15 Oct WHAT’S THE DIFFERENCE BETWEEN A FLAT RATE AND A VARIABLE RATE?

TWO TYPES OF PROCESSORS

PROCESSOR A – A Flat Rate Provider

Businesses partnered with third party merchant processors, such as Paypal, Stripe, or Square, charge a high flat rate and high per transaction charge (usually around 2.9% and .30 per transaction). There is no evaluation process, and it is automatically the same for every business. As a result, it is fixed and never changes. Though this seems helpful for calculating one’s expenses for the month, these merchant processors are actually overcharging with a high flat rate to make a profit. As a result, your business loses hundreds to thousands of dollars a month for the seeming “convenience” of not paying small account fees. Their fixed flat rate never changes, and since your business only has an indirect agreement with the bank through the third-party merchant processors, you have no opportunity to improve or change the rate.

PROCESSOR B – A Variable Rate Provider

Businesses will have a direct agreement with the bank and undergo an evaluation process to determine the best rate, fees and technology for an individual business. It’s important to evaluate each business to find out things like what types of cards their customers usually use (for example American Express usually costs the merchant more than Visa) and what types of transactions occur (over the phone, online, in person). Again, a fixed rate is the same for every business everywhere. A variable rate is more specific to the business which helps the merchant obtain the best possible rates and fees on a monthly basis.

The only locked rate in an agreement like this is the interchange rate (this is the nonnegotiable charge levied by visa, mastercard, amex and discover); then the processor adds a certain number of basis points to each transaction. This type of contract is known as Interchange +. And while it may be nice to have a fixed rate of 2.9% and .30 per transaction; chances are that you’re paying far more than you need to.

TAKEAWAY – In 2019 PayPal made over $17 billion in profits. Square made over $4.7 billion. Stripe made over $3 billion. Clearly the fixed rate is working out – for them.