A per-transaction fee is an expense a business must incur each time it processes an electronic payment for a customer transaction. These fees vary across service providers, typically costing merchants between 0.5% to 5% of the transaction amount, plus certain fixed charges.
Key Takeaways
- A per-transaction fee is a cost that businesses pay to a service provider every time a customer payment is processed electronically.
- Per-transaction fees usually range between 0.5% and 5% of the transaction amount, along with additional 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 typically involves both an acquirer fee and a processor fee.
How Per-Transaction Fees Work
Merchants face per-transaction fees from multiple entities in a transaction. They partner with merchant acquiring banks to manage all communications in an electronic payment scenario.
Merchants also open a merchant account with the acquirer, which serves as the primary deposit account for funds from each transaction. High volumes of electronic payments make the terms of the merchant account agreement significantly important for merchants.
Components of Per-Transaction Fees
Merchants encounter various fees for accepting electronic payments, some of which are variable while others remain fixed. A wide range of acquiring banks offers different fee structures and service capacities, allowing merchants to select the one that best suits their needs. Acquirers often charge per-transaction fees in addition to a monthly fee for managing the merchant account.
The second component of a per-transaction fee is the fee paid to the network processing company. Merchants establish which branded cards they accept based on the network of their merchant acquiring bank.
Payment card companies like MasterCard, Visa, Discover, or American Express have their per-transaction fees, also known as wholesale fees, which are often a fixed charge per transaction. Acquirers may negotiate lower wholesale fees through network relationships with processors.
Acquirer and processor fees form the primary components of a comprehensive per-transaction fee. Additionally, merchants may face other fees too, such as a terminal fee charged by terminal providers like Square for using their services.
Per-transaction fees can lead merchants to set minimum spending amounts for customers opting to pay with credit or debit cards. For example, merchants might set a $5 or $10 minimum for card transactions. Smaller merchants are more likely to impose these minimums since they are less able to absorb card fees.
ISA definite differences exist between fees charged by companies like MasterCard, Visa, American Express, and Discover. These variations are often nominal, sometimes amounting to just a few cents. Generally, Visa charges the lowest amount overall. However, the fees also depend on the cards used, as rewards cards often have higher fees.
Merchant Account Statements
Acquirers present a monthly statement detailing a merchant’s total costs and transaction activities. Transaction fees from service providers will generally be categorized as interchange, tiered, or subscription:
- The interchange section lists both payment card company fees and service provider fees separately.
- The tiered section assesses different fees based on the transaction type, such as in-person versus online.
- Subscription fees are scheduled on a monthly or annual basis.
How Can I Avoid Transaction Fees?
You can avoid transaction fees by choosing cash for payments. However, when paying with a credit card, the per-transaction fee is charged to the merchant, who might pass the cost onto consumers through higher prices.
Who Pays Credit Card Transaction Fees?
The merchant or vendor is responsible for paying credit card transaction fees, not the cardholder. The business pays these fees to the credit card issuer or payment processor.
Can Businesses Charge a Credit Card Surcharge?
While merchants are responsible for paying credit card transaction fees, some of them may impose a surcharge to recoup this expense. However, this practice is illegal in some states.
The Bottom Line
Per-transaction fees are costs borne by merchants, though consumers may experience higher prices if the fees are passed down. Merchants, especially smaller ones, may also set minimum purchase amounts for credit card transactions to avoid financial losses.
Related Terms: acquirer, merchant account, merchant discount rate, debit card, credit card.
References
- FDIC. “Merchant Processing”. Page 8.
- Square. “Fees and Payments”.
- VISA. “Minimum Transaction Amount on a Visa Credit Card”.
