With a multitude of payment processing companies available to choose from, finding the right fit for your growing business can feel like an overwhelming task. When securing a payment processor the question of whether a subscription or markup pricing plan is best for your business will ultimately arise.
So what is the difference between a subscription-based payment processing plan and a markup pricing option? Each payment processing company comes with its own set of rates, fees, and contract terms. A merchant services provider that qualifies as a good deal for a small business might be too expensive for a larger one. So what is the cheapest way to process credit card payments?
In this blog, we break down the difference between subscription vs. markup and which is better for your business.
What is the best way to accept credit cards?
Using a merchant services provider instead of a bank can help you save hundreds of dollars a month in payment processing fees. Banks typically use a markup pricing model. They then contract out to a third-party merchant service provider to process transactions for them and charge you additional fees just to hand your business to someone else.
Merchant services providers offer additional pricing formats with the offer of better pricing for businesses wanting to accept credit card payments. Even with the perceived savings, many providers have their own markup model – meaning your business needs to pay close attention to smaller details to make sure you’re really getting the best payment rates.
What is the Average Credit Card Transaction Fee?
The transaction fee Is an additional per swipe fee that is charged on top of the interchange and percentage markup. These fees can range from $0.08 to $0.30. It’s important to consider that a processor who has a low rate may end up charging you just as much or more than another processor by charging a higher per-transaction fee.
This can be especially expensive for merchants with low average transaction size. There are also certain processors who do not charge any transaction fees, however, this typically comes with a higher markup percentage and additional hidden fees that end up offsetting any potential payment savings. This is why it’s important to evaluate processors based on the effective rate which accounts for all payment processing costs.
Comparing Subscription Versus Markup Rates
| Subscription (Stax) | Flat Rate (Square) | Tiered Rate** | |
|---|---|---|---|
| Card Present
(CP) |
$99/month + 8¢ per transaction + interchange |
2.6% + 10¢ per transaction
(includes interchange) |
Qualified: 1.9% plus 25¢ per transaction
Mid-Qualified: 2.4% plus 31¢ per transaction (can include or be charged in addition to interchange) |
| Card-Not-Present
(CNP) |
$99/month + 15¢ per transaction
+ interchange. |
3.5% + 15¢ per transaction
(includes interchange) |
Non-Qualified: 3.35% plus 31¢ |
** Due to the variable nature of tiered rate pricing models, the number represents one pricing scenario. Actual rates and card category qualifications will vary widely from each tiered pricing merchant services provider.
Flat Rate
Flat rate pricing is a variation on percentage markup models. Instead of charging a percentage extra on top of the interchange (which means each card’s final cost will be different), flat-rate models make each card payment type the same percentage. The most popular example of this is Square. No matter what card is being used, you’ll always pay 2.6% with Square for card-present payments.
This might seem like a good system at first, but the more payments you process, the more expensive it gets. This is especially true if you process a lot of cards with low interchange rates, like debit cards. These cards average an interchange around .5% – so 2.6% is an extremely large markup.
Tiered Rate
By far one of the most expensive processing pricing models, tiered rates bundle different card payment types within set tiers and charges based on those qualifications. The important thing to remember with this model is that the tiers are arbitrary and determined by the provider. Your business should instead focus on “interchange plus” models such as those found in the flat rate/subscription realm.
While on the surface the rate may seem to look attractive and competitive, the reality is that your business is actually losing money. Providers offering tiered pricing models are focused on making the most profit for themselves, not the best savings for the merchant. Tiered rates are extremely variable and can also be paid on top of interchange instead of blended into the rate like those in flat tiers.
Make sure to have a consultation to determine if a business is being charged a blended tiered rate on mark-up tiered rate.
Subscription
Often the best choice for merchants is subscription-based pricing models. A monthly membership is paid in exchange for the direct cost of interchange. This means that no matter how much you process, you only ever have to worry about the direct cost of the cards you’ve processed in addition to a flat membership.
There are a handful of other companies that use subscription-based pricing, but here at Stax, we are the only provider that can guarantee unlimited payment processing and absolutely no hidden fees.
Subscription vs Markup Pricing Scenario 1:
Let’s say your business processes $18,000 CP payments per month with four $150 sales purchased using a rewards debit card per day for thirty days. How much will each pricing model’s credit card processing costs affect you?
Cost of Processing $18,000 per Month
4 sales per day x $150 per sale x 30 days = $18,000
| Stax* | Square | Tiered Services Provider |
|---|---|---|
| $306.60 | $480.00 | $442.20< |
Say you take payments through online invoices or over the phone. Your business keys in three $500 sales per day for a total of $45,000 per month in CNP processing. How much would this cost your business?
Subscription vs Markup Pricing Scenario 2:
Cost of Processing $45,000 per Month
3 sales per day x $500 per sale x 30 days = $45,000/month
| Stax* | Square | Tiered Services Provider |
|---|---|---|
| $974.70 | $1,588.50 | $1,535.40 |
*Interchange is set by the card associations like Visa and Mastercard and is a required cost for taking credit cards. The exact interchange rate for each transaction is affected by dozens of factors. Interchange can be less than 1% for certain in-person debit cards and over 2.7% for some keyed-in rewards credit cards.
For these examples, we averaged a number of common interchange rates and applied 1.65% for card-present transactions and 2.15% for card-not-present purchases.
What is a good rate for credit card processing?
So what is a good rate for credit card processing? Whether you’ve experienced percentage markups, tiered rates, or other programs designed to inflate profits for the payment processing vendor, there is a better option for your business. Checking your effective rate (the total processing fees divided by total sales volume on your payment processor’s statement) is one of the quickest ways to discover if you’re paying too much for your merchant account.
The average effective rate is around 2.75% – 3.25% however, certain processors and transaction methods can end up charging costs of up to 5% through a combination of high rates, hidden fees, and expensive equipment and leases.
Reach out to Stax for a consultation today.
