What it means
When a customer buys something using a card or digital wallet, several behind-the-scenes parties help complete the transaction. These include the credit card network, the customer's bank, and your merchant service provider.
Each of these players takes a small cut of the sale, which combines to create the total payment processing fee. For non-finance managers, understanding these fees is vital because they directly impact your profit margins.
If you sell a product for 50 pounds and your processing fee is 3 percent, you do not keep the full 50 pounds. Over the course of a year, these small percentages add up to a significant business expense that must be accounted for in your pricing strategy.
Processing fees typically consist of interchange fees set by card networks, scheme fees, and the markup charged by your specific payment provider. They can be charged as a flat rate per transaction, a tiered pricing model, or an interchange-plus model, which separates the wholesale cost from the provider profit.
In practice, you need to monitor these costs regularly and negotiate with providers as your sales volume grows. Choosing the right payment gateway and understanding your pricing structure helps protect your bottom line.
Ignoring these expenses can lead to lower-than-expected profits, especially for businesses with high sales volume and low profit margins.
In practice
Real-world examples.
Example
Sarah runs a boutique coffee shop and accepts card payments for lattes and pastries. On 10,000 pounds of monthly sales, her payment processor charges a flat 2.5 percent fee, costing her 250 pounds every month.
Example
A local plumbing service invoices clients online using a digital portal. For each 200 pound repair job paid by card, the processor deducts a fee of 4 pounds plus 20 pence, reducing the actual cash received to 195 pounds and 80 pence.
Example
An online clothing retailer selling 50,000 items a year uses a specialized payment gateway. By negotiating their rate down from 2.2 percent to 1.8 percent, they save 10,000 pounds annually in processing fees.
Think of it
“Payment processing fees are like a toll booth on a highway. Every time a customer's money travels from their bank to yours, the toll collector takes a small coin for making the journey safe and fast.
Formula
Calculation
Total Fee = (Transaction Amount x Percentage Rate) + Flat Fee per Transaction. Example: A customer pays 100 pounds. Your processor charges 2 percent plus 20 pence per transaction. Total Fee = (100 x 0.02) + 0.20 = 2.00 + 0.20 = 2.20 pounds. You receive 97.80 pounds.Case study
Seen in the real world.
GreenLeaf, an independent garden centre, decided to track its payment processing costs after noticing lower profit margins during the busy spring season. The manager, David, reviewed the monthly merchant statements and discovered the business was paying an average of 2.8 percent across all card transactions, alongside hidden terminal rental fees. GreenLeaf had annual card sales of 300,000 pounds, meaning processing costs were draining 8,400 pounds a year. David shopped around and switched to an interchange-plus pricing model with a new provider, dropping the effective rate to 1.9 percent and eliminating unnecessary equipment rentals. This simple change saved GreenLeaf 2,700 pounds in the first year alone, which went straight to the bottom line.
Watch out
Common mistakes.
- Failing to factor processing fees into product pricing, which eats into expected profit margins.
- Signing long-term merchant contracts without checking for hidden exit fees or annual price increases.
- Ignoring monthly merchant statements and missing unexpected spikes in transaction costs.
Questions
People also ask.
Can I pass payment processing fees directly to the customer?
In many regions, yes, you can add a surcharge, but rules vary widely by local laws, card network policies, and specific card types.
Why are credit card fees higher than debit card fees?
Credit cards involve borrowing money and carry higher fraud risk, so card networks charge higher interchange fees to cover those risks.
How can my business lower its payment processing fees?
You can negotiate rates based on high sales volume, encourage customers to use debit cards, or shop around for a more competitive provider.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related