Last Updated: December 2, 2020

Credit card processing is remarkably complicated. There are hundreds of factors that go into determining the rates of each transaction. And there are many different options for how you structure your rates. Any small business must find the cheapest solution for their store.

For Square users, this just got a bit more difficult. Square processing rates changed from a flat 2.75% of each transaction to 2.6% plus a $0.10 fee. In an effort to “better align [their] rates with industry-wide transaction costs,” the new rates will go into effect November 1, 2019. Though the percent taken from each transaction actually diminished by .15%, the seemingly innocuous 10 cent fee is what quietly skyrockets the rates. More on that below.

So, let’s look at what this price increase means, why it will cost businesses much more than it seems, and how to find a great processing solution.

What Square’s Processing Changes Means

Though the change might seem inconsequential, it will be entirely otherwise for many small businesses.

The rate change from 2.75% to 2.6% plus the 10-cent fee makes smaller transactions much more costly.

Phoenix Knor’malle from MysticSense has personally experienced the effect of this change:

“I began using Square as my credit card processor in 2018. While I appreciate the effort to provide a slightly lower percentage on the total amount, I feel that the new fee structure unfairly targets small businesses. Charging a 10 cent fee in addition to 2.6 instead of a flat 2.75% fee means that smaller transactions are charged significantly more than larger transactions.”

For instance, a $10 transaction formerly cost the business 27.5 cents for processing. Under the new model, this will be 36 cents, a 31% increase in the rate. For $5 transactions, the former rate was 13.75 cents and is now 23 cents, a 67% increase.

The new rates only become less expensive for transactions that are at least $66.67. Unfortunately, very few retailers, coffee shops, bakeries, or QSRs have average transactions greater than this amount. Most are between $5 and $20.

Even more unfortunately, Square only recently notified small business owners of this change, making it difficult to find a cheaper solution quickly. Citing industry standards, Square’s blog post announcing the change argued that they must raise their rates to ensure that they make a profit on every transaction.

It Will Affect Your Bottom Line

This depends on the type of business you own, particularly your average transaction and your total sales volume. But let’s create a simple hypothetical to help illustrate.

A coffee shop averages $2,000 of credit card sales per day with an average transaction of $10. This means they are processing 200 transactions every day and 73,000 a year. Total annual sales are therefore $730,000.

Under the old pricing model, the coffee shop would pay the flat 2.75% of the total which comes to $20,075. Under that new processing rates the flat 2.6% comes to $18,980 plus $7,300 for the $0.10 charge with each transaction. The new total comes to $26,280, an increase of $6,205 every year.

Again, this is one example. If your businesses processes fewer transactions or has a greater average transaction value, the difference will be less. Likewise, if your average transaction is less than $10, and you have more than 200 transactions a day, this difference will be even greater.

Businesses that are most likely to be affected by this change are the very businesses that Square markets most to: coffee shops, bakeries, kiosks, delis, etc. Sadly, these businesses are also more likely to feel the financial hit of this change than others.

Infographic comparing Square's old processing rates with their new processing rates

How the Fees Are Calculated

Historically, credit card processors have taken flak for how complicated rates actually are. The number of factors that contribute to the final price for each transaction are staggering:

  • Interchange rate
  • Type of card
  • Swiped or keyed
  • Card present or online
  • Processor rates
  • Assessment fees

Many businesses become surprised because they are not aware of all of these different factors. For example, Andrew Cunningham, Founder of DailyPest was disappointed to discover the other rates involved with his processor.

“I decided to set up a Square account for some of our transactions due to their emails I would constantly receive. We signed up and were told that we would have a flat rate of 2.6% for all credit card transactions, as we were completing verification over the phone. They did not mention key-in rates (3.5%) or terminal rates to us, nor did they mention the differentiation in prices. 3.5% was far more than we had hoped to pay for processing fees.”

In the end, most transactions are assessed a fee between 2 and 4 percent. While many of the factors are out of a business’s control, there are some ways to keep certain factors from contributing to the final tally.

The Different Structures of Processing Rates

To combat a declining reputation and a prolific number of complaints, credit card processors have come up with different ways of bundling the fees. Remember, though, that the final price may be a flat rate, but the same factors go into each transaction. Below are the main ways that companies structure their processing rates.

Flat-Rate: The simplest way of assessing the fees, flat-rate structure bundles everything into one package. Sqaure’s 2.75% rate was an example of this. However, merchants don’t see the break down of each transaction. Often, the processor is taking a bigger cut of the total fee than anyone realizes.

Tiered: There are different tiers for each transaction, so the charge will vary. This is in place to ensure that the processor makes a profit every swipe or dip. The business, however, isn’t afforded any transparency.

Interchange-Plus: Arguably the most fair, interchange-plus plans pass on the interchange fee (the bulk of each final processing fee) directly on to the merchant at cost. A small fee is also attached for the processor so you know exactly how much you’re paying the merchant service provider. Square’s new model is reminiscent of this, but the 2.6% is not the interchange fee. In many cases, the interchange rate will be lower than that amount, so they’re profiting much more than the 10 cent additional fee.

Subscription: A processing subscription is another popular route because it passes on interchange costs directly. Here, instead of a per transaction additional fee, the processor charges a simple monthly rate. This is a great route for a high volume, low average transaction value sort of business like the hypothetical above.

Find the Best Processing Solution

It’s not easy to find the cheapest solution out there. The best way to do this is to shop around.

Companies like Square don’t allow this, however. In this scenario, the processor is also the point of sale solution. This forces businesses that use the POS system to also use the processing services. Though convenient and straightforward, it will cost more money.

Consider more flexible options. Filip Duz, Owner of Giraffe Window Cleaner in Dallas, TX found a more affordable solution that also came with more functionality.

“I have used Square in the past, but switched to using the processing service that comes with my CRM, Jobber. Square’s processing rates are a few basis points higher, so there is little incentive for me to use them, considering I can do lots of other tasks in Jobber in addition to processing transactions.”

And if you want even more flexibility and save several thousands dollars every year in processing costs, get a retail point of sale that works with many different processors.

In this case, you’ll be able to choose between any integrated partners that the POS offers, allowing you to shop around and find the cheapest solution on the market. Not all businesses are made the same and neither are processors. Take the time to find a solution that works for your small business.

To learn more about KORONA and our processing partners, click below. We’ll put you in touch with the cheapest solution you can find.

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