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What are transaction fees?

What are transaction fees?

Aug 21, 2023
Checkout.com

A transaction fee is the payment that a business must make for each customer transaction that’s processed online. The specific amount of the transaction fee is determined by the chosen service provider.

The transaction fee imposed by your selected payment processor can be calculated either as a percentage of the transaction amount or as a fixed additional charge.

For instance, if you accept a payment of $50, the transaction fee might range from 0.5% to 5%, resulting in a fee of $0.25 to $2.50. Alternatively, it could be presented as a percentage accompanied by an additional charge, such as 2.5% plus $0.30.

This page will explain everything your business needs to know about transaction fees, including the different types and how they’re calculated.

What types of transaction fees exist?

There are many types of credit card transaction fees that your business needs to consider, including:

Card scheme fees

Card scheme fees are like membership fees that banks pay in order to join a payment network, such as Visa, Mastercard or American Express. These fees are applicable to any financial institution that can issue debit or credit cards to its customers.The charges include network dues, clearing fees, assessment fees, cross-border fees and settlement fees. These fees are fixed and non-negotiable.

Gateway fees

Payment gateway fees are the charges incurred by enabling online payments through a selected payment gateway on a website or app. These charges are calculated as a percentage of the online transaction amount, and vary based on the specific online payment method that the customer uses.

Interchange fees

The interchange fee is a payment card industry term referring to the fee exchanged between banks for the processing of card-based transactions. Typically, for sales or service transactions, it represents the fee that a merchant's bank pays to a customer's bank.

Acquirer fees

Acquirer fees, also known as the acquirer markup, is the payment made to the payment service provider that offers acquiring services to merchants, whether for card-present or card-not-present payments. Unlike interchange and card scheme fees, the acquirer fee is frequently customized in collaboration between the merchant and their acquirer or payment service provider.

International transaction fees 

A foreign transaction fee is charged by a credit card issuer for transactions conducted abroad or with foreign merchants. These fees usually range from 1% to 3% of the transaction value and are paid by U.S. travelers in U.S. dollars. Online purchases made with international vendors may also be subject to these fees. 

Some banks or credit card issuers now provide waivers on these fees or offer fee-free cards to eligible customers. It's important to note that foreign transaction fees are distinct from currency conversion fees and may be added on top of foreign transaction charges.

Payment method specific fee

These fees are specific to certain payment methods, such as mobile wallets or alternative payment providers, which may have their own transaction processing charges separate from traditional card-based fees.

Learn more: What is the ISA fee?

What are transaction fees for merchants?

When a customer pays with a credit card, your business incurs a transaction fee involving multiple parties, which usually means your business has to pay at least two types of fees.

You first need to pay the interchange fee, which is charged by the credit card company for each transaction. It consists of a small percentage of the transaction amount along with an additional charge per transaction. The specific percentage varies based on factors like the type of credit card, card issuer, nature of the purchase, and transaction amount.

Second, the merchant service provider – which could be the merchant bank or an authorized independent sales organization – applies an additional charge. This fee is also a percentage of the transaction and may include a fixed amount per transaction.

Read more: What are per-transaction fees?

Transaction fees examples

In most cases, your business will need to pay a small fixed fee ranging from $0.20 to $0.30 for each credit card payment, along with a percentage fee ranging from 0.5% to 5.0% on top of that.

Let’s say your business processes a $100 transaction from a customer. This is what you could end up paying: 

  • The lowest fee in this scenario would amount to 0.5% of $100 plus $0.20 $100, resulting in a total fee of $0.70
  • On the other hand, the highest fee would be 5.0% of $100 plus $0.30, making a total fee of $5.30
  • A median transaction fee of 2.75% of $100 plus $0.25 would equal $3.00.

As demonstrated, card fees can differ significantly based on factors such as the monthly transaction volume, transaction value, type of fee, fixed fee amount, and percentage rate.

Learn more: What is a void transaction?

How to calculate transaction fees?

Different card and account providers utilize various approaches to calculate their transaction fees. Generally, there are two primary methods:

Flat fee: The account provider imposes a fixed payment processing fee for each transaction, regardless of the transfer amount.

Percentage fee: The account provider deducts a percentage from the transferred funds, typically around 2-3%.

When it comes to percentage fees, your service provider might also charge a flat fee in addition to the percentage, or as a minimum fee for very small payments or transfers.

These two methods exhibit significant differences. If you engage in numerous small credit card transactions, the cumulative effect of individual fixed fees could result in higher costs. On the other hand, if you conduct a few large transactions, the limited number of flat fees is likely to be considerably lower than a 2-3% fee based on the total transfer amount.

Blended Pricing vs. IC++ pricing for credit card fees

When a customer makes a card payment, different fees are exchanged between your business and your payment service provider (PSP). The PSP may offer a specific pricing model, which will affect how the fees are presented to your business.

Blending pricing model

In a blended pricing model, all the processing costs linked to each transaction are combined into a single fee known as the Merchant Service Charge (MSC). This MSC includes interchange fees, scheme fees, and markup fees, all blended together and presented to you, the merchant, as a fixed percentage.

Interchange++ pricing (IC++)

Interchange++ is a pricing model commonly used in Europe and North America, available for payments made via Visa and Mastercard. It stands out for its transparency, providing a comprehensive breakdown of your expenses. 

Unlike the blended model, it breaks down all fees associated with each transaction into three components:

  1. The Interchange fee, directed to the card issuing bank.
  2. The scheme fee, which goes to Visa or Mastercard (first +).
  3. The acquirer fee (second +)

How transaction fees work at Checkout.com

At Checkout.com, we apply different fees depending on the products and types of payments you’d like your business to accept, giving you flexibility over your transaction fees. 

For card processing, we offering Interchange++ pricing that gives you a comprehensive breakdown of your various fees. For alternative payment methods, such as iDeal and SOFORT, we apply a gateway fee and a payment method specific fee.

No matter which type of transaction fee we offer your business, you’ll always benefit from tailored and transparent pricing, with no hidden or surprise fees. To understand exactly how your business may be charged, contact our sales team for accurate information.

Read more: Like-for-like settlement

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August 21, 2023 14:43
August 21, 2023 14:43