During the 2020s, the digital payments industry has grown exponentially. It was estimated in 2024, over USD $11.45Tn worth of transactions were processed online. This number is set to grow at an impressive rate of 10% over the next three years. Businesses are quickly adapting to the digital world and are heavily relying on payment gateways to accept payments online.

With leading payment gateways offering multiple pricing models for different payment methods, businesses are finding it tough to understand fee structures and choose a payment gateway that's right for them.

This article covers payment gateway (PG) fees for card-related transactions by breaking down the fee components and factors influencing these fees.

Decoding card transaction fees: Understanding online payment costs

Payment transaction fee components

Most PGs charge their customers on a per transaction basis. The fee includes a fixed component and percent of the transaction component. For example, Zoho Payments charges its customers 2.79% + 30c per transaction for Mastercard and Visa cards, while Verifone charges 3.50% + 30c per transaction for American Express cards. However, PGs don't get to keep all the money they charge businesses.

It is well known that there are many entities like payment processors, acquiring banks, card networks, issuing banks, and the like that play a critical role in successful transaction completions. The payment transaction fee is split among these entities for the services they provide.

Interchange fee component

The card issuing bank (customer's bank) gets a lion share (around 70%) of the transaction fee, primarily attributed to the fact that the banks issue the cards to the customers and bear the credit and transaction risk to a large extent. Fund recovery is done by the bank once it authorizes the transaction, and the bank bears the brunt if the customer fails to pay. The exact fee charged by the issuing bank depends on the type of card, industry, security checks made by the merchant, and other factors.

Network fee component

Network fees, AKA scheme fees, are charged by card networks such as Visa, Mastercard, American Express, and the like. It varies based on the card network and the type of card (credit or debit) in use. Generally, the fee varies from 0.1% to 0.25% based on the cardholder's location, merchant location, card type, currency, and other factors. Card networks charge these fees to offset the costs incurred for fraud prevention measures, network infrastructure, and similar services.

Processor fee component

Many payment gateways do not process the transaction on their own and are dependent on payment processors or payment service providers like Adyen, Stripe, and similar third parties behind the scenes. These processors charge a substantial percent of the transaction amount (approximately 0.5% to 1.5%) as a processing fee. The fee varies based on several factors, including the risk profile of the merchant, the merchant's industry, payment gateway performance, card type, and complexities in the payment transaction pathways.

Payment gateway fee component

Payment gateways charge a minuscule percent of the transaction fee (0.5 % to 1%) as mark up for providing services to securely collect, verify, and forward card information to processors and for confirming the status of the transaction to merchants and customers.

Additional fee component

For certain international cards, an additional charge of 1% is levied to offset the handling and payment orchestration costs. For international transactions, an exchange fee is levied to accommodate foreign exchange costs.

Total payment transaction fee

While the total payment transaction fee is the sum of all the above components, the processor and payment gateway mark-up fee components are something that can be negotiated. However, such transactions are solely dependent on the volume of transactions, number of chargebacks, and risk profile. Businesses also need to have a deep understanding of the card types and preferred payment methods customers use to take full advantage of such negotiations.

Conclusion

Payment transaction fees are a key aspect of online payments. By understanding the components and factors influencing the fees, merchants can make informed decisions to optimize their payment costs. With strategic planning, businesses can effectively manage payment transaction fees while enhancing their overall profitability and customer satisfaction as society embraces accepting payments online more.