What Are Processing Fees? How to Understand and Optimize Processing Costs

What Are Processing Fees: How to Understand and Optimize Processing Costs
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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 transactions?

2. Who pays credit card transaction fees?

3. Credit card processing fees for small business

4. Credit card processing fees calculator

5. How to optimize your expenses: Synder Insights payment processing fees tracker

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

One of the main challenges for every merchant when operating an ecommerce 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. Online marketplaces have revolutionized the way we approach shopping, providing a convenient platform for consumers and businesses alike to engage in transactions. 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. This processing fee is usually different for every business and can change based on how customers pay you.

Such 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 fees?

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

Such processing fees include any charges related to handling payments from customers. These 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. 

Who pays credit card transaction fees?

In a typical credit card transaction, the credit card processing fees are generally paid by the merchant (i.e., the business) accepting the credit card as a form of payment. When a customer makes a purchase using a credit card, the merchant processes the payment through a payment processor or merchant service provider. The processor deducts the applicable fees from the transaction amount before depositing the remaining funds into the merchant’s account.

These fees are separate from the actual purchase amount and are typically a small percentage of the transaction value, along with any additional flat fees or monthly charges associated with the payment processing service.

It’s important to note that while merchants are responsible for paying credit card processing fees, they often factor these costs into their overall pricing structure to ensure they can cover the expenses associated with accepting credit card payments. This means that the cost of processing fees may indirectly be passed on to consumers through the pricing of goods or services.

Credit card processing fees for small business

In ecommerce, there are different types of processing fees 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.

Credit card processing fees for small businesses can vary depending on various factors such as the type of business, the volume of transactions, the average ticket size, the type of credit card being used, and the payment processor chosen.

processing fees: credit card

Let’s explore each type of credit card processing fees.

Payment processor fees

Payment processors or merchant service providers offer services to facilitate credit card processing. They charge their own fees for their services, which may include various components such as a percentage of the transaction value, a fee per transaction, monthly fees, setup fees, statement fees, and others. These fees can vary between providers, and it’s important to compare and understand the pricing structure offered by different processors.

It’s worth noting that some payment processors advertise different pricing models, such as interchange or flat-rate pricing. 

Interchange fees

These are fees charged by the card networks (Visa, Mastercard, American Express, etc.) and are a percentage of the transaction amount plus a flat fee. Interchange fees are set by the card networks and vary based on factors like the type of card (rewards, corporate, debit, etc.) and the nature of the transaction (in-person, online, keyed-in, etc.). These fees usually make up a significant portion of the total processing cost. 

Interchange fees are included into the processing fees and are a type of the per-transaction fee 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 or digital 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 transaction fee, regardless of the type of card, brand, or whether it’s an in-store or physical purchase. The charge for the flat-rate transaction fee is calculated in the following way:

% of the transaction amount or % of the purchase + an additional fixed fee

Here are 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 the plan – from 2.4% to 2.9% + $0.30.

Monthly fees for services

Not a highlight of the ecommerce 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 ecommerce website, allowing you to process payments in real time without ever seeing customers’ credit card details. There are several 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 ecommerce workflow. 

To get an accurate idea of the fees your small business may incur, it’s recommended to reach out to payment processors and request a detailed breakdown of their pricing structure. They should be able to provide you with a quote based on your business’s unique requirements. Additionally, it’s advisable to carefully review the terms and conditions and consider negotiating rates or looking for providers that offer competitive pricing and transparent fee structures.

Assessment fees

Assessment fees are an additional component of credit card processing fees charged by the card networks, such as Visa, Mastercard, or American Express. These fees are distinct from interchange fees and are designed to cover the operational costs of the card networks themselves.

Assessment fees are typically calculated as a small percentage of the transaction value. While the specific percentage can vary depending on the card network and the type of transaction, it is generally a fixed rate applied to the transaction amount.

The purpose of assessment fees is to support the infrastructure, services, and maintenance provided by the card networks. These fees contribute to the ongoing operations of the network, including activities such as fraud prevention, technology development, customer support, and network security.

For merchants, assessment fees are an important consideration as they add to the overall cost of processing credit card payments. While assessment fees are typically lower than interchange fees, they still contribute to the total processing costs that businesses must bear.

It’s important for small businesses to be aware of assessment fees when evaluating different payment processors or merchant service providers. These fees, along with interchange fees and other processor-specific charges, should be carefully considered and compared to ensure that the chosen payment processor offers a competitive fee structure that aligns with the business’s transaction volume and needs.

Credit card processing fees calculator

To calculate credit card processing fees for a specific transaction or estimate the fees for your small business, you can use the following formula:

Total Processing Fees = Transaction Amount x (Interchange Rate + Processor Markup) + Additional Fees

Here’s a step-by-step guide on how to calculate credit card processing fees:

1. Determine the transaction amount. This is the total amount of the sale or purchase made by the customer using a credit card.

2. Obtain the interchange rate. Interchange rates are set by the card networks (Visa, Mastercard, etc.) and vary based on factors such as the type of card used (debit, credit, rewards, etc.) and the type of transaction (in-person, online, etc.). You can find the interchange rates on the card network’s website or by contacting your payment processor.

3. Determine the processor markup. This is the fee charged by your payment processor or merchant service provider for their services. The processor markup is usually a percentage of the transaction amount. The specific markup will depend on your agreement with the processor. You can find this information in your payment processing contract or by contacting your provider.

4. Calculate the interchange fees. Multiply the Transaction Amount by the Interchange Rate. This gives you the portion of the processing fees that goes to the card network.

Interchange Fees = Transaction Amount x Interchange Rate

5. Calculate the processor fees. Multiply the Transaction Amount by the Processor Markup. This gives you the portion of the processing fees charged by your payment processor.

Processor Fees = Transaction Amount x Processor Markup

6. Add additional fees. Some payment processors may charge additional fees, such as flat fees per transaction, monthly fees, statement fees, or setup fees. Include these fees in the total processing fees calculation.

Total Processing Fees = Interchange Fees + Processor Fees + Additional Fees

It’s important to note that the specific rates and fees can vary between payment processors and the type of business you have. It’s best to consult with your payment processor directly to obtain accurate rates and fees applicable to your business. They can provide you with a detailed breakdown of the fees and help you calculate the processing costs for your transactions.

How to optimize your 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’ll 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. 

Benefits for businesses with access to processing fees reports 

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 which platform works best for them on the global level;
  • Take into account the performance of each provider based on the % of successful transactions;
  • Monitor closely the chargeback ratio;
  • Create a better strategy for the whole business. 

The prospects seem good, but here you might have two questions: how to calculate all the expenses and is it really possible without additional risk to mess everything up

Yes, you can. Especially with the right software solution. 

Synder Insights provides its users with the reports essential for tracking KPIs and 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. What you’ll find especially useful is that there’s one that covers payment processing fees:

Processing fees in Synder Insights

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:

Payment processing fees: Synder Insights

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

Payment processing fees per platform: Synder Insights

Synder Insights’ main features: 

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

To learn more about how your numbers can be visualized into clear-cut reports, hurry up to start Synder Insights 15-day free trial. See for yourself how the software builds  personalized reports for ecommerce businesses regardless of the platforms! Or choose a date and book a seat at a webinar with our specialists who’ll walk you through the onboarding process and tell everything about the software’s 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!

Conclusion

Overall, processing fees are essential costs for small businesses accepting payments, particularly in ecommerce. Understanding these fees is crucial for efficient cash flow management. They include interchange fees, assessment fees, and payment processor fees, which can vary based on factors like transaction volume and type of card. By accurately calculating and optimizing these fees, businesses can make informed financial decisions and create a customer-friendly environment. Tools like Synder Insights can assist in tracking and analyzing processing fees, allowing businesses to streamline their cash flow and drive success in the ecommerce landscape. 

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