What is a transaction fee?

A transaction fee is a charge a business must pay every time it processes a customer’s payment. Transaction fee costs vary depending on the payment processor. For example, if a company accepts a $70 payment, the transaction fee could be between 0.5% to 5%, or taken as a percentage with an additional charge.

How do transaction fees work for businesses?

Several parties make money from each transaction the business processes. Essentially, the business collecting payment pays two sets of fees.
The first is an interchange fee—an amount the credit card company charges for each transaction. The interchange fee is a small percentage of the transaction and a per-transaction charge.
The percentage will vary depending on the type of credit card used, who issued the card, the purchased item, and the item amount.
Second, businesses pay an additional charge to the service provider. This is usually the business’s bank or an authorized independent sales organization of the business’s bank. The fee is also a percentage of the transaction and can include a fixed per-transaction amount.

What are some additional examples of transaction fees?

There are several types of transaction fees aside from interchange fees.

Tiered fees

Providers can use tiered fee structures, which use different fees for various transaction types (Card Present or Card Not Present). CNP transactions usually have higher fees than CP transactions because they are more vulnerable to fraud.

Subscription fees

Providers can also charge a flat fee instead of charging per transaction. Subscription fees are predictable and easy to factor into cash flow projections. Subscription fees are usually on an annual or monthly basis.

International transaction fees

International businesses that send goods to other countries may incur international transaction fees. Unlike transaction fees, customers usually pay these fees.

Is it possible to avoid transaction fees?

It’s possible to avoid credit card foreign transaction fees entirely by paying for purchases in foreign countries using the local currency instead of a U.S. credit card (or American dollars if the vendor accepts them).

Impact of transaction fees

Transaction fees can impact both businesses and customers in various ways:

1. Reduced profit margins
   Transaction costs can affect a business’s profit margins. When a business pays transaction fees on each sale, it decreases its profitability, which could limit growth opportunities or the ability to offer competitive pricing.
2. Consumer pricing
   Business owners may want to forgo transaction costs to their customers by increasing product prices. This can sour the customer experience and decrease sales volumes.
3. Checkout experience
   Transaction costs can influence the customer experience. Unexpected fees or confusing pricing can lead to frustration, cart abandonment, and/or customer churn.
4. Payment method choices
   Transaction costs affect which payment options a business provides its consumers. Some payment methods have higher fees than others, leading businesses to encourage customers to use lower-cost methods to minimize fees.