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Transaction Fees: Definition & Examples

Gone are the days when cash was the only way to make a purchase. Consumers have more ways to pay for goods and services than ever, from Chip and PIN or contactless transactions with debit cards to the use of e-wallets and even cryptocurrency. When merchants offer a wide range of payment options, they ensure convenience for the customer and remove a potential barrier to sale.

Nonetheless, electronic transactions of any nature require processing, and providers expect to be paid for this. As such, each transaction carries a small fee. These may not drive a huge wedge between your top and bottom line. Nonetheless, they can eat away at your margins if left unchecked. Here, we’ll look at some examples of transaction fees that merchants may encounter. So you know exactly what to expect when offering secure and convenient transactions for your customers. 

What are transaction fees?

Transaction fees are the expenses that businesses need to pay to their payment service provider every time the provider processes an electronic payment for a Card Present or Card Not Present transaction. 

Transaction fees can vary slightly, depending on the payment service provider. However, the value is typically anywhere between 0.5% to 5% of the transaction’s value. There are also certain fixed fees attached to transactions. This is why many smaller merchants will only accept card or electronic payments for purchases over a certain value (e.g. £5). Their size and slender margins prohibit them from absorbing the fees for smaller transactions. 

A transaction fee is broken into two parts – an acquirer fee and a processor’s fee. Let’s take a closer look at these, and other fees that merchants may incur when processing transactions. 

Examples of transaction fees

Understanding the different types of transaction fees can ensure transparency when it comes to your operational spending. Your payment service provider will usually send you a regular merchant account statement that details the different fees you have paid in the month. 

Different providers use different fee structures and charges. These are some that merchants are most likely to encounter:

Interchange fees

Interchange fees are paid to the issuing bank. The acquiring bank (the merchant’s bank) charges a fee and the processing company (e.g. Visa / Mastercard / Amex) also charges a fee. 

Terminal fees

Point Of Sale (POS) terminals are no longer limited to physical stores. Sole traders such as hairdressers and handymen can accept card payments on the go from virtually anywhere with portable card terminals. The providers of these POS terminals may also charge a small fee. 

Tiered fees

Some providers use tiered fee structures. These use different fees for different types of transactions (i.e. Card Present or Card Not Present). CNP transactions usually carry a higher fee than CP transactions. This is because they carry a greater degree of risk as they are more vulnerable to fraud. 

Subscription fees

Some providers charge a flat subscription fee instead of charging per transaction. This can ensure that monthly transaction fees are predictable and easy to incorporate into cash flow projections. Subscription fees are usually assessed on an annual or monthly basis. 

International transaction fees

If your reach is international, you may want to send goods to other countries. In which case, an international transaction fee will also be applied. This is usually absorbed by the customer. 

We Can Help

If you’re interested in finding out more about transaction fees and how they may apply to your business operations, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

GoCardless is used by over 60,000 businesses around the world. Learn more about how you can improve payment processing at your business today.

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