Say you had an excellent quarter for your business with thousands of dollars in sales both in your home country and overseas. But in your income statement, you see money leaking through transaction fees. You have to keep paying the fees as customers continue to use e-payment methods.
Transaction fees create a hole in your cash flow if it's not monitored correctly. Transaction costs can negatively impact your bottom line. High transaction costs diminish returns, and can cost upto thousands of dollars each year.
That's why it's crucial to understand how transaction fees work and how you can save on them.
Transaction fees are the money you pay card issuers and processors to process your customer's e-payments. This happens because several parties —banks and card processors —are involved in processing a single payment, and they charge a fee to make the transaction. It's generally 0.5-5% of the overall payment plus a fixed fee.
Suppose you hire a real estate agent to look for a house. The agent makes the transactions between you, the buyer, and the house owner, the seller.
He's the middleman who charges a fee to fulfill your requirement. Similarly, banks and card processors are a medium through which a payment is processed, so they charge money for their work.
With the rise of digital payments, your business can't survive relying on only cash payments. You must offer various payment methods such as debit cards, credit cards and e-wallets.
These payment methods are convenient for the customer but almost always come with per-transaction costs. Suppose a customer uses a UOB issued American Express card, and you have an arrangement with HSBC to get a payment terminal.
Here, three parties are involved in the payment:
They will all take a share out of your total payment. HSBC, your acquirer, will process the payment. You pay a fixed fee to the acquirer and the network every time a payment is processed. The rate of this transaction fee is outlined in the merchant discount rate. It ranges from 1-3% of the overall transaction.
Visa and other networks likeMastercard, American Express, or Discover essentially charge the same credit card transaction fees as shown below:
You can't pass this fee on to the customer directly, but you can increase the overall costs to cover the transaction fee. This is why some businesses set spending limits in their stores to use e-payments. For example, a customer must spend a certain amount or above —say $80 —to use his cards or e-wallet. Customers with payments below the limit have to pay with cash.
The interchange rate is applied to all credit and debit card transactions. Banks charge this fee to cover the handling costs and any transaction risks. Interchange fee makes up the most significant part of the transaction charges for your business as it includes a percentage fee plus a fixed fee.
Your business must link its credit card to a merchant account. It allows you to process e-payments and deposit the money in your bank account. A merchant account is necessary as it doesn't wait for the customer to pay their credit card bills and deposit money into your account immediately after they make the payment.
In exchange, the merchant account provider charges a fee on top of the interchange fee. It involves a monthly statement fee, maintenance fee, and fall-below fee, which varies with the transaction volume and the type of your business.
A customer can pay by swiping a card, over the phone, or via an e-wallet. Each mode of payment follows a different processing fee. It depends on how much risk is involved. For instance, a transaction where the customer pays with his card upfront is less risky than an unknown person paying online with a coupon.
The interchange fee is the chief component of your overall transaction fee. Banks charge interchange fees to process your payments. It's the total of a percentage fee and a fixed fee.
For instance, to process a payment of $100, you'll have to pay a processing fee of 1.65% + 10 cents. The interchange rates vary with card companies and the payment methods, such as swiping the card, typing into a terminal, or online payment.
Retailers often use point-of-sale systems, which are a group of software designed to accept payments. The companies that provide these terminals charge a fee which is called a terminal fee.
In the tiered model, a payment processor divides the interchange cost into three categories, depending on the risk associated with it. The more the risk, the higher the processing fee.
The categories are as follows:
Some card providers allow a subscription plan rather than charging per transaction. It gives you a pre-set idea of how much you will pay for transaction charges. Subscription plans are easy to incorporate and are charged monthly or annually.
If you're doing business outside Singapore, banks apply extra charges, called foreign transaction fees, on your credit card. They also depend on the card issuer and card processor's policies.
Foreign transaction fees are applied when:
You can save foreign transaction fees by:
An acquiring bank is registered with card networks. It accepts credit card payments from the merchant on the network's behalf.
If you owe your credit card company some money and can't pay the higher interest, you can transfer that whole debt to a new credit card with a lower interest rate. The new credit card company clears your debt with the older one.
This transfer allows you to pay the same debt to a new company for lower interest. But the catch is that the new company will charge a balance transfer fee so you can move over your debt.
Calculate which amount is more - the previous debt with the given interest rate or the new debt with lower interest plus the balance transfer fee. If the shift is profitable, transfer your debt to the new company in exchange for the balance transfer fee.
Other than the types mentioned above, the service provider can charge more credit card transaction fees depending on your activity, such as:
Transaction fees are not uniform for all transactions. It depends on your card and account providers' policies. There are various factors in play, such as
Two main criteria involved in transaction fees are:
Here's an example of processing rates from Elavon, shown on Costco’s website
Let's assume a customer uses a Visa debit card issued by Citibank to pay $100 to your business. We'll understand how the transaction fee is divided among all involved parties and what the merchant gets.
You, as a merchant, must have a contract with an acquirer outlining the set payment processing rates. So, the payment of $100 goes straight to the acquirer, and they debit their fees upfront, which is 1.99% + 25 cents.
The acquirer must now distribute this money amongst Visa, the issuer, and itself. So, how does each get paid? Let's look at the issuer's perspective.
The issuer is also entitled to interchange fees. The amount depends on the payment method and the risk involved in the transaction. For convenience's sake, we'll assume this was a low-risk transaction. So the issuer is entitled to $1.65% + 15 cents, which is called the interchange fees.
The issuer must distribute the remaining $98.20 among the merchant, Visa company, and the acquirer. We already know that the merchant got $97.76 after debiting the merchant discount fee. So, the remaining 44 cents will be distributed between Visa and the acquirer.
Now, Visa's fee is 0.11%, depending on the risk involved but since we've assumed a low-risk situation, let's go with 0.11%
Again, we know the merchant gets $97.76, so the acquirer's take is 33 cents.
Transaction fees are an unavoidable charge. But there are ways to reduce it. Try the tips below to save up on your transaction fees:
The best way to save transaction fees is to pass them on to the customers. There are two ways to do it:
Remember to check the state laws about both convenience and surcharge fees.
Risk is an essential factor in determining your overall transaction fee. So, encourage your customers to swipe cards for over-the-counter transactions as they're safer and invite less interchange fees.
Consult with your payment processor about the transaction fee. They know minute details of your fee schedule and can offer you a workaround for your transaction fee. A friendly phone call can get you creative ways to save money or rate reduction for your loyalty.
Aspire's multi-currency business account lets you save a lot on international card transactions. The FX fee is 0.7% of all foreign transactions - four times cheaper than banks. On top of this, we offer 1% cashback on all qualified SaaS and digital marketing spending. With Aspire, you scale and save together.
The transaction fee is an unavoidable expense. You can't stop online transactions to save your business from it. But you can choose options that dilute its effect on your business.
Aspire's a multi-currency business account and the Visa card comes with four-time lesser FX rates than banks. It comes with the added convenience of accounting integration, so you save time spent on bookkeeping.
Are you thinking of marketing your business online? Aspire also offers 1% cashback on SaaS and marketing spending. It can't be better than this. Become an Aspire partner today and save time and money together.