Payment Strategies for High Growth Businesses – When are ‘flat fee’ plans a rip-off?

Stripe, Braintree, Intuit and others have massively popularized the idea of the flat fee payment processing account — no monthly fees and a per transaction cost that is simple and easy to understand.  In fact, MerchantPlus also recently introduced such a plan (called the “Starter Plan”) that offers a very common and competitive per transaction cost of 2.9% per sale.  These plans have become the most popular options for startups, developers and small online businesses across the United States.

The question comes up, however, do these accounts stop making economic sense for a growing business at some point?   When is that?  The answer (in case you’re more a Cliff Notes kind of reader!) is at about $15,000/mo in sales.  The details behind that conclusion are a bit more nuanced and require a thorough explanation of the complicated part of the credit and debit card processing world: Interchange.

At some point, it is up to the business owner (or finance team/investors)  to determine when the simplicity of a flat rate pricing plan and no monthly fees of an “aggregator” account are trumped by the cost savings and added flexibility of a direct merchant account with an acquiring bank.

What is interchange and why is it important?

interchange-graphicInterchange fees are costs charged to process merchants to process various types of credit and debit card transactions, typically a percentage of the sale plus a per item cost.  The interchange fees are set by the card brands (Visa, Mastercard, primarily, but also Discover, AMEX, etc).   The fees are publicly published (Visa’s are here and Mastercard’s are here) and vary by the card type, issuing program that the card was created under and certain qualifications at the time of the transaction.  You can add to that mix some government regulation, specifically for debit card transactions.  A good overview on the status of U.S. regulation of debit card fees to merchants can be read here.

To give a popular example of interchange in action, the cost to process a Visa-branded “rewards” card (one that gives the card holder back points, cash or other benefits) is going to have a higher interchange fee than a similarly authorized non-rewards card.  These interchange fees primarily make their way back to the card issuer and are used to pay for the benefits of the card program.  You didn’t actually think that 1% cash back was a free gift from the bank, right?

Interchange can also vary by transaction type (key entered, swiped with magnetic stripe data or customer entered in an eCommerce scenario), but in this context we’re mainly talking about eCommerce or keyed in transaction rates.  eCommerce rates currently range from 1.80%-2.40% + $0.10 for Visa/MC credit cards OR 0.05% + $0.21 for debit or “check” cards.  With debit cards making up an even larger percentage of sales (particularly when the average ticket is under $50), the benefit of accessing regulated debit fees can be a huge savings point for merchants.

Are there additional fees other than interchange?

In order to have an apples to apples comparison to these “flat rate” pricing plans (often 2.9% + $0.30), it’s important to outline other fees that occur in the transaction chain.  These include:

  • Gateway fee – Often $0.05 up to $0.30 per transaction, depending on the features or vendor.
  • Network Authorization Fee – The fees charged to send the authorization request to the card issuer.    $0.05 to $0.10 is the normal range for this line item.
  • AVS Fees – The cost to leverage the Address Verification Service, generally around $0.05 and often bundled into the authorization fee.
  • Settlement Fee – The cost to capture or settle a transaction and start the process to actually move the money from the card holder’s account to the merchant / clearing side.  Add another $0.05 to $0.07 for this fee.
  • Batch Fee – Cost to close or capture a set of authorization within a given time period at the front end network.   Generally between $0.10 and $0.25 from most processors.
  • Interchange Markup – Merchants who provide “Interchange Pass Through” pricing will quote a basis point markup on top of interchange.  This can range from 5 to 100 or more basis points, depending on volume.
  • Monthly fees – You’ll often see a statement fee, account on file fee, online access, compliance or other types of maintenance fees related to each Merchant ID.

Without a doubt, understanding these different fee items and negotiating a proper merchant account provider is more complicated than choosing a flat fee account option from Stripe, MerchantPlus or Braintree.  However, understanding these intricacies can save some serious money as a business grows.

What are the economics behind the $15k/month breaking point?

First off, it’s important to recognize that any merchant that is working on an interchange-based pricing plan benefits from:

  • Regulated debit card rates
  • Interchange reimbursement for refunds / returns
  • The ability to identify transaction qualifications and optimize them

Secondly, we put together a model below which should help clear up how we came to the $15,000 number.  The assumptions we made are below:

B2C / B2B Transactions90% / 10%Majority of eCommerce volume is B2C
Debit / Credit30% / 70%Depending on the business and its customer demographic, this can vary dramatically
Sales Refunds2%Estimation based upon return/refund rates
Average Transaction Size$!00Estimated ticket for general eCommerce and key entered transactions
Interchange Markup+ 0.3% & $0.10/eaMerchantPlus’ starting rate, which automatically decreases with volume
Monthly Fees$30/moCombined rate to include all monthly base fees for MerchantPlus’ Advanced account

Fees of “Starter” vs. “Advanced” Plan

Business Size$ ProcessedMP “Starter”MP “Advanced”% DifferenceAnalysis
Small$1,500$48$6841%Makes more sense to be on flat fee “Starter” account due to monthly fees.
Medium$15,000$448$381-17%At $15K it starts to have real impact on bottom line with a savings of 17% of total processing costs.
Large(r)$125,000$4,000$3,170-21%Savings increase at larger volumes to become over 20% savings on fees.
Enterprise$1.5M$48,000$37,000-23%With the MerchantPlus RateAssure program, the basis point markup decreases automatically, yielding powerful savings.

What these figures demonstrate: Flat fee plans from MerchantPlus (Starter Account), Stripe, Braintree and others are great options for small businesses. The actual break even point, where the cost for a flat fee program versus the cost for an interchange plan equal out varies based on your processing profile but for most MerchantPlus merchants is right around $4,500.

The benefits of simplified pricing start to be overcome by cost economics around the $15,000/mo mark.  

What are the options when a company outgrows a Flat Fee plan?

In order to receive interchange plus pricing, businesses should seek out a direct merchant account with a payment processor that offers Interchange “pass through” pricing plans.   It’s important to keep in mind that nearly every payment processor is selling the same underlying service (the ability to process bank card transactions), but there are hundreds of confusing pricing packages desired to attract merchants.  In many cases, these bundles mask fees and tie businesses into long term contracts.

Importance of Transparency

MerchantPlus, Stripe, Braintree and other internet-focused payment platforms have designed their offerings to help start-ups access advanced payments with clearly defined fees and powerful API’s.  Once a business reaches a certain scale, MerchantPlus and its Advanced and Enterprise plans can help businesses solve the next stage of technical, business and costs challenges with Interchange-based pricing, the unique RateAssure pricing scalability feature and a wide choice of technology platforms.

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