What Are Per-Transaction Fees?
A per-transaction fee is an expense a business must pay each time it processes an electronic payment for a customer transaction. Per-transaction fees vary across service providers, typically costing merchants from 0.5% to 5% of the transaction amount plus certain fixed fees.
Key Takeaways
- A per-transaction fee is an expense that businesses pay a service provider each time a customer payment is processed electronically.
- The per-transaction fee can vary depending on the service provider but usually ranges between 0.5% and 5% plus certain fixed fees.
- Merchants partner with merchant acquiring banks to set up the electronic payment process and the deposit account for the funds.
- A per-transaction fee usually consists of an acquirer fee and a processor fee.
How Per-Transaction Fees Work
Per-transaction fees are required of the merchant from a few different entities in a transaction. Merchants partner with merchant acquiring banks to facilitate all of the communications in an electronic payment transaction.
Merchants also set up a merchant account with the acquirer, which serves as the merchant’s primary deposit account for funds from each transaction. A merchant who receives a lot of electronic payments will rely heavily on the merchant acquiring bank, making the terms of the merchant account agreement an important factor for a merchant.
Components of Per-Transaction Fees
Merchants pay a variety of fees related to the acceptance of electronic payments. Some fees will vary while others are fixed. Merchants have a wide range of acquiring banks they can partner with for electronic payment services. Each acquirer has different fee structures and service capabilities allowing merchants to choose the acquirer that is best for them.
Acquirers will typically charge per-transaction fees as well as a monthly fee for the management of a merchant account.
The second component of a per-transaction fee is the fee paid to the network processing company. Merchants establish the types of branded cards they can accept at their store based on the processing network of their merchant acquiring bank.
Payment card companies such as MasterCard, Visa, Discover, or American Express each have their per-transaction fees that will be charged to the merchant in a transaction. Payment card company fees, also called wholesale fees, are usually a fixed fee per transaction. Some acquirers may be able to negotiate lower wholesale fees through network relationships with processors.
Acquirer and processor fees are the main components of a comprehensive per-transaction fee. In some cases, other fees for a merchant may also apply. One added cost merchants might encounter is a terminal fee which is a per-transaction fee charged to a terminal provider such as Square for the use of a terminal in an electronic payment card transaction.
Per-transaction fees are the reason why some merchants impose a minimum that customers must spend if they want to pay with a credit or debit card. For example, merchants may set a $5 or $10 minimum for credit card and debit card transactions. Smaller merchants who are less able to absorb excess card fees are more likely to impose these minimums.
American Express, Visa, MasterCard, and Discover all charge approximately the same fees, with slight variations that amount to cents in some of the components. Generally, Visa charges the lowest total amount. This depends on the cards used as well, as cards with rewards often have higher fees.
Merchant Account Statements
Acquirers will detail a merchant’s total monthly costs and transaction activities in a monthly statement. Generally, service provider transaction fees will be delineated in one of three categories: interchange, tiered, or subscription.
The interchange section lists the payment card company fees and service provider fees separately on the merchant’s monthly statement. The tiered section assesses different fees based on the transaction type, such as in-person versus online. Subscription fees are also assessed on a monthly or annual basis.
How Can I Avoid Transaction Fees?
You can avoid transaction fees by paying for a purchase with cash. However, if you are using a credit card, there will be a per-transaction fee charged to the merchant. If the merchant does not want to pay the fee, they may raise their prices so customers would effectively be subsidizing the fee.
Who Pays Credit Card Transaction Fees?
A credit card transaction fee is charged to the merchant or vendor, not the cardholder. Businesses pay the card transaction fees to the credit card issuer or payment processor company.
Can Businesses Charge a Credit Card Surcharge?
A merchant is responsible for paying a credit card transaction fee, and some merchants charge a credit card surcharge to recoup this expense. However, in some states it is illegal for merchants to charge a credit card surcharge.
The Bottom Line
Per-transaction fees are charged to merchants, not consumers, but you may be affected by these fees if the merchant adjusts prices to recoup their expenses. Merchants, especially smaller businesses, may also set minimum purchase amounts if you are using a credit card so that they do not lose money on a transaction.
FAQs
What Are Per-Transaction Fees? A per-transaction fee is an expense a business must pay each time it processes an electronic payment for a customer transaction. Per-transaction fees vary across service providers, typically costing merchants from 0.5% to 5% of the transaction amount plus certain fixed fees.
What are the components of transaction cost? ›
Transaction costs are the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. Therefore, the transaction cost is one of the most significant factors in business operation and management.
What are the typical transaction costs? ›
A typical transaction cost is a calculation of the cost of a transaction, made using a typical spread. The transaction costs are calculated like this: 1% fee + the spread price of the cryptoasset, calculated at the time of the execution of the order.
What is the average per transaction fee? ›
Typical Costs From Major Credit Card Companies
| Credit Card | Average Interchange Fees |
|---|
| Visa | 1.15% plus 5 cents to 2.40% plus 10 cents |
| Mastercard | 1.15% plus 5 cents to 2.50% plus 10 cents |
| Discover | 1.35% plus 5 cents to 2.40% plus 10 cents |
| American Express | 1.43% plus 10 cents to 3.30% plus 10 cents |
Mar 7, 2024
Transaction costs are costs incurred that don't accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market. In economics, the theory of transaction costs is based on the assumption that people are influenced by competitive self-interest.
What are the 3 main components of a transaction? ›
Three components of a transaction processing system are input, storage and output.
What are the four types of transaction costs? ›
According to theory, there are four main types of transaction costs namely, bargaining costs, opportunity costs, search costs, and policing/enforcement costs.
What is a good cost per transaction? ›
What Are Per-Transaction Fees? A per-transaction fee is an expense a business must pay each time it processes an electronic payment for a customer transaction. Per-transaction fees vary across service providers, typically costing merchants from 0.5% to 5% of the transaction amount plus certain fixed fees.
What may be included in transaction costs? ›
Transaction costs can include things like brokers' commissions and spreads, which are the differences between the price the dealer pays for a security and the price the buyer pays. Other examples are commissions paid to professionals such as real estate agents.
What is the formula for cost per transaction? ›
Divide the total cost over the total number of transactions.
Transaction fees are typically calculated based on a percentage of your transaction amount or a flat fee per transaction. The exact fee structure depends on the payment service provider and the type of transaction you're doing.
What is transaction fee pricing model? ›
Transactional pricing models charge customers based on the number of transactions (the amount of work) done in a specified time. Because customers only pay for work as it's completed, there's little or no need for large upfront investments.
How much is a 3.5% transaction fee? ›
Credit card processing fees typically cost a business 1.5% to 3.5% of each transaction's total. For example, you'd pay $1.50 to $3.50 in credit card fees for a sale of $100. How much you're actually charged depends on factors like the card type and whether the transaction was made in-person or online.
What is the transaction cost theory? ›
"A theory accounting for the actual cost of outsourcing production of products or services including transaction costs, contracting costs, coordination costs, and search costs. The inclusion of all costs are considered when making a decision and not just the market prices.
Which of the following accurately defines transaction costs? ›
The time, effort, and other resources needed to seek out, negotiate, and complete an exchange.
Which of the following are examples of transaction costs? ›
The three main types of transaction costs are:
- Search and information costs. Customers pay search and information costs when seeking data that helps determine whether to buy a product or service. ...
- Bargaining and decision costs. ...
- Enforcement and policing costs. ...
- Vacations. ...
- Concert tickets. ...
- Investments.
WHAT IS TRANSACTION PRICE? As per ASC 606-10-32-2, The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes).
What are the components of cost? ›
Cost components are the most granular representation of item costs. Examples of cost components are purchase order item price, material, freight, tax, and overhead. Cost Components come from different sources: Predefined costs from external sources such as Purchasing, Accounts Payable, and Inventory Management.
What are the transaction costs in accounting? ›
Transaction costs include legal fees, property transfer taxes etc that are directly attributable to the acquisition of the property.
