Flat rate or interchange-plus: how card processing pricing really works

Card processing quotes are hard to compare because they are built differently on purpose. Once you know the three parts of a card fee and the three ways processors package them, most of the confusion goes away.

The three parts of every card fee

• Interchange. Set by the card networks and paid to the bank that issued the card. It varies by card type. A rewards credit card costs more to accept than a debit card. No processor can change it.
• Network fees. Small fees that go to Visa, Mastercard and the other networks. Also fixed.
• Processor markup. What your processor keeps. This is the only part you can negotiate, and it is where quotes differ.

Flat rate

One blended percentage, usually plus a few cents per transaction, for every card. It is simple and predictable, and common with modern POS systems. The processor sets the rate high enough to cover expensive cards, so you overpay on cheap ones like debit. It suits smaller restaurants and low average tickets, where simplicity is worth more than the savings.

Interchange-plus

The processor passes interchange and network fees through at cost and adds a fixed markup on top. Statements are longer, but you can see exactly what the processor earns. At higher card volume this is often the cheaper structure.

Tiered

Transactions are sorted into buckets such as "qualified" and "non-qualified," each with its own rate. The processor decides which bucket a card falls into, so the quoted low rate may apply to very few of your sales. Treat tiered quotes with caution.

Compare on one number: your effective rate

Take a recent statement. Divide the total fees by the total card sales. That percentage is your effective rate, and it is the only fair way to compare one offer with another. Ask each processor to estimate it from your real statement.

Fees that hide outside the rate

• Monthly, statement and batch fees
• PCI compliance or non-compliance fees
• Monthly minimums
• Early termination fees
• Equipment leases, which are often non-cancellable and can cost many times the price of the terminal

If you plan to add a surcharge or a cash discount, check your state's rules and the card networks' rules first. They differ, and they change.

One more thing

If your POS requires its own processing, the rate is part of the POS decision, not a separate one. Weigh them together.