Having a credit card is undeniably great as it allows you to stroll cash-free when you’re shopping or traveling The only thing that makes a credit card confusing is the processing rates, which are a little overwhelming if you’re new to it.
Processing rates differ per card, as some have tiered pricing or membership pricing. Figuring out what flat rate pricing is, can help you save money when using a credit card for any type of transaction.
There’s a lot to know about flat rate pricing and in this article, we’re diving deeper into this concept and why it exists. As flat rate credit cards grow in popularity among merchants, cardholders need to understand what the fuss is all about.
Credit Card Processing
Before we proceed to flat rate pricing on credit cards, we need to understand what goes into card processing. First, understand that there are three entities involved in every credit card transaction.
There’s the organization or bank that issues the credit card; card networks that distribute the card itself, and the acquirer or the processor which communicates with the issuing bank to approve or decline a transaction.
The latter are also known as merchant service providers (MSPs), and sometimes independent sales organizations (ISOs). What happens when cardholders swipe a card is, the transaction is sent to the issuing bank through the acquiring bank.
If the issuing bank approved the transaction, the funds are immediately transferred to a merchant’s bank account. Then the credit card networks will provide the technology to facilitate electronic payments.
Credit Card Fees
Now that transaction processing is clear, let’s move on to the card fees. Per transaction, the merchant pays an amount to the processor, depending on the pricing model used by the credit card processing companies.
The traditional wholesale rate is set by the issuing bank and the credit card companies. Under this type, keyed-in transactions have a higher fee compared to the swipe one. This is usually referred to as the interchange rate or interchange fee.
Another transaction fee to take note of is the processor markup, wherein processors will add on top of the percentage rate. The amount will depend per transaction, but usually $0.10 or more.
Because this is set by the processor, the amount can be negotiable. Those who transact with a higher volume can negotiate a lower markup to save. This doesn’t apply to the cardholders but the merchants.
Flate Rate Credit Card Fees
Now, going to the flat rate credit cards, merchants are charged a fixed rate that includes both the interchange or wholesale rate plus the processor markup. PayPal uses a flat rate processor to charge the same amount per transaction.
This is a simplified transaction processing to allow merchants to see clearly how much the cost will be. A common type of flat rate processing these days is where the processor takes a specific percentage for a volume of transactions.
The Downside of Flat Rate Pricing
Some merchants may choose the traditional transaction processing types as the rates depend on the transaction. Meanwhile, if you want a more fixed and predictable rate for every transaction, the flat rate pricing is best.
Because payment processors don’t have a clue how much card customers are using per transaction, the rates need to be high enough to cover the cost. Therefore, the downside is each interchange fee for processing a transaction is more expensive.
The logic is simple, when the processor charges a low flat rate and a customer processes high-end rewards, the processor loses money on the transaction. Hence, the processor needs to play safe and charge something high enough to keep the business going.
Who Benefits From Flate Rate Pricing?
The question of whether who’s going to benefit from a flat rate pricing is obvious and that is the processor itself. However, merchants can still benefit especially if most transactions are under $15 to $20.
What’s in it for cardholders is that flat rate credit cards offer the same amount of cashback for every purchase, regardless of the type of purchase.
This means if the card’s dole is between 1 to 5 percent cashback, cardholders can get the same rate they’ve signed up for.
A flat rate credit card may benefit merchants and cardholders who have minimal transactions monthly. Aside from the simplicity of it all, flat rate pricing provides a straightforward way to calculate fees involved in processing transactions.