Before You Swipe and Dip: Choosing Your First Payment Processor

What to Look For, What to Avoid and When to Switch


Starting a business is exciting and scary, and it seems like there’s an endless amount of things to learn.


One of the most confusing topics for business owners is choosing a credit card processor: what pricing model is right, which company is the best, when should you switch to a different processor?


Whether you’re brand new to running a business or a seasoned owner stepping into the world of accepting credit cards for the first time, here’s what you need to know about choosing your first payment processor and the signs that it’s time to graduate to a new one.


It’s Not About “Rates”


Many businesses make the same mistake the first time, or even the first few times, when shopping for a processor: they focus on “rates.” But rates are only one factor in the processing equation and if you shop based on who has the lowest “rate” you’re setting yourself up for headaches, confusion, and overpaying.


Instead, start by evaluating your situation. Answer these two questions:


  • What is your average transaction total?
  • What is your average monthly credit card volume?


It’s okay if you don’t know exact numbers (a ballpark estimate will work) so write down your answers or keep them in mind as you move on to the sections below.


Understanding Processing Costs


There are three components to credit card processing costs: interchange, assessments, and markup. Interchange and assessments are non-negotiable; you can think of them as the “wholesale” cost of credit card processing. Interchange goes to the banks that issue credit cards to customers, while assessments go to the card brands, such as Visa and MasterCard. As with anything in business, the closer you pay to wholesale, the better.


Markup is the only part that’s negotiable (everything else stays the same from one processor to the next) and is what the processor charges (as profit) to handle your transactions for you.


How processors charge the wholesale costs and markup is determined by pricing model, with the three common pricing models known as flat rate, interchange plus, and tiered. As tiered pricing is the most expensive, we don’t recommend it. This article will instead focus on the other two pricing models (flat rate and interchange plus) which are superior for businesses, whether you’re choosing your first or your fifth processor.


With those basics in mind, let’s get back to your answers to the questions about your business.


If your average transaction total is less than $10 or if your average monthly volume is less than $3,000 – $5,000


If this is you, you’ll want to investigate flat rate credit card processing solutions. Flat rate credit card processing is what it sounds like – the processor charges you a flat rate to process credit card transactions on your behalf. A typical flat rate might be 2.75 percent or 2.9 percent + 30 cents.

With flat rate processing, all of the costs (interchange, assessments, and markup) are included in the flat rate. This makes it look simple but is only competitive for businesses that fit the profile described. Additionally, it isn’t possible to see what the processor’s markup is when you’re on a flat-rate model, so you can’t see how close you are to wholesale.

Square, Stripe, and PayPal are examples of flat rate processing companies.


If your average transaction total is more than $10 and your average monthly volume is greater than $3,000

If this is you, you’ll want to look for interchange plus credit card processing. Interchange plus pricing is often quoted as the markup only, such as “0.10 percent + 10 cents on top of interchange” or “interchange plus 0.10 percent + 10 cents.” That means that the processor is only charging you 0.10 percent and 10 cents on each transaction as its markup.

Other costs that you’ll be charged are the wholesale costs (the non-negotiable charges), which you’d pay with any processor. When you’re charged on interchange plus processing, you’ll see the wholesale cost and the markup separately, so you can tell how close to wholesale you’re paying.


When to Switch


Businesses that are just starting out grow over time. Average transaction amounts and monthly volume may both go up as you gain new customers and increase sales. It’s perfectly fine to start out with a flat rate processor and then switch as your business grows. Here are some things to keep in mind about switching:


  • Consider switching when your average ticket and monthly volume go up and stay up
    This is particularly true if you use a flat rate processor. If you start processing more than $3,000/month in credit cards and have an average ticket above $10, consider switching to a more competitive interchange plus processor.
  • Keep a close eye on contracts and termination fees
    Some processors use automatically renewing contracts, so be sure you know when your current agreement is up and provide the required notice to the company. (It’s a good idea to send cancellation notification by certified mail.) If you want to end your contract early, you may have to pay an early termination fee.
  • Don’t switch based on “low rates”
    Remember from the beginning of this article, it’s not about “rates.” To get the best deal, you want to pay the lowest markup over the wholesale cost. When talking to the processor and getting a quote, the rep should be able to tell you the markup. If they can’t, or won’t it may be best to consider another processor.


Outside of that if you are in a business that is using cash and check for transactions stick to it and avoid a merchant account all together. Cash Is King 😉