Transaction fee – what is a transaction fee?
A transaction fee is a charge that a business has to pay every time it processes a customer’s electronic payment. The cost of the transaction fee will vary depending on the service used.
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Depending on the payment processor your business uses, a transaction fee can be charged as a percentage of the transfer amount or with an additional fixed amount. For example, if you take a payment of £50, the transaction fee may be commonly between 0.5% - 5% (£0.25 - £2.50), or as a percentage with an additional charge, e.g. 2.5% + £0.30.
Transaction fees for merchants
When a customer pays for something using a credit card, the business is charged a transaction fee. It’s a somewhat complex process, and several parties make money on each transaction the business processes. Understood simply, the business taking the payment has to pay two sets of fees.
Firstly, there is an interchange fee. This is the fee that the credit card company charges for each transaction. The interchange fee is a small percentage of the transaction, plus an additional per-transaction charge. Exactly what percentage is charged will vary according to a number of factors including, the type of credit card that is used, who has issued the card, what is being bought, and how much the transaction is.
Secondly, there’s an additional charge which comes from the merchant service provider. In some cases, this is the merchant bank, i.e. the bank that provides the merchant account and allows credit cards to be accepted by the business, or it may be an authorised independent sales organisation of the merchant bank. The additional fee that’s charged here is also a percentage of the transaction and it can also include a fixed, per-transaction amount.
Foreign transaction fees
It’s common that you incur internal transaction fees when you by something on your credit card in a foreign currency. If your card is going to charge you a foreign transaction fee, this will be explained in the card’s terms and conditions. Sometimes, a card will not charge any foreign transactions fees.
Most commonly, foreign transaction fees are charged to travellers who are abroad and use their card in another country. However, at times, they can also be added to your credit card bill when you buy something online from a foreign vendor.
Essentially, whenever you use a credit card to make a purchase that is not in your local currency, you will be charged a foreign transaction fee.