Breaking down transaction fees: A guide for businesses

- April 4, 2024 3 MIN READ

For many small business owners, choosing a payment provider is like going to the mechanic with no knowledge of cars, writes Chris Dahl, Co-CEO, Pin Payments.

The plethora of options, technical jargon, and pricing complexities can be overwhelming and difficult to understand. Likewise, payments can consist of differing fees, rates, and options, which people are often unaware of. Understanding these differences can have a significant impact on your business’s bottom line.

So, how can you cut through the jargon and understand what’s important? Here’s a step-by-step guide to help you get started.

Your guide to understanding transaction fees

Whether you run a brick-and-mortar or online store, the anatomy of transaction fees remains the same. As businesses are usually the ones to pay transaction fees, it’s crucial you understand its components, as together they form the basis of what you’re charged. Transaction fees are made up of three separate fees which include interchange fees, scheme fees, and acquiring fees. Here is a breakdown of each.

  1. Interchange fees

Interchange fees are what the cardholder’s bank charges to facilitate their online transactions. The merchant’s acquirer pays them to the customer’s bank, and the amount of interchange to pay is defined by the card schemes. Interchange fees are paid to cover the cost of authorising transactions, fraud and other handling of the transactions. . Factors that influence the fee amount include card types (credit vs. debit), merchant categories or industries (high risk vs. low risk), transaction types (one-time or recurring payment) and whether it’s a rewards card (as interchange fees pay for those loyalty points).

2.  Scheme fees

Card networks like Visa or MasterCard impose scheme fees as a cost to both the merchant’s bank (acquirer) and the cardholder’s bank (issuer) for using their payment networks. These fees are separate from interchange fees and form a significant component of a merchant’s total card processing costs. The fees cover various aspects of operating a card network such as maintenance and development, marketing, fraud prevention and security measures and administrative costs.

3. Acquiring fees

Acquiring fees, also known as acquirer markups, are what payment processors or banks charge merchants for processing your transactions. This is where the cost of the technological and financial infrastructure to process payments comes in. These fees cover the cost of securely authorising and routing transactions through the payment network, risk management, settlement, customer support, technology and infrastructure and profit margins. Acquiring fees are either percentage-based, a fixed fee or a hybrid model. However, the exact costs will depend on the merchant type and industry, card type, processing volume and your ability to negotiate. Acquiring fees are often a significant cost for merchants, on top of interchange and scheme fees, so greater transparency will help you understand overall costs and compare different payment processors.

Blended Rates vs. Interchange++ Pricing

 The decision of whether to use a blended rate or Interchange++ will depend on your business needs, but it’s important to be aware of the differences. Payment providers often provide small businesses with blended rates, where the provider takes an ‘average’ of all the fees and rolls it into one price. This pricing model offers predictability, allowing small businesses to forecast their payment costs easily.

While simple, blended rates lack transparency when compared with Interchange++ used by larger enterprises, which breaks down all fees, providing the opportunity to optimise costs. Despite this, larger businesses have experts and teams to understand this level of detail, whereas the average small business does not. For this reason, small and medium businesses typically prefer the blended approach due to its simplicity and predictability.

Ask yourself the following questions, to understand what impacts your fees and how risky your transactions are:

  1. Is your business primarily online or in-store?
  2. Are you dealing with recurring payments?
  3. Are your transactions predominantly through debit or credit cards?

The answers to these questions can significantly influence your costs and give you bargaining power when choosing a provider. However, ultimately payment fees are linked to risk and transactions deemed riskier incur higher fees. Likewise, recurring payments or transactions via Apple Pay or Google Pay are often cheaper, attributed to their lower risk profile compared to traditional methods. Ultimately if you have a healthy business with a predictable cash flow and loyal customer base, you can request your payment provider a better rate.

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