We would also start asking about free lunches. What actually exists is creative marketing.
Independent Sales Organizations (ISOs) that resell credit card processing often market themselves as “membership clubs” with no markup on processing fees. In reality, every ISO includes a markup, known as the Discount Rate, on top of the base costs. Without that markup, they would essentially be providing the service for free, which clearly is not sustainable.
There are three primary methods, or combinations of them, for applying the Discount Rate. Notice which one is actually fixed, and which one is called “flat” but is anything but.
The fee is tied directly to the sale amount. On a $100 sale at a 0.05% discount rate, you pay exactly 5 cents. No bundling, averaging, or guessing. The fee is what it is, based solely on your sales.
Truly fixed cost
A fixed amount per transaction, so the effective percentage changes with every sale. An 8-cent fee is 0.08% on a $100 sale, but 0.16% on a $50 sale. It is sometimes called “flat rate processing,” yet the percentage impact shifts with transaction size, so it is anything but fixed.
Varies by sale size
Generally the least advantageous. It is like paying one fixed price, say $10, for items worth anywhere from $5 to $12. Whether the item is worth $5 or $12, you pay $10. It sounds appealing, but you overpay on lower-value transactions. For it to work in the store’s favor, most items have to sit closer to $5, with very few near $12.
Usually the worst
Many processors and ISOs promote these models as the simpler way: just pay this flat fee over cost. But how do you even know what it truly costs? Merchant processing is non-regulated, which allows processors to charge anything they want, including inflating interchange.
In practice, the pricing structure is much more complex. A percentage fee, say 0.05%, stays constant regardless of your total volume or individual transaction sizes. Flat-rate models typically add a small per-transaction fee, which makes the cost move. The flat fee rises and falls with your processing volume. If you are lucky, one month your fee and your volume line up at a reasonable price. The next month you are $100 into the next bucket, which drastically changes your effective rate. Again, there is nothing flat about this system.
Ultimately, merchant processing is much like any other commodity: its primary differentiator is cost. Regardless of how ISOs market themselves, you are essentially paying for a data line that transmits your transaction details to networks such as Visa, Mastercard, Discover, and American Express.
Ethics play a crucial role beyond pricing structures. Marketing terms like “Zero Markup,” “Flat Rates,” or “Wholesale Cost” can be deceptive and make people question everything. It is worth considering whether a provider’s claims align with transparent business practices, especially when they have access to your business checking account.
Read the whole file, not just the rating
Checking reviews and ratings, such as those from the Better Business Bureau, is essential. But do not just look at the rating, read the entire file. One of the larger ISOs in the market has an A- rating and is not even accredited, while another has an A+ rating despite receiving hundreds of complaints.
Some will try to make things look simple on the surface, but the underlying structures and fees are complex. Understanding exactly how fees are calculated, and verifying your provider’s ethical standards, is key to making an informed decision.
Don’t hear what I’m not saying. I am not saying this is a bad way of doing business. It can be a good one, if you fit the sweet spot in the brackets. But keep in mind that if your credit card processing volume goes up or down, it can kick you out of the sweet spot and into a very bad spot. So tread carefully.
And to be clear, just because an ISO or credit card processor seems to be up for straight-shooter of the year, it does not mean they are the good guys. I heard an old saying growing up: “there is more than one way to skin a cat.” Don’t hate me for saying that, I think it is a terrible thing to say. But the analogy is very apropos here. You can overbill a merchant more ways than I can even count, and the list is growing daily.
The post How Can I Have the Lowest Discount Rate and the Worst Deal will give you more insight on the issue. So will my book, The Great American Heist: How Credit Card Processors Silently Siphon Off Businesses’ Profits. Another great resource is our How to Read Your Merchant Processing Statement.
Prefer to talk it through first? Schedule a call to see if your credit card processor is overbilling you.
If you want a model where you can actually see what the processor is making, it exists and it has a name: interchange plus pricing.
Under interchange plus, the processor passes interchange and the network assessments through at cost, then adds a stated markup on top, quoted as a percentage plus a per transaction amount. Something like interchange plus 0.20% and 10 cents. The markup is a number on a page rather than something you have to reverse engineer.
That is the whole advantage, and it is a real one. Every other model bundles the processor’s margin into a single figure, which means you cannot separate what the networks charge from what your provider charges. Interchange plus pricing keeps those two things apart, which is precisely why some providers are reluctant to quote it.
Being on interchange plus does not by itself mean you are being billed fairly. There are three common ways the model gets undermined.
We have documented exactly this happening to a merchant who negotiated 7 basis points and ended up paying 58, with every fee disclosed and every promise kept. It is worth reading: when your processor promises to make things right.
Two requests, both reasonable, and the response to them tells you most of what you need to know.
A provider who is genuinely passing interchange through has no reason to refuse either. A provider who hesitates has told you where their margin comes from.
A pricing model where the processor passes interchange and assessments through at cost and adds a stated markup on top, quoted as a percentage and a per transaction amount. It is the only common model where the markup is a number you can actually read.
No. Zero markup is not a real thing, because a processor with no markup would be working for nothing. Interchange plus is the honest version of the same idea: the markup still exists, but it is disclosed rather than buried.
Usually for established businesses, and not always for very small ones. Flat rate bundles everything into one number, which can be simpler and occasionally cheaper at low volume. As volume grows, the bundling almost always costs more than a disclosed markup would.
By padding the interchange half. If the interchange figure passed through to you is inflated, the disclosed markup looks small while the real cost sits in a number you assumed was fixed. Ask to see interchange categories, volume per category and fees per category.
Ask for the markup stated as a percentage plus a per transaction amount, in writing, and ask for a statement format that shows interchange by category. If either request is refused, that tells you what the pricing depends on.
Your markup stays fixed. Interchange itself moves when the networks update their schedules, usually twice a year, so your total cost moves with it. That is normal, and it is also the excuse used for increases that have nothing to do with the networks.
Find out whether your processor is overbilling you, and by how much. The audit is free: no strings, no credit card, nothing to sign.
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If Bank of America handles your credit card processing, go and pull your last three statements before you read any further. We have watched accounts at that bank move from four basis points to over forty, and the businesses paying it were told the new
Do you have a “Risk Fee” on your credit card processing statement?
No? Good. You are luckier than a lot of merchants, and you should keep reading anyway.
