In 2024, you’d be hard pressed to come across a merchant that doesn’t offer a variety of payment options. These days, credit cards and debit cards are all the rage as cash isn’t the necessity it once was. As a result, merchants of all sizes enable their customers to make card payments. But it does come with a cost.
Why does credit card acceptance come with a cost?
Consider the fact that payment processors do much more than enable store owners to accept payments. They also assume the risks associated with potential fraud. If a customer disputes a charge, a payment processor will often have to refund the amount being disputed. Not to mention, payment processing companies provide merchants with the necessary tools – including both hardware and software – to accept card payments from customers.
The fees that merchants are charged for each transaction helps to offset the costs associated with the abovementioned services. Generally, the fees are small percentages of the transaction values plus a flat fee per transaction. Credit companies like Visa and Mastercard charge interchange fees as well. We’ll delve into those shortly.
What are the different credit card processing pricing models?
Flat rate or fixed pricing charges merchants a fixed percentage fee for every transaction, no matter the card type, transaction volume or interchange rates. For example, a payment processor may charge 2.9% and $0.30 per transaction. For a $100 purchase, the merchant would be charged $3.20. This is the sum of 2.9% of $100 which is $2.90 plus $0.30.
Tiered pricing charges merchants fees based on transaction categories: qualified, mid-qualified and non-qualified. Qualified transactions generally refer to charges made by credit cards being swiped in person. These fees are often the lowest. Mid-qualified transactions refer to charges that are keyed in or made after a certain timeframe. They’re a bit pricier. Non-qualified transactions are considered high-risk or have incomplete information. Those fees are highest.
Interchange plus pricing charges merchants the interchange rate set by the card networks plus a markup fee from the payment processor. As mentioned before, credit companies charge interchange fees. They’re often set as a percentage of the transaction amount plus a fixed per-transaction fee. For example, if interchange rate for a credit card transaction is 1.7% plus $0.10 per transaction and the payment processor’s markup fee is 0.3%, the total fee charged to the merchant would be 2.0% plus $0.10 per transaction.
Because Unity Payments is dedicated to straightforward and honest pricing, we have adopted the Interchange Plus pricing model. It ensures that merchants only pay the true cost of each transaction. There are no monthly fees or lengthy contracts.
What other key factors contribute to credit card processing fees?
Interchange fees charged by card networks represent the cost of moving money between banks. Every card network has its own interchange fee structure and there are various categories or tiers of interchange rates. They’re often based on merchant types, transaction methods and risks associated with the transactions.
Merchant categories factor in too. Known as the Merchant Category Code, or MCC, this classifies businesses by industry type. The hospitality industry, for example, may incur larger fees due to risks of chargebacks and fraud.
Sales volume is another factor. The more sales a merchant makes, the lower the processing fees may be. Payment methods also play a role. An in-person sale is considered less risky than an online sale and therefore, may be subject to lower fees. Payment processors offer different pricing models from each other. They factor into the fees merchants are charged.
What are the practical implications of these pricing models?
Let’s use the example of a small sandwich shop that processes approximately 3,000 transactions per month that average about $5 each. That makes their revenue $15,000 monthly. Since this type of business has tones of small size transactions, with flat free pricing, the added 30 cents per transaction really cuts into the shop’s profits. These types of businesses are sensitive to direct cost transactions much more than the average interchange cost. With interchange plus pricing charging a transaction fee of $0.10, this shop would save $600 a month in direct transaction costs.
Let’s say a popular online retailer processes $10 million a year through a variety of credit cards, averaging $250 per transaction. A flat rate pricing model that charged 2.9% versus an interchange plus pricing model charging an average of 2.1% would cost that business an extra $80,000 a year. This business is more sensitive to the percentage interchange cost than the per transaction costs.
As you can see, Interchange plus would offer the lowest cost for both types of businesses.
What are the pros and cons of each pricing model?
The pros of flat rate pricing are that the fees are predictable and straightforward since the rates don’t vary. They’re also ideal for businesses with low revenue that wish to keep things simple. The cons include the fact that flat rates are usually more expensive for high-revenue generating businesses.
The pros of interchange plus pricing are that merchants often save money, especially if they, on average, process bigger transaction size. Merchants can also process a variety of cards and benefit from their lower rates. The cons include the fact that this structure is a bit more complex and requires some monitoring and understanding of interchange rates.
Unity Payments rewards your success!
With our interchange plus pricing model, we pass on the lowest interchange fees for every credit card type, complemented by a transparent margin. As your business expands, our margin naturally decreases, resulting in escalating savings over time. To learn more, please don’t hesitate to call us at 1-800-661-3761 or email us at info@unitypayments.ca.
