When choosing a merchant services provider, you’ll inevitably have to choose between a subscription model and a markup model. The terms “subscription” and “markup” refers to the types of monthly or annual fees you must pay as a merchant. While subscription payment processing has become extremely popular in recent years, it’s not the best payment solution for every business.
Subscription vs Markup – What’s the Difference?
The main difference between subscription and markup pricing models is that subscription models involve paying a monthly fee whereas markup models involve paying a percentage of each transaction.
If you choose subscription payment processing, you pay a flat monthly fee for merchant services and a very small per-transaction fee for each sale. If you go with a markup pricing model, you pay a percentage of each sale, which includes the card network and issuing bank fees as well as a markup that goes to the payment processing company. Because this model is percentage-based, the fee amount could vary wildly from one transaction to the next.
Subscription Payment Processing
The subscription pricing model has become extremely popular among merchants seeking to simplify their payment processing services. In a subscription payment processing model, you might pay €100 per month for payment processing. Whether you process 10 transactions or 500 transactions, the monthly rate is the fee.
This model is becoming popular because people tend to associate simplicity with value. And while it’s true that subscription payment processing can be an excellent value, it’s not necessarily the best option for every business.
Consider this: If you have a small business that nets €500 per month and you pay a €100 flat rate for your merchant services, you’re losing 20% of your revenue to merchant services (actually more when you consider additional fees). But if you net €5,000 per month and pay the same €100 fee, you’re getting a real bargain. So it all depends on your business.
Subscription models are typically offered by merchant service providers that work with banks on your behalf. They still have to pay a markup to the bank, but they simplify your own contribution by allowing you to make flat-fee payments.
Markup Payment Processing
This is the more traditional payment model. A markup refers to a percentage of your sale. So if you go with a markup payment processing provider, your monthly merchant fees will typically fluctuate from one month to the next. For example, Block (formerly Square) charges between 2.6% and 3.5% for each transaction, plus a per-transaction fee.
If you’re paying a 2.6% markup and you process €5,000 worth of transactions in a given month, you would be on the hook for €130 in merchant fees for that month. Note that this number is very close to the €100 subscription fee noted in the previous example. That’s why it’s so important to crunch the numbers carefully when deciding on a payment processing plan. Either type of plan may be in your best interest, but the plan that looks the best on paper isn’t always the bargain you think it is.
Other Variables to Consider With Subscription vs Markup
When deciding between subscription vs markup payment processing, it’s not enough to look at the base rate. You also have to factor in any additional fees and stipulations that are imposed.
Assessment and Interchange fees
The interchange rate is determined by the card associations (Visa, Mastercard, etc…) and goes to the issuing bank. It’s a required cost for credit card processing and can vary from around 1% to 3% of each transaction. The card associations also charge assessment fees, which represent a much smaller percentage of each transaction and go towards the card networks’ operating costs.
The interchange rate for online transactions tends to be higher than that for in-person transactions because online sales are more vulnerable to fraud. If you go with subscription payment processing, you might still be charged interchange and assessment fees for every transaction. That’s one way in which subscription payment processors recoup their own markup costs.
If you go with a markup payment processor, the interchange rate will often be factored into the markup itself, so you won’t always encounter it as a separate charge. Still, it’s always important to look carefully at every fee that’s imposed when you compare different payment processors.
A per-transaction fee is common with both markup and subscription payment processors, and it’s charged in addition to the markup or monthly subscription fee. A typical transaction fee can range between €0.07 and €0.45, according to 2023 data. So if you see a payment processor that charges 2.6% + €0.07, you’re paying a 2.6% percentage fee plus a €0.07 transaction fee. The transaction fee typically remains the same for each sale.
So—using the fee schedule above—if you complete 50 transactions and earn €5,000 in revenue in a given month, you would pay €165 in fees for the month. There are other variables to consider, of course. For example, card-not-present transactions are sometimes subject to a higher transaction fee.
Flat-Rate, Interchange Plus, and Tiered Markups
When dealing with markup payment processors, you’ll find that providers offer flat-rate, interchange plus, or tiered pricing.
With a flat-rate service, you pay the same amount no matter what. The 2.6% transaction percentage applies for every transaction whether it’s on your website, in person, or over the phone.
With interchange plus, you pay the exact amount charged by the card network and issuing bank plus a set markup percentage to the payment processor. In this model, the transaction fee will be different for every transaction depending on a number of variables. However, you can often save money compared to flat-rate pricing.
Tiered pricing models bundle transactions into groups based on the level of risk. For example:
- 1.7% markup for qualified transactions (card-present transactions, such as swiped and chip-inserted debit cards)
- 2% markup for mid-qualified transactions (for the majority of transactions, including those that are manually entered on a website)
- 2.5% markup for non-qualified transactions (for card-not-present transactions, international transactions, and other transactions that have a higher likelihood of fraud)
The actual terms of each tier are determined by the merchant services provider. If you manage an e-commerce business, you’ll usually end up paying more with this type of service because you’ll rarely if ever get the qualified rate. Please note that some processors include the base costs in their tiered rates whereas others charge the tiered rate in addition to the base costs. It’s essential to clarify this point before signing on the dotted line.
In a majority of cases, you’ll just be responsible for the markup/subscription fee and the per-transaction fee. However, always read the fine print, as some providers will impose additional merchant account fees depending on the services provided:
- POS software and hardware fees: If you use a point-of-sale system, your payment processor will usually charge additional monthly fees for the software and/or hardware rentals (terminals, card readers, etc…).
- Payment gateway fees: You may be charged an additional fee for the use of a secure payment gateway, particularly if the gateway is being sold as an add-on service alongside your merchant services.
- PCI compliance fees: PCI compliance is required for all businesses that accept credit cards online. Some payment processors will charge a fee for PCI compliance audits to help you avoid legal liability (though many other processors will provide this service for free).
- Monthly support fees: Some payment processors charge a small monthly support fee for customer support, monthly statement preparation, and other ancillary services.
- Batch fees: Also called batch header fees, these charges are imposed for the settling of transactions at the end of each day.
- Chargeback fees: If a customer initiates a chargeback (forces a refund directly through the bank), you’ll usually be charged a type of penalty known as a chargeback fee. It’s important to keep your chargeback rate low, as too many of these disputes can jeopardize your merchant account.
- Early termination fees: If you agree to a contract period for your merchant services (such as 12 months), you may be charged a fee for terminating your contract before that time.
These types of fees may be present regardless of whether the service is subscription or markup-based, so always shop around for a provider that’s transparent and fair.
Subscription vs Markup Payment Processing—Which Is Better?
Subscription payment processing may be best if:
- You have a high sales volume and are able to secure a low monthly membership rate.
- You’re looking to simplify your merchant payments and ensure that there are no unexpected surprises at the end of the month.
- You’re combining your payment processing, payment gateway, and other merchant services into a single straightforward plan.
- Your sales volume isn’t in danger of hitting any monthly volume caps.
- You want to avoid contracting with the banks directly.
Markup payment processing may be best if:
- You have a low sales volume that doesn’t justify the cost of a monthly membership fee.
- Your sales fluctuate dramatically from month to month.
- You’re able to score an extremely low rate.
Count the Cost, Including Fees
The most important thing when choosing between subscription and markup payment processing is to do the math before signing up. What looks like a bargain upfront may actually be poor value when you factor in all of the fees.
The most cost-effective option for your business will ultimately depend on the volume and value of the transactions you process every month and the nature of those transactions (national or cross-border, card present or card-not-present, and so on). Calculate your monthly costs using both of these methods and it should become clear which option is best for you.