Payment processing plays a crucial role in every small business, especially with the decreasing use of cash. Nowadays, almost 56% of consumers use credit cards, and 52% use debit cards for payments. But with the market offering an abundance of alternatives, getting confused is natural. Every option comes with different perks, and on top of that, we also have to consider their pricing models.
Choosing the wrong option can add high costs to our routine business proceedings. As business owners, we all know how even a slight rise in costs can hinder our revenue and market performance. That is why we must assess two crucial aspects when choosing a payment processing model – the processing rates and pricing model.
Given such settings, the two most popular options that emerge in front of us are interchange plus and fixed-rate payment processing – while the terms seem straightforward, understanding their differences and knowing which to choose can be excruciating.
That is why we have prepared a detailed guide to understand the two and find the best option for small businesses.
What is Fixed-Rate Payment Processing?
Fixed-rate or flat-rate merchant processing is a popular payment method known for its simplicity. As the name suggests, fixed-rate payment processing charges a fixed fee regardless of the wholesale rate and card type. This means we have to pay the same fee, making it simple to understand and calculate.
But does it makes the option ideal for every transaction or even business? Definitely not. The option has its downsides, especially compared to its alternative, interchange plus, which we will talk about later.
What Is Interchange Plus Pricing?
Interchange or cost-plus pricing is a popular but complicated payment method used for merchant processing. For example, credit card processors use the model to calculate the per-transaction cost, making it the opposite of fixed-rate processing.
It consists of two components – a markup selected by the credit card processor and an interchange fee calculated by the card network. The model offers a balanced and fair pricing scheme due to its transparency. But how does it fare against fixed-rate payment processing? Let us find out.
The Difference Between Fixed-Rate Payment Processing and Interchange Plus
The primary difference between fixed-rate and interchange plus lies in their charges evaluation. The former charges a fixed amount on every card a small business comes across, irrespective of its type. Conversely, the latter charges a different amount on every transaction, depending on the card and payment type.
The second most notable difference between the two lies in the amount they charge. This is also where most small business owners lose a grasp of which option is better. To put it in numbers, an average fixed-rate transaction costs around 2.90% + $0.30. The numbers are applicable on the two most popular payment models – Square and PayPal.
On the other hand, interchange plus charges are much cheaper on most cards. For example, swiping a Visa Debit card generates average interchange fees of 0.8% + $0.15. What if we keyed the card instead of swiping? The charges surges to 1.650% + $0.15. While the charges are higher than swiping, they are nowhere near the amount incurred through fixed-rate merchant processing.
Even a card with charges on the higher end of the spectrum, like the Visa Credit Retail Rewards Signature, costs 2.300% + $0.10. The charges hike to 2.700% + $0.10 if we key the card. Further, we should not forget to add the markup fees associated with interchange transactions.
On average, an interchange payment will cost us somewhere between 0.1% – 0.5%. However, even after accounting for the markup fees, any rational business owner can understand which payment model seems more appealing.
But if it was that simple, why do many small business owners use the fixed-rate method? Because it is simple to calculate and implement. The best thing the fixed-rate payment processing method has going is its simplicity, as a result of which we do not have to make any complex calculations to formulate the charges.
On the other hand, interchange plus charges a different amount for every card type. That is the sole reason many business owners refrain from implementing the interchange payment model. However, the perks it offers far outweigh the efforts it requires to understand it.
While the model is not impenetrable, it is ideal for small businesses, especially if they primarily deal with debit cards. If that is the case, there is no second-guessing while choosing the payment processing method.
Is that all supporting the case of fixed-rate processing? No, other than being predictable and simple to understand, the method also accepts elite cards without any extra cost. Of course, we cannot do this with interchange plus, but the method has several additional benefits to make up for it.
With fixed-rate payments, we cannot comprehend the interchange rate and markup fees. It restricts our grasp of the charges we are paying to the card processor. This is where the interchange payment model shines as it tells us exactly what we are paying for with every transaction. It makes the transaction fair and helps us find the best price.
Closing Thoughts: Which Payment Processing Model Suits a Small Business Best?
One can make arguments for both methods, seeing how they offer certain benefits of their own. However, if we conduct some research and calculations, interchange plus appears as the best option for small businesses. While the fixed-rate method comes with simple perks which can entice any business owner, it falls in multiple crucial aspects.
Many modern businesses opt for the fixed-rate model, but more ventures have started to realize the efficiency of interchange plus processing. As our revenue increases, so does the benefits offered by the interchange method. That is why fixed-rate merchant processing is suited for micro-businesses but not small businesses.
Any small business owner can understand the differences between fixed-rate payment processing and interchange-plus with the information given above. Once we understand the core benefits offered by these methods, the choice becomes substantially simpler. Visa and MasterCard also show the latest interchange rates to help us make an informed decision about which method to choose.