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What's The Difference Between A Flat Rate and A Variable Rate?

Flat Rate Fee

Variable Rate

Flat rate and fixed per transaction charges for every client; no evaluation process

Evaluation process to determine best rate and per transaction charge for a business

No possibility for change or better rate

Always potential for better rates and fees in the future

Merchants have indirect agreement with bank through third party processors contract with bank

Merchants have direct agreement with bank, which allows these merchant processors to negotiate the best rates and fees for them.

Profit from merchants by overcharging

Profit from banks by promising volume, not by overcharging their merchants

Cover small account fees but overcharge you for this convenience

Merchants pay small account fees and flat interchange+ rate—but they have more than enough to cover all fees with extra savings gained each month

Merchants give hundreds to thousands of dollars a month away for the “convenience” of not paying small account fees

Merchants save hundreds to thousands of dollars each month with lower variable rate and fees determined by initial evaluation process.



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.