripped off on nearly every single transaction since the national average is 1.79%*.
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Real Life Scenarios
In this industry, it is common to “farm-out” jobs to another limousine company. Let’s say that you sent a job to an affiliate who charged you $128 for a ride from the airport to a hotel. While you might be okay with the overall price, you might be upset if you saw it broken down like this – Base Ride = $49, Gratuity = $35, Airport Fee = $20, Fuel surcharge = $14, Misc Fee = $10. This would be upsetting to anyone. But, you deserve to know what you are paying for.
Let’s take the role of a consumer here. Let’s say a funeral cost $8,545. Let’s break it down with unrealistic charges – Funeral home services = $1595, Use of facilities = $1000, Casket Spray = $1000, Guest Book = $250, Casket = $3000, Hairdresser Services = $500, Graveside Tent & Chair Rentals = $1200. If the funeral director provided no itemized invoice for the services, a family would likely pay the $8,545 as an acceptable fee. However, once they realize they paid $250 for a guest book, they would likely become upset.
These are just two examples of why transparency in pricing is so important. Don’t settle for a Flat Rate. Know how much you are paying and who is keeping what amounts.
* Source: Wikipedia