Payment processing costs
What is a payment processing fee?
Payment processing fees are charges that merchants incur when accepting electronic payments, mainly through credit and debit cards. These fees facilitate the transaction process. They vary based on factors like the payment processor, card type, and transaction nature (in-person vs. online).
Here is a breakdown of some components involved in payment processing fees:
Interchange fees: The largest portion is paid to the cardholder's issuing bank, ranging from 1.5% to 2.9% + a fixed fee (e.g., $0.10). The fee varies by card type and transaction.
Assessment fees: Charged by card networks (e.g., Visa, Mastercard) for network maintenance, averaging around 0.13% to 0.15% of the transaction volume.
Processing fees: Charged by payment processors, typically 0.5% to 1% + a fixed fee (typically from $0.20 to $0.30).
Additional charges: Include PCI compliance, monthly service fees, terminal rental fees, and authorisation fees.
Average payment processing fees
The typical range is 1.5% to 3.5% per transaction. For major networks, fees differ between in-person and online transactions. Examples include:
Visa: 1.79% + $0.08 (in-person), 2.43% + $0.25 (online)
Mastercard: 1.98% + $0.08 (in-person), 2.51% + $0.25 (online)
American Express: 2.68% + $0.08 (in-person), 3.18% + $0.25 (online)
Discover: 2.05% + $0.08 (in-person), 2.40% + $0.25 (online)
What factors affect processing fees?
The industry type plays a significant role in determining payment processing fees, as different industries have varying levels of risk and transaction volumes. High-risk industries, usually the ones prone to fraud or chargebacks, often face higher fees.
Transaction volume is another crucial factor. Businesses that handle a high volume of transactions may have the leverage to negotiate lower rates due to the economies of scale, lowering their average processing costs per transaction.
Geographical location can also influence fees, as payment processing costs vary across regions. Some areas have higher fees due to regulatory, banking infrastructure, or currency exchange considerations.
Lastly, the payment method affects processing fees, with credit card and online transactions typically incurring higher costs due to increased fraud risks and the card-not-present nature of online payments.
Am I allowed to charge payment processing fees?
Merchants can pass payment processing fees onto customers; however, they must adhere to regulations that vary by location. Knowing local laws and guidelines is essential to ensure compliance with regulatory requirements, which can help merchants avoid legal issues.
To maintain transparency, merchants should always inform customers about additional fees at the point of sale or during checkout. It helps avoid unexpected price surges and builds trust. Additionally, providing an itemised breakdown of the fees allows customers to understand precisely what they're being charged for, which can further enhance clarity and acceptance.
Credit card payment processing fees
Credit card payment processing fees are charges businesses incur when accepting credit card payments. These fees include interchange fees from the issuing bank, payment processor fees for facilitating the transaction and assessment fees paid to the credit card network. The fees typically range from 1.3% to 3.5% per transaction, with various factors influencing the exact amount.
To minimise costs, businesses can negotiate with service providers, reduce fraud risks, and choose the right fee structure. Understanding these components helps companies manage and reduce their processing fees effectively.
What are merchant fees?
Merchant fees in credit card processing refer to the various charges businesses incur when accepting payments via credit and debit cards. These fees cover the costs of processing transactions, maintaining security, and providing payment services to merchants.
Typical merchant account fees
Merchant account fees consist of multiple components:
Interchange fees: The primary fees paid to the cardholder's issuing bank, ranging from 1% to 4% of the transaction amount. They vary based on card type, transaction size, and whether it's card-present or card-not-present.
Assessment fees: Also known as brand fees, these small charges from card associations (Visa, Mastercard, etc.) range from 0.08% to 0.10% of monthly transactions.
Merchant acquirer fees: Charged by the payment processor for transaction facilitation, ranging from 1.43% to 3.5% per transaction.
Payment gateway fees: Associated with linking a merchant account to an e-commerce platform, typically between $25 and $50 per month, with an additional $0.10 to $0.25 per transaction.
Terminal fees: Covering the cost of using POS systems, these range from $25 to $45 per month.
Monthly service fees: Fixed charges from the payment processor, ranging from $9.95 to $24.95 per month.
Incidental fees: Non-standard fees for specific events, such as disputed transactions or insufficient funds.
The average credit card processing fee is about 2.24% of each transaction, according to the Merchant Payments Coalition, though this varies depending on services and fee structures.
Is it legal to charge merchant fees?
Merchants typically pay these fees directly to their payment processors. However, as previously mentioned, merchants can pass these costs to customers as convenience fees. Regulations vary by location, so it's crucial to understand local laws regarding surcharges.
In the United States, regulations like the Durbin Amendment prohibit surcharging for credit card transactions. However, merchants can charge convenience fees for debit card transactions if they comply with specific rules. Always check local regulations before passing fees on to customers.
How to reduce merchant fees
Merchants can reduce fees by negotiating with payment processors. Businesses with high transaction volumes have the leverage to negotiate lower fees with payment processors. By demonstrating consistent and substantial transaction activities, companies can often secure more favourable rates, leading to significant cost savings over time.
Merchants should also optimise their transaction processing. Effective payment methods, such as contactless payments, can lower processing costs. Reducing card-not-present transactions, which tend to have higher fees, can also contribute to cost efficiency. Encouraging customers to use lower-cost payment methods whenever possible can notably impact overall expenses.
Maintaining compliance with PCI DSS (Payment Card Industry Data Security Standard) is another way to lower merchant fees. It helps businesses avoid potential fines and penalties caused by violating regulations. PCI compliance protects sensitive payment data and contributes to long-term cost savings by reducing risks and preventing unnecessary charges.
Business transaction fees
Transaction fees are charges that businesses incur when accepting payments, whether via credit cards, debit cards, or other payment methods. These fees can affect profitability, so it’s crucial to understand why they are charged, how different payment methods impact costs, and ways to reduce or avoid them.
Why do I get charged transaction fees?
Transaction fees exist because of several components in the payment process. The main types include interchange fees paid to card-issuing banks, payment processor fees for handling transactions, and assessment fees charged by card networks like Visa and Mastercard.
Each fee varies based on factors such as the transaction amount, card type, and industry. Typical fees include credit card processing fees ranging from 1.5% to 3.5% per transaction.
For instance, interchange fees vary by network: Visa and Mastercard charge between 1.15% to 3.15%, while American Express fees range from 1.10% to 3.15%.
What is the impact of transaction methods on fees?
Transaction methods significantly influence fees:
In-store transactions: They generally have lower fees since the cardholder is present.
Online transactions: Higher fees apply due to increased fraud risk, with rates like 2.43% + $0.25 versus 1.79% + $0.08 for in-store payments.
Mobile payments: Fees vary but are typically comparable to in-store transactions.
The payment method affects transaction fees:
Credit cards: Tend to have higher fees compared to debit cards.
ACH transfers: More cost-effective with lower fees.
Digital wallets: Some platforms may charge flat rates, but these can fluctuate based on transaction type and volume.
Are transaction fees legal?
Transaction fees are legal, but regulations differ by region. Merchants must explicitly disclose fees to customers, and there are limits, such as a maximum of 4% for credit card processing.
How to avoid foreign transaction fees
Foreign transaction fees (usually 1% to 3%) apply to purchases made in different currencies. To avoid them, use credit cards with no foreign transaction fees, opt for local payment methods, or prepaid travel cards to avoid conversion costs.
Payment gateway cost
How much does it cost to build a payment gateway?
Developing a custom payment gateway involves a substantial investment, depending on the project's complexity and features. Here's a cost breakdown:
Minimum viable product (MVP): Creating an MVP costs between $150,000 and $250,000, covering essential payment processing features.
Standalone payment gateways: More comprehensive systems may exceed $250,000, especially if advanced features and integrations are needed.
Integrated payment platforms: Gateways requiring integration with existing systems or advanced functionalities can cost $500,000 or more.
When choosing between building an in-house payment gateway or using a third-party solution, businesses should weigh the pros and cons of each option.
In-house development offers several advantages, such as full control over features, allowing for customisation tailored to your specific business needs. This approach can also result in potential long-term savings, as there are no ongoing transaction fees. However, the drawbacks include a high initial investment and an extended development period, typically six months to a year. Additionally, you must consider the ongoing maintenance costs to keep the system running smoothly.
Third-Party Solutions provide a faster deployment and lower upfront costs, usually ranging from $10,000 to $50,000. They also reduce the technical burden since the provider handles most of the maintenance and updates. However, this convenience comes with ongoing transaction fees, typically around 2-3% per transaction, and offers less control over the payment gateway’s features and updates.
How much does it cost to integrate a payment gateway?
The cost of integrating a payment gateway into existing systems can vary significantly based on the complexity and customization required.
Basic Integration typically ranges from $5,000 to $15,000. This cost covers the integration process when only minimal adjustments are needed, making it a suitable option for businesses with straightforward requirements or pre-existing compatible infrastructure. Factors such as the current system's architecture and the level of customization can influence the final cost within this range.
Advanced Integration costs tend to be higher for more complex systems. If extensive modifications, additional security measures, or integrations with multiple platforms are necessary, the expenses can increase substantially. This option is ideal for businesses needing enhanced functionality or more robust security, but it requires a greater investment to ensure seamless and secure payment processing.
Here are the breakdown of integration costs with existing systems:
Planning and consultation: Assessing requirements and designing integration strategy.
Development and testing: Coding and testing to ensure functionality and security.
Licensing fees: Compliance costs (e.g., PCI DSS certification) can add $15,000 to $40,000.
Support and maintenance: Ongoing support to ensure smooth operation.
Cost-effective payment processing
How can you reduce payment processing costs?
Reducing payment processing costs is essential for maintaining profitability. Here are some practical tips:
Optimise your pricing model: Consider flat rate pricing for predictable and transparent expenses, making it easier to budget for processing costs.
Minimise interchange fees: Implement tokenisation technology to enhance transaction security and lower interchange fees. Additionally, a minimum credit card charge should be set to avoid high fees on smaller transactions.
Avoid higher-fee keyed transactions: Limit manually keyed transactions, as they tend to incur higher processing rates. Whenever possible, use automated processing systems.
Use the processor's payment gateway: Choose your payment processor's gateway to avoid additional fees from third-party gateways.
Minimise chargebacks: Reduce chargeback rates by implementing strong customer authentication and offering order confirmations, which can help lower associated fees.
Add fraud protection tools: Utilise tools like Address Verification Services (AVS) to qualify for lower interchange rates, contributing to overall savings.
Monitor and analyse transaction data: Regularly monitor transaction data to identify high-fee transactions, optimise payment routing, and ensure cost-effective processing.
Cost savings with payment processing partnerships
To achieve cost savings through payment processing partnerships, businesses should prioritize selecting the right processor, understanding pricing models, and using tailored solutions. Choosing a processor with transparent, competitive rates like National Processing helps high-volume merchants reduce costs.
Additionally, membership-based models, such as Helcim's sliding scale for interchange-plus pricing, offer savings as transaction volumes grow, while flexible pricing options from companies like APEXX provide customized solutions to fit specific business needs.
Partnering with the right payment processor can unlock custom solutions tailored to operational requirements, especially for high-risk industries or unique system integrations. Cost-effective models, like Payment Depot’s tailored interchange-plus rates, and processors that avoid long-term contracts, such as National Processing, allow businesses to reduce fees and financial commitments.
When evaluating processors, businesses should consider transaction fees, customer support, and integration capabilities. Transparent fee structures, strong customer service, and seamless integration with existing systems ensure smooth operations and minimize hidden costs, ultimately helping businesses enhance efficiency and reduce overhead.
Comparing payment processing fees
When choosing a payment gateway provider, consider:
Interchange fees: Debit card transactions usually have lower fees than credit cards.
Assessment fees: These are typically lower than interchange fees but still impact total costs.
Processor/gateway fees: Be aware of percentage-based fees, which can range from 0.10% to 0.40%, plus a small fixed fee.
Total transaction rates: Compare rates among providers; for example, Checkout.com offers competitive rates as low as 2.02% + $0.20 per transaction, compared to the typical 2.9% + $0.30 blended rate.
These strategies and considerations can help you effectively manage and reduce payment processing costs.
Are payment processing fees tax deductible?
Payment processing fees are typically considered business expenses and are, therefore, tax-deductible. This includes various fees associated with accepting credit card payments:
Merchant fees: These include costs like interchange fees, assessment fees, and other charges by the payment processor. Businesses can deduct these fees as part of their operational expenses.
Transaction fees: These fees, ranging from 1.5% to 3.5% per transaction, are also tax-deductible since they are incurred with each processed payment.
VAT on payment processing fees
Value Added Tax (VAT) applies to payment processing fees in various jurisdictions. Here's how VAT impacts these fees:
VAT charges: Payment processors may charge VAT on their services, which varies by country and can increase the total processing cost.
Reclaiming VAT: Businesses registered for VAT can usually reclaim the VAT paid on processing fees as part of their input tax, thus reducing their overall expenses.
Are transaction fees tax deductible?
Transaction fees are tax-deductible as they represent a necessary cost of doing business. It's essential to keep accurate records of all transaction fees paid throughout the year to support deductions when filing taxes.
Are merchant fees tax deductible?
Yes, merchant fees are tax-deductible. This includes:
Interchange fees: Paid to the cardholder's issuing bank.
Assessment fees: Charged by card networks to maintain the payment infrastructure.
Processor Fees: Charged by the payment processor for facilitating transactions.
These components of merchant fees can be deducted as part of your business expenses.
Global payment card processing fees
Processing international payments involves several fees that vary based on the card association, transaction details, and the complexity of the transaction. Key fees include cross-border fees charged by card associations like Visa (1% to 1.4%) and Mastercard (0.6% to 1%) to cover international processing costs. These are added to regular transaction fees and may be higher for transactions not settled in USD.
Currency conversion fees also apply when transactions involve different currencies, and these fees vary among payment processors. Additionally, credit card networks set interchange fees, which are paid by the merchant's acquiring bank to the cardholder's issuing bank. Assessment fees, on the other hand, are charged directly by card networks as a percentage of the transaction value.
Currency conversion significantly affects the final cost of cross-border transactions, with fluctuating exchange rates impacting merchants and consumers. This necessitates careful pricing strategies to account for these fluctuations.
Cross-border transactions are more complex, increasing the risk for credit card companies, which leads to higher fees due to increased compliance requirements and the need for advanced security measures.
Global payments merchant fees
Merchant fees for cross-border payments are different from domestic ones. The primary difference lies in the cross-border fee, which explicitly covers the additional processing costs of international transactions. The merchant fee structure includes a base rate (e.g., 0.6% for Mastercard transactions settled in USD) and an enhanced rate (e.g., 1% for non-USD transactions). Additional fees, such as currency conversion and assessment fees, may also apply.
Cross-border payments typically involve higher fees due to the complexity and risks associated with international transactions. These include extra cross-border and currency conversion fees not present in domestic transactions.
Merchant payment solutions
APEXX offers a seamless merchant payment solution integrating multiple payment services, such as gateways and acquirers, into a single, unified platform. Our system is built to lower costs and enhance payment acceptance rates through intelligent routing and analytics.
Our solution gives you access to a wide array of global payment options, ensuring a smooth and efficient transaction experience for your business and customers. We prioritise flexibility, scalability, and optimisation, making our platform an all-in-one choice for improving your payment processing in the digital marketplace.
