The rise of electronic payment methods has made it more convenient than ever for consumers to purchase goods and services using their preferred payment method.
While this might mean businesses can increase sales by catering to a broader customer base, they’ll also incur additional fees to complete each electronic transaction.
In this article, we’ll explain transaction fees, how they’re determined, and how business owners can control this cost to support profitable transactions.
What is a transaction fee?
Transaction fees are a type of expense incurred when a good or service is sold. They are meant to cover the cost of facilitating the transaction between the buyer and seller and are charged on top of the sales price of the product or service.
Whether a transaction is facilitated by an online payment processor or in person through an agent or broker, transaction fees are how these entities make money from connecting buyers and sellers and ensuring a smooth transfer of funds.
Importance of understanding transaction fees for businesses
In the modern marketplace, transaction fees are often seen as part of the cost of doing business when accepting electronic payment methods.
Even though they may not be avoidable, like credit card processing fees, it’s still important for business owners to understand how these fees are determined and strategies for minimizing them since they can impact profit margins.
How transaction fees work
Each payment processor, bank, or broker can determine how it charges transaction fees. Below, we’ll cover some of the common ways they do so.
The calculation and structure of transaction fees
The structure of transaction fees can vary between different payment processors and intermediaries. However, they’re generally calculated on either a fixed fee, a percentage of the transaction amount, or a hybrid of the two.
For instance, if a credit card processing fee is 1.5% of the transaction total, then a $50 transaction would cost the seller $0.75. Or, they might charge a flat fee of $0.55 per transaction, regardless of the total value.
If it’s a hybrid structure, it might be something like a $0.25 fee on each transaction plus 0.50% of the purchase amount.
Factors that influence transaction fees
Several factors can influence the total transaction fee, depending on how a payment processor, broker, or agent determines it.
If the transaction fee is charged as a percentage of the purchase amount, the value of the sale will directly correlate to this cost. In this case, the higher the purchase amount, the higher the transaction fee.
In addition, payment processors may impose different fee structures on merchants depending on the nature of their business, the type of card used, their location, or the products or services they sell.
For instance, MasterCard charges different fees depending on the merchant’s “category.” Specifically, a retail business has a fee of 2.26%, while a utility company has a fee of 1.88%.
Because the fees charged by different payment processors and credit card companies vary widely, it’s best to review each provider's fee structure to ensure you clearly understand the fees that apply to your business.
Examples of transaction fees
Here is an overview of the common types of transaction fees that a business might incur:
- Processing fees: A standard fee that online payment processors will charge to facilitate the transaction.
- Merchant fees: A separate fee that merchants pay to a payment processor to maintain their account and be able to process transactions through the platform.
- Interchange fees: A fee that the merchant’s bank pays to the cardholder’s bank when a customer uses the card to make a purchase.
- Foreign transaction fees: The cost of making a purchase in a foreign currency or having a transaction processed by a foreign bank.
Strategies for minimizing transaction fees
Unless a business or its customers make purchases in cash, chances are, they’ll incur some type of transaction fee.
While these fees are typically low in dollar amount, the total cost of transaction fees can add up over time, especially as a company scales and increases the number of transactions.
Luckily, there are some strategies to help minimize transaction fees for businesses, including the following:
Reviewing current fees
The first step for businesses to lower this cost is to understand the transaction fees they’re currently paying.
It’s possible that they’ve signed up for accounts with payment processors without understanding the fees they’ll incur on each transaction or how they’re structured. The monthly statement provided by the payment processor should provide a breakdown. If not, request one from them.
Clarifying the specific fees the business pays will make it easier to pinpoint potential areas for savings and negotiations.
Negotiating lower fees with payment processors
Some transaction fees, such as the interchange fees set by credit card networks, are fixed and cannot be negotiated.
However, there is some flexibility with other types, like the fees paid to payment processors. Platforms may be open to lowering processing fees, especially for long-standing customers or those who conduct a large volume of transactions, potentially saving businesses hundreds or thousands of dollars a year.
Encouraging cost-effective payment methods
Certain payment methods incur higher transaction fees than others. For instance, credit card payments tend to have higher fees than debit card, check, or cash transactions.
Businesses shouldn’t discourage credit card payments outright, though they may incentivize other payment methods by adding a surcharge for customers who pay with a credit card. This practice is permitted in most states, though it’s important for businesses to review the local laws where they operate to ensure compliance.
Optimizing profitability
Again, completely avoiding transaction fees is not a practical solution for most modern businesses. Instead, they must find ways to continue supporting profitability as they grow, even as transaction fees increase in tandem.
Balancing transaction fees with other business expenses
Transaction fees do have an impact on profitability, though businesses incur plenty of other expenses that weigh more heavily on their profits, as shown on the income statement.
Office rent, employee wages, utilities, selling, general and administrative costs (SG&A), and marketing expenses are all substantial costs, and strategies to right-size these expenses could have a greater impact on profitability than focusing only on transaction costs.
Maximizing revenue while managing transaction costs
Because of how transaction fees are structured, in general, the more revenue a business earns, the higher this cost will be.
Companies should not be wary of revenue growth to avoid an increase in transaction costs. It’s a necessary cost of doing business, and achieving higher sales volume could even provide extra bargaining power with payment processors to lower certain processing fees, as discussed above.
Leveraging technology to streamline payment processes
Aside from choosing platforms with favorable fee structures and negotiating fees lower where possible, the right technology can further streamline payment processing for better cost-effectiveness, productivity, and cash flow management.
Platforms like BILL that let you automate invoicing and accounts receivable processes save your team valuable time and effort. Plus, BILL allows you to accept ACH payments with a flat processing fee to avoid incurring a large expense on big transactions.
Whether you need to set up recurring invoices or accept a one-time payment from a customer, BILL helps you get paid faster with fully automated, affordable ACH payments.
Sign up for BILL today to try ACH payment processing for your business.
