What Are Processing Fees and How to Understand a Processing Fee to Quickly Optimize Costs

Today, merchants have the opportunity to sell their products in a variety of locations and online marketplaces. To help increase visibility and drive sales, they also sell their products via multiple channels. But selling products across different channels can lead to a lot of complications when it comes to processing fees. 

The cost of transactions is one of the biggest and most common challenges digital marketers face today. The good news is that with a little bit of research and testing, you can create a sustainable model that balances your margins, volume, and other key performance indicators (KPIs) like conversion rates and average order value.

In this article, we’ll cover everything about how to understand your processing fees across multiple channels. Let’s get started!

Contents:

1. What do processing fees mean and how do they affect transaction?

2. Types of fees you need to be aware of

3. How to optimize the expenses: Synder Insights

4. Synder Insights’ main features

What do processing fees mean and how do they affect transaction?

One of the main challenges for every merchant when operating an e-commerce business is processing payments. It’s also one of the most essential elements of running your own store regardless of the sales channel – Amazon, eBay, Etsy, Shopify, etc.

Payment processing fees are the costs associated with accepting payments from your customers. Whether you accept cash, check, credit card or another form of payment, you’ll probably have to pay some sort of fee for processing payments. These fees are usually different for every business and can change based on how customers pay you.

These fees typically charge 2-3% of the transaction, but can be higher or lower depending on the company you work with and your specific needs. Payment processing fees cover things like renting POS software, maintenance, fraud prevention, and more.

Why is it important to understand processing fee?

Understanding the cost structure of these processing fees is essential for running an efficient cash flow management process for your company.

These processing fees include any charges related to handling payments from customers. Such expenses may comprise gateway or processor fees, transaction fees, monthly minimums, monthly statement fees, initial setup costs and other monthly maintenance costs. Each of these expenses has its own set of pros and cons that businesses must analyze before choosing one provider over another. 

With the right approach to understanding payment processing fees, a business owner may get:

• A better understanding of the expenses;
• A thoroughly planned strategy aiming at not losing more than gaining;
• A customer-friendly business environment.

Plus, with a proper comparison of different variants of payment gateways and their fees, it’ll be easier to choose the best variant that’ll be both reasonably priced and efficient for the business. 

Let’s take a closer look at the types of fees.

Types of fees you need to be aware of

In e-commerce, there are different processing fees types on top of the standard product or service price. Some businesses might already be doing this and not even know it! A business owner has to double check with an accountant or bookkeeper whether or not these kinds of processing fees are charged in a particular payment gateway or with the payment method a seller is using.

Here are some of the most common types of fees a business owner might face.

Interchange fees

Interchange fees are included into the processing fees and are per-transaction fees that merchants pay their acquiring bank whenever a cardholder purchases something with a branded debit or credit card. Interchange fees can be especially costly for small businesses, which tend to have higher transaction volumes and smaller profit margins than larger chains.

In response to increasing pressure from merchants, regulators, and the general public, more and more banks have begun offering customized interchange fee arrangements for their smaller business customers when the transactions are made via credit card. The goal is to balance the need for healthy profits while keeping costs low enough so that merchants continue to accept credit cards as payment methods. 

These fees vary depending on factors such as whether it’s a domestic or international transaction, if it’s directly tied with the issuing bank or another third party entity, how much money you have in your account, and whether it’s a debit or credit card transaction. 

Even though the exact percentage and formula will vary, Interchange fees are usually calculated as a percentage of the sale, plus a fixed fee. For example, 1.80% + $0.10.

📌 Note: The interchange rates vary by each network and are set every April and October.

Flat-rate fees

When it comes to processing payments, the costs can get a little tricky – some platforms have higher processing fees. Each payment processor has its own rates and fees. For example, some processors charge per transaction, while others require a monthly subscription fee with variable transaction fees based on the dollar volume of transactions.

The majority of businesses choose flat rate processing fees because they’re easy to understand and can save them money in the long term. This is because fixed cost per transaction rates might seem more expensive at first, but if your business accepts payments frequently, the long-term costs will be much lower. 

The payment processor charges a flat fee for all transactions, regardless of the type of card, brand, or whether it’s an in-store or physical purchase. The pricing for the flat-rate fees are charged in the following way:

Here’s the pricing rates that the most popular payment processors use for their processing fees per transaction: 

• Stripe: 2.9% + $0.30 each for online transactions and 2.7% + $0.05 for card-present transactions;
• PayPal: range from 1.9% to 3.5% + fixed fee from $0.05 to $0.49;
• Shopify: depending on plan – from 2.4% to 2.9% + $0.30.

Monthly fees for services

Not a highlight of the e-commerce business owner’s life, but still, each platform costs a certain amount of money. Regardless whether it’s a sales channel or a payment gateway, the cost will be deducted from the account if a seller wants to continue the business. Such expenses mostly come from using third-party payment gateways. 

Payment gateways connect directly to your e-commerce website, allowing you to process payments in real time without ever seeing customers’ credit card details. There are several different types of payment gateways that specialize in processing certain types of transactions. Each type will have different monthly fees and equipment costs. Depending on the volume and type of transactions, one payment gateway might be more cost-effective than another.

👉 Check out our article on how to choose the right payment gateway for your business to create a working mechanism for the whole e-commerce workflow. 

How to optimize the expenses: Synder Insights payment processing fees tracker 

Payment processing fees are the costs businesses incur when handling payments for goods or services. These fees are a fixed expense and cannot be avoided, but they can be controlled.

When having a small business, every dollar counts. To prepare the final reports for tax season, business owners will probably need help from the professional accountants. But they can provide their accountants with the tools that will ease the work for both of them. 

Expenses are a fixed cost for businesses and need to be managed effectively. You’lll have to keep them in check to manage your profits. This is why it’s important to optimize the expenses from the very beginning. If it’s not done, a business owner might see a negative impact on the bottom line. 

When a business owner has access to an accurate report on processing fees, it becomes easier to: 

• Analyze the difference between payment gateways and see for whom which platform works best on the global level;
• Take into account the performance of each provider based on % of successful transactions;
• Monitor closely the chargeback ratio;
• Create a better strategy for the whole business. 

The prospects seem good, but here comes the main problem: how to calculate all the expenses and is it really possible without additional risk to mess everything up? 

The answer is yes. Especially with the right software solution. 

Synder Insights provides its users with the reports essential for setting up KPIs and tracking an overall business performance per specific units. With synchronization of ongoing transactions, detailed data from each transaction is recorded as well. This way, the information is updated automatically.

Synder Insights boasts a number of useful reports –  returning customer rates, products most purchased together, top performing products, etc. There’s one that covers payment processing fees:

This report shows the total amount of processing fees that are charged by all payment gateways the user has customer payments flowing through. The Payment processing fees report provides a business owner only with the information about processing fees – no other expenses are included. The report can be built in different ways.

The overall information about expenses across all channels may look like this:

The information may be filtered by platforms/time periods. In this case the report will be more detailed:

Synder Insights’ main features are: 

• Hourly multichannel data imports;
• Sales analytics;
• Product and COGS analytics;
• Customer cohort reports;
• Cross platform e-commerce KPIs.

To learn more about how your numbers can be visualized into clear-cut reports, hurry up to start Synder Insights 7-day free trial. See for yourself how the software builds  personalized reports for e-commerce businesses regardless of the platforms! Or choose a date and schedule a demo with our specialists who’ll walk you through the onboarding process and tell everything about the software features. 

Keep track of the cash flow across all channels and build an efficient business plan based on this information! Let the business reports be more than just numbers!