Credit Card Processing Fees: What You Need to Know
If you are starting an online business, make sure to understand how to optimize payment transaction costs.
As of January 31st Gumroad made an announcement that they will increase their margin to 10%. In the email they sent, there is one tiny detail (highlighted below).
They presented it in a way that creators should be happy because of transparency, but in reality, they are saying
We’re gonna take 10%.
On top of that, you will be charged credit card processing fees.
How much? - Well…
What was the actual problem here for Gumroad?
Their fee was blended, and they couldn’t really tell how much they earn, depending on the dynamics of credit card processing fees.
They don’t wanna do that anymore. Their cut is 10% and the revenue is more predictable.
What are interchange fees?
Paying with cards costs, and costs both sides, the merchant, and the customer. Yet it’s a commodity of modern life. Paying for books, digital services, and whatnot, from the comfort of your home.
Let’s take a look at the credit card processing fee structure. In its most basic form card payment fees comes in three types of fees:
Charged by the bank which owns the POS. Usually, the bank where the merchant has a bank account opened.
Card scheme fee
Charged by the card network such as VISA and MASTERCARD
Charged by the bank which issued the card. Usually, the bank where the customer has the bank account. The interchange fee is the most significant part of this fee structure.
On the infographic displayed below, there are two flows executing at different times.
Authorization flow (displayed in blue)
Settlement flow (displayed in dotted red)
Authorization flow is happening during the purchase, and the network communicates whether the customer has enough funds. This is when the reservation of funds is made as well. Usually, funds are not transferred between the customer and the merchant at this moment.
Settlement flow executes when the merchant closes the day. This is when the batch of transactions is transferred by the acquirer to the network, and the network distributes transactions to issuers.
What affects card processing fees
It comes down to risks. The riskier transaction, the more expensive.
What is the card type (credit is more expensive than debit, a business card is more expensive than individual)
Card present or not (online payments are more expensive, risk of fraud is higher). For example in the EU:
When present, interchange fee = 0.2%
When not present, interchange fee = 1.15%
Visa vs Mastercard
Business categorization - MCC - (in some countries, charities and similar services have lower fees)
Regionality (EU is cheaper than the rest of the world due to high regulations)
In the EU, Debit and Credit interchange fees are capped at 0.2% and 0.3%
In the US, regulated banks have a cap on Debit, while Credit is unregulated.
Mexico is 5 times more expensive than the EU, and Australia 4 times.
Can we really affect these factors? Truth is, not really. In the areas of the world with smaller markets, but the high presence of card networks, it’s pretty much up to card networks to decide how much they’ll take.
Basically, institutions in power are card networks. And things are way more unregulated in online payments.
In the last couple of years, the number of investments into fintech startups is measured in tens of billions. It is a very lucrative business to have your checkout form integrated into hundreds of thousands of websites.
Everyone is fighting to capture as many online purchases as possible and route transactions through their systems to the same card networks.
You heard about PayPal, Stripe, AliPay, Adyen, Square, etc. These are default choices when enabling online payments for your product nowadays.
What is their business model? It’s collecting fees and each of them has different fee structures.
In my next post, I explained Stripe's fee structure and optimization strategies.
Click on the link below.
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