What Are Per-Transaction Fees?
A per-transaction fee is an expense a business must pay each time it processes an electronic payment for a customer transaction. Per-transaction fees vary across service providers, typically costing merchants from 0.5% to 5% of the transaction amount plus certain fixed fees.
Key Takeaways
- A per-transaction fee is an expense that businesses pay a service provider each time a customer payment is processed electronically.
- The per-transaction fee can vary depending on the service provider but usually ranges between 0.5% and 5% plus certain fixed fees.
- Merchants partner with merchant acquiring banks to set up the electronic payment process and the deposit account for the funds.
- A per-transaction fee usually consists of an acquirer fee and a processor fee.
How Per-Transaction Fees Work
Per-transaction fees are required of the merchant from a few different entities in a transaction. Merchants partner with merchant acquiring banks to facilitate all of the communications in an electronic payment transaction.
Merchants also set up a merchant account with the acquirer, which serves as the merchant’s primary deposit account for funds from each transaction. A merchant who receives a lot of electronic payments will rely heavily on the merchant acquiring bank, making the terms of the merchant account agreement an important factor for a merchant.
Components of Per-Transaction Fees
Merchants pay a variety of fees related to the acceptance of electronic payments. Some fees will vary while others are fixed. Merchants have a wide range of acquiring banks they can partner with for electronic payment services. Each acquirer has different fee structures and service capabilities allowing merchants to choose the acquirer that is best for them.
Acquirers will typically charge per-transaction fees as well as a monthly fee for the management of a merchant account.
The second component of a per-transaction fee is the fee paid to the network processing company. Merchants establish the types of branded cards they can accept at their store based on the processing network of their merchant acquiring bank.
Payment card companies such as MasterCard, Visa, Discover, or American Express each have their per-transaction fees that will be charged to the merchant in a transaction. Payment card company fees, also called wholesale fees, are usually a fixed fee per transaction. Some acquirers may be able to negotiate lower wholesale fees through network relationships with processors.
Acquirer and processor fees are the main components of a comprehensive per-transaction fee. In some cases, other fees for a merchant may also apply. One added cost merchants might encounter is a terminal fee which is a per-transaction fee charged to a terminal provider such as Square for the use of a terminal in an electronic payment card transaction.
Per-transaction fees are the reason why some merchants impose a minimum that customers must spend if they want to pay with a credit or debit card. For example, merchants may set a $5 or $10 minimum for credit card and debit card transactions. Smaller merchants who are less able to absorb excess card fees are more likely to impose these minimums.
American Express, Visa, MasterCard, and Discover all charge approximately the same fees, with slight variations that amount to cents in some of the components. Generally, Visa charges the lowest total amount. This depends on the cards used as well, as cards with rewards often have higher fees.
Merchant Account Statements
Acquirers will detail a merchant’s total monthly costs and transaction activities in a monthly statement. Generally, service provider transaction fees will be delineated in one of three categories: interchange, tiered, or subscription.
The interchange section lists the payment card company fees and service provider fees separately on the merchant’s monthly statement. The tiered section assesses different fees based on the transaction type, such as in-person versus online. Subscription fees are also assessed on a monthly or annual basis.
How Can I Avoid Transaction Fees?
You can avoid transaction fees by paying for a purchase with cash. However, if you are using a credit card, there will be a per-transaction fee charged to the merchant. If the merchant does not want to pay the fee, they may raise their prices so customers would effectively be subsidizing the fee.
Who Pays Credit Card Transaction Fees?
A credit card transaction fee is charged to the merchant or vendor, not the cardholder. Businesses pay the card transaction fees to the credit card issuer or payment processor company.
Can Businesses Charge a Credit Card Surcharge?
A merchant is responsible for paying a credit card transaction fee, and some merchants charge a credit card surcharge to recoup this expense. However, in some states it is illegal for merchants to charge a credit card surcharge.
The Bottom Line
Per-transaction fees are charged to merchants, not consumers, but you may be affected by these fees if the merchant adjusts prices to recoup their expenses. Merchants, especially smaller businesses, may also set minimum purchase amounts if you are using a credit card so that they do not lose money on a transaction.
FAQs
Transaction fees are charges incurred when you make financial transactions, such as buying products online or transferring money. They're the costs associated with processing and securing these transactions and they're normally collected by payment processors or merchant banks.
What are the typical transaction costs? ›
A typical transaction cost is a calculation of the cost of a transaction, made using a typical spread. The transaction costs are calculated like this: 1% fee + the spread price of the cryptoasset, calculated at the time of the execution of the order.
What are transactions costs defined to be the costs of? ›
Transaction costs are defined as the costs beyond the cost of the product or service that are required to exchange a product or service between two entities (Sarkis et al., 2011).
How do you calculate a transaction fee? ›
Effective Rate
- So let's say your monthly volume is $10,000 with an average ticket size of $50:
- Divide the transaction cost by your monthly volume, and multiply that by 100:
- 0.50% is your approximate rate for transaction fees. ...
- 2.65% is your total transaction rate.
Transaction costs are expenses incurred when buying or selling a good or service, outside the cost of the good or service itself. Transaction costs represent the labor required to bring a good or service to market or to connect a buyer with a seller.
What is the cost per transaction? ›
The cost per transaction is a financial measure that is typically used to compare overall operating costs among applications, database servers, or hardware platforms. You can measure the cost per transaction. To measure the cost per transaction: Calculate all the costs associated with operating an application.
What are the components of transaction cost? ›
Williamson defines transaction costs as a cost innate in running an economic system of companies, comprising the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales.
What are examples of transaction costs? ›
For instance, time, travel charges, and labor are transaction costs. A firm's expertise or legal authority could also be considered a transaction cost.
How do you calculate transaction cost? ›
Based on the estimation method, the transaction costs are calculated by adding half the spread of the corresponding PRIIP asset group to the transaction price.
What type of expense is transaction fee? ›
Key Takeaways. A per-transaction fee is an expense that businesses pay a service provider each time a customer payment is processed electronically. The per-transaction fee can vary depending on the service provider but usually ranges between 0.5% and 5% plus certain fixed fees.
Final answer: Transaction costs include all resources expended in an economic exchange or decision-making process. The best definition among the given options is the cost of participating in a market, which covers various aspects of market activities.
What is a transaction cost classified as? ›
Transaction costs are normally defined as search costs, negotiation costs, and costs incurred from having a CDM project approved, including costs of monitoring, validation, registration, and enforcement of the contract.
How to calculate average cost per transaction? ›
Analyze cost per transaction: Divide the total cost by the number of purchase transactions processed over a specific period (e.g., monthly or annually). This calculation provides the average cost per transaction and helps you evaluate the efficiency and cost-effectiveness of your procurement processes.
What is the 2% transaction fee? ›
Depending upon the type of credit card you use, you might end up with an additional 2% on top of your network fee. This charge can be high, depending upon the issuing bank, and is calculated collectively with your conversion rate to reflect your statements more simply.
How do you calculate per transaction? ›
Let's say you have an ecommerce store and in a given month, you sold a total of 500 units through 100 transactions. Units per Transaction = 500 units / 100 transactionsUnits per Transaction = 5 units per transaction.
What is the fee of a transaction? ›
A transaction fee is a charge that a business has to pay every time it processes a customer's payment. The cost of the transaction fee will vary depending on the service used. Create and send professional invoices with SumUp Invoices.
Why was i charged a transaction fee? ›
They're basically the cost that your payment processor charges you in order to facilitate the transaction. When it comes to transaction fees, most payment processors charge a percentage of the transaction, but other times they charge a flat rate.
Do you have to pay a transaction fee? ›
You can avoid transaction fees by paying for a purchase with cash. However, if you are using a credit card, there will be a per-transaction fee charged to the merchant. If the merchant does not want to pay the fee, they may raise their prices so customers would effectively be subsidizing the fee.
Are transaction fees illegal? ›
Merchants can impose a surcharge as long as it doesn't exceed the cost of the merchant's processing fee. Merchants may offer discounts for payment by cash, check or other methods unrelated to credit cards. There is no prohibition for credit card surcharges and no statute on discounts for different payment methods.
