Online businesses usually receive their payments through payment gateways or processors. These payment service providers (PSPs) charge a percentage of the transaction plus a fixed fee (depending on your PSP) to facilitate payments. Though the merchant fees are only a fraction of the transaction, they add up, especially in frequent transactions, reducing your profits.
In this article, we’ll explain the different merchant fees you will likely see on your invoice. We’ll also explore strategies to minimize these fees’ impact on your profits and finally guide you through choosing a PSP that gives you your money’s worth.
What are merchant fees?
Merchant fees are the costs businesses incur when customers pay electronically. From authorization checks to fraud prevention, the fees ensure secure and efficient payments for businesses and customers.
Key players in payment processing
First, it’s essential to know who’s involved in a transaction to understand the scope of merchant fees:
- Merchants: Businesses that accept card payments.
- Customers: People making purchases with credit or debit cards.
- Issuing Banks: Banks that issue the credit or debit cards customers use.
- Acquiring Banks: Banks that process card payments on behalf of merchants.
- Payment Processors: Companies that handle the transaction details between merchants, customers, and banks.
All these entities charge a percentage of the total transaction to provide their services.
Main components of merchant fees
Several fees go into an online transaction:
Interchange fees
Interchange fees are the costs merchants pay to the issuing banks whenever a customer uses a card. These fees are a percentage of the transaction amount plus a fixed fee. The type of card (credit, debit, rewards), transaction size, and industry all influence the interchange fee. Premium credit cards, for example, often incur higher fees for merchants.
Assessment fees
Card networks like Visa and Mastercard recoup their operational costs through assessment fees, which are typically a fraction of the transaction amount.
Payment processor fees
Payment processors make money through various fees:
- Per-transaction fees: These are charged for each transaction, usually combining a small percentage and a fixed amount.
- Monthly fees: A flat monthly charge for maintaining the account.
- Other fees: Additional costs like PCI compliance, chargeback, and statement fees.
Factors affecting merchant fees for online businesses
Running a successful online business hinges on understanding the various factors that influence your total payment processing costs. Here’s a breakdown of the key factors:
Industry type
Payment processors categorize industries based on perceived risk. This directly affects your fees. For instance, an online store selling high-end electronics like laptops faces higher fees because of the expensive nature of the products and the potential for fraud.
Electronics is a high-risk industry than an online bookstore, where books are generally low-priced and less susceptible to fraudulent activity. The bookstore, therefore, enjoys lower processing fees.
Average transaction size
Imagine you run an online boutique selling unique, handcrafted clothes with an average price point of $20. In this scenario, the per-transaction fees can quickly add up. For example, if your processor charges $0.30 per transaction plus 2.9%, a $20 sale incurs roughly $0.88 in fees.
However, if you sell high-end furniture with an average transaction value of $1,000, the flat $0.30 fee becomes less significant than the percentage-based fee. The overall cost becomes more manageable with larger transactions.
Payment methods
Different payment methods come with varying fee structures. Credit card transactions typically incur higher fees than debit cards or e-wallets. Your PSP can help you accept digital currencies, which usually attract a lower transaction fee than traditional card payments.
Processing volume
Higher processing volumes can translate to lower fees due to volume discounts. Imagine your online business starts small, processing about $10,000 monthly. Your processor might charge you standard rates. However, as your business grows and you process $100,000 monthly, you could negotiate for lower transaction rates. For example, instead of 3.0% per transaction, you might secure a rate of 2.3% because of your higher volume, reducing your overall costs.
Why understanding merchant fees matters
Aside from the facilitation they provide, it’s vital to understand the importance of different fees and their influence on your online business. Here are the compelling reasons.
Impact on pricing
Assume you’re running an online jewelry business. Per-transaction fees are an essential part of pricing your necklaces and earrings.
Let’s say your average necklace costs $50 to make in materials and labor. You also know your payment processor charges a 3% fee and a $0.30 fee per transaction. To ensure profitability, you must factor these fees into your final price. In this case, the processing fee would be $1.90 (3% of $50) + $0.30 = $2.20. That means you’d need to price your necklace at least $52.20 to cover all your costs and make a profit.
Since consumers ultimately bear the burden of final costs, choose a transparent PSP that reveals all their fees. Upfront disclosure prevents unexpected charges during settlements. You don’t want surprises during settlements.
Secondly, you want a PSP that offers the best value for money so your business receives excellent services at reasonable prices, keeping your products or services competitively priced.
Negotiation: The art of the deal
While some fees, like interchange fees, are pre-determined by the card networks, there’s still room for negotiation with your payment processor. You can negotiate for better rates with your merchant account, especially on fees under their control, such as monthly or statement fees.
By understanding the various fee structures and researching different processors, you can leverage your business transaction volume and payment frequency to secure more competitive rates. Negotiating lower monthly fees with your processor can lead to substantial cost savings in the long run. So, research, negotiate, and save.
Fraud prevention: A proactive approach
Merchant fees also play a role in fraud prevention. When a customer disputes a transaction, you incur a chargeback fee. Though chargebacks are annoying, they act as an alert for potential fraud.
Monitoring these fees and analyzing how chargebacks occur prepares you to take proactive steps to reduce fraud risk in your online store. This might involve partnering with a fraud prevention service or setting up stricter security protocols for transactions with high-order values.
Fun fact:
Global consumers prefer digital wallets, with 50% of all e-commerce spending occurring through them.
Strategies to minimize payment processing fees for online businesses
Keeping your online business’s bottom line healthy requires minimizing payment processing fees. Here are practical strategies you can implement:
Negotiate rates
Don’t underestimate the power of negotiation. We’ve already explained how to leverage your position to pay a lower percentage of your transactions.
Leverage technology
Fraud prevention tools can reduce the risk of costly chargebacks. If you run an online electronics store, using these tools can help detect and prevent fraudulent transactions, reducing chargeback fees. Additionally, your PSP may provide valuable insights and analytics to help you understand your fee structure and identify areas for potential savings.
The ultimate strategy: Selecting a PSP for your online business
Your PSP handles your online transactions. Choosing the right one impacts your customer experience and profits. Consider the factors below before making a decision.
Multiple payment options
Let’s say you manage an online sporting goods store with a global reach. Canadian customers might prefer credit cards, while those in the Philippines might use Maya. APS supports numerous payment methods, enabling seamless transactions from anywhere.
Such payment flexibility reduces cart abandonment and boosts sales, as customers can complete purchases using their preferred method. Ultimately, you generate high volumes to negotiate lower transaction fees while increasing your profits.
Transparent fee structure
We’ve seen the types of fees facilitating one transaction. Therefore, when choosing a PSP, ensure they provide all their merchant fee categories during the negotiations.
Incorporating new payment technology
Does your PSP provide the latest payment methods or use up-to-date technologies?
For example, blockchain payments can offer lower transaction fees and faster processing times. If you’re selling mining hardware, integrating Web3 payments could attract a tech-savvy audience looking for secure and efficient payment options. A gateway like APS, which supports digital currency payments through Binance Pay, can provide this option.
Taking control of merchant fees
Knowledge is power. Understanding the various factors that influence these fees, such as your industry type, average transaction size, and the payment methods you offer, helps you select a reliable PSP to handle your transactions.
Taking a proactive approach goes a long way. Explore different pricing models, negotiate terms, and conduct general research to help you reduce your merchant fees. Remember, customer experience matters. Ensure you offer multiple payment options, like credit cards, debit cards, and digital wallets, to improve your client’s satisfaction.
FAQs
1. What are merchant fees?
Merchant fees are charges businesses incur whenever a customer uses a credit card, debit card, or other electronic payment method to make a purchase. These fees cover the various costs involved in processing the transaction.
2. Who charges merchant fees?
Merchant fees are charged by various entities involved in the transaction process, including issuing banks, payment processors, and card networks.
3. How do you avoid merchant fees?
While unavoidable, you can reduce your merchant fees through negotiations with payment processors. If you have significant leverage, such as a high transaction volume, you can negotiate on the monthly fees or per-transaction fees.
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