Flat-Rate Pricing

Flat-rate pricing is a way of charging merchants for card payments in which every transaction costs the same rate, regardless of the card used. The rate is usually a percentage of the sale plus a small fixed fee per transaction, and it often differs only by channel, with one rate for in-person payments and another for online ones. The provider absorbs the differences in interchange and scheme fees between card types.

The model is sometimes called blended pricing. It is the opposite of interchange-plus pricing, where each card's real cost is passed through to the merchant, and it differs from tiered pricing, which sorts cards into a few rate bands. It became widespread with small-business providers that let merchants start accepting cards within minutes of signing up online, without the long application and credit review once typical of a merchant account.

Think of a parcel company that charges one price for any box that fits a standard size, whether it is going across town or across the country. Some deliveries cost the company more than the price and some cost less, but it has worked out a price that covers the average. The sender does not need to look up distances or zones.

Flat-rate card pricing works like that single postage price. Behind the scenes, a basic debit card is cheap to accept and a premium rewards credit card is expensive. The provider sets one rate that covers its average cost plus its margin. The merchant knows in advance what every payment will cost, at the price of sometimes paying more than the real cost of a cheap card.

The fee on one transaction under a flat rate is:

where $r$ is the flat percentage rate written as a decimal, $V$ is the value of the sale and $f$ is the fixed fee per transaction. Under a rate of 2.9% plus $0.30, a $200 sale costs:

That is $6.10, or 3.05% of the sale. A $10 sale costs $0.29 + 0.30 = 0.59$, or 5.9%, because the fixed fee weighs more on small payments. Businesses with low average ticket sizes, such as cafés, therefore feel the fixed part most. Larger tickets narrow the gap, because the percentage part dominates. The real all-in percentage for a business is measured by its effective acceptance cost.

Flat rates are the standard offer of most payment facilitators, which sign up many small merchants under their own master merchant account and handle the underwriting themselves. Well-known examples in the United States include Stripe, whose standard published rate for domestic online card payments is 2.9% plus 30 cents, and Square, which publishes separate in-person, online and keyed-in rates. Published rates change over time, so merchants check the provider's current price list rather than relying on older figures.

Many traditional acquirers and independent sales organizations also offer a flat option for small accounts. Some providers move merchants to negotiated pricing once their monthly volume passes a set level, which usually lowers the overall merchant discount rate.

• Simple and predictable. One rate makes costs easy to forecast and statements easy to read, which suits new or seasonal businesses.
• Fast onboarding. Flat-rate providers usually approve small merchants quickly and bundle hardware, a payment gateway and reporting.
• Cross-subsidy between cards. A merchant whose customers mostly use low-cost debit cards pays the same as one whose customers use expensive premium cards, so it may pay well above its real cost.
• Little room to negotiate. The rate is usually fixed, and the merchant does not see how much the provider keeps.
• Account risk. Because the provider takes on the risk of many small merchants, it may hold funds or close accounts quickly when it sees unusual activity or a rise in chargebacks.

A flat rate makes the cost of each card payment easy to quote, so some merchants pass it on to customers. In the United States this is done through card surcharging on credit cards, which network rules and some state laws limit, or through cash discount programmes that offer a lower price for cash. Surcharging debit cards is not allowed under network rules in the United States. In the European Union, surcharges on consumer cards covered by the interchange caps are banned under the revised Payment Services Directive.

When a merchant grows, comparing the flat rate with an interchange-plus quote is the usual way to check whether the convenience is still worth its price. Many providers will prepare such a comparison from a few recent statements. The comparison depends on the merchant's average sale, card mix and share of card-not-present payments.