Get a 0% Interchange-Plus Markup with Membership Fee Pricing

So we’ve talked about tiered pricing and we’ve talked about interchange-plus pricing. These are the two most popular pricing models, and you probably already know – if you’ve read our articles – that interchange-plus pricing is almost always a better deal and a most honest arrangement for merchants. But there’s a new pricing model on the rise: the flat fee plus interchange system, which I tend to call membership fee pricing. It’s a variation of interchange-plus, but is quite different. Instead of charging the typical maintenance fee, percentage markup and per transaction fee, this new breed of provider just charges a monthly membership fee plus a per transaction fee, which is ostensibly a 0% markup. These providers will normally offer a few different plans, each with different value-added services. As a rule, the plans with higher membership fees will have a lower per transaction fee, thus providing better value for merchants who process more transactions each month. It’s an interesting concept, but here’s the real question of the hour: Can the membership fee pricing structure for payment processing compete with standard interchange-plus markups? The short answer is yes, yes they can. I’ll show you how.

Where to Find Membership Fee Pricing for Payment Processing

I first saw this type of pricing arrangement from Heartland Payments, which offers a $65 per month plus interchange plan for low-volume merchants (under $50K per year). If you read the review, you’ll see my math describing why this is not actually a good deal for most low-volume merchants. Still, it was an interesting proposition to me. Years later, services like Payment Depot (see our review) popped up actively advertising this type of pricing model. Payment Depot includes value-added services to make the plans even more alluring, along with nixing early termination fees. This leads to some serious savings and value for the broadest spectrum of merchants possible.

Why Does a Flat Fee Plus Interchange Make Sense?

Here’s what I make of this pricing structure. Most processors charge you a percentage fee, which means that larger transactions cost merchants more to process. But, when you think about it, larger transactions don’t necessarily cost the provider more to process. Having to deal with a thousand one dollar transactions is, in reality, far more expensive than dealing with one $1000 transaction. So why do most processors charge a percentage markup on transactions? As far as I can tell, there are two reasons:

1. Because there is a greater risk involved with larger transactions. If a customer disputes a $1000 transaction and you decide to skip town on the bill, the processor is left with the task of paying it for you and taking you to collections. It’s much more likely to have one $1000 transaction go sour than one thousand one dollar transactions. For a greater risk, some would say, a greater reward is requisite for the company footing that risk.
2. Because this is just “How It’s Done,” and it allows the processing company to make a larger profit on businesses that are processing high dollar volumes, even if they have comparatively few separate transactions. In most cases the businesses with high dollar volumes are willing and able to pay more than businesses with small dollar volumes, so it makes some sense to charge these businesses more for their processing. Also, the card networks charge a percentage fee and a transaction fee (via interchange/assessments), so it just makes intuitive sense for the processor to do the same.

There is merit to these rationales, but card payment processing providers like Payment Depot are proving that it’s possible to change this protocol. By paying a flat fee for account maintenance and access to the card networks, the playing field is leveled (to use Payment Depot’s tagline). A transaction fee covers the increased cost of dealing with a large volume of transactions, but doesn’t penalize merchants for processing large tickets. While processing a larger dollar volume with a low transaction volume will produce the most savings with this type of pricing plan, even small-ticket merchants can find solid value depending on their overall dollar volume.

Is Membership Fee Pricing the Future of Payment Processing?

The question of sustainability remains, of course, since providers like Payment Depot are relatively new on the scene. But, personally, although I am always cautious and skeptical, I see great potential in this pricing model. If these companies are making enough profit to say afloat without charging a percentage markup, then this could indeed be a revolutionary change for pricing in the payment processing sector. Time will tell, but for now I’m excited to see how things go, and I hope that merchants will give this pricing model a shot. If you do, please report back to me! I’d love to hear your experience. What do you think? Comment with your insights.