What is a Transaction Fee?

Published by Thomas Herold in Banking, Laws & Regulations

'Transaction Fee' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Transaction Fee describes a cost that companies have to pay every time they process a debit card or credit card transaction. These can also be called per transaction fees. Such fees range typically from .5 percent to five percent of the full transaction amount plus another .20 to .30 handling fee per transaction. Every merchant service provider assesses its own specific fees. As an example, when customers charge a $100 amount, the fee for the merchant to process this transaction could vary from a low of .70 to a high of $5.30. This is why those merchants which encounter many debit and credit card payments from their customers are best advised to shop the most advantageous deals and lowest fees from the various service providers.

Such transaction fees are set by two different participants. The first is the actual card payment firm, such as Visa, MasterCard, American Express, or Discover. The other fee setter comes from the provider of the merchant services. These wholesale or payment card transaction fees cannot be negotiated and do not vary from one merchant to the next. Yet the fees of the service providers do range. Service providers group them according to one of three main categories. These are interchange plus, tiered, or subscription.

With interchange plus, the structure of fees breaks out according to the service provider and payment card company fees individually on the monthly statement of the merchant. Tiered structures levy their fees on the type of transactions in question. This might be online or in person based transactions. With subscription fees, these are either annually or monthly assessed. Such per transaction fees reimburse the financial service firms for processing the payment card transactions.

There are more than just transactions fees that merchants have to pay in order to accept credit and debit card payments from their customers. The merchants also have to cover terminal fees, annual fees, and network fees. The contract dictates the terms of the payment processor and what the merchants might be capable of negotiating with the processors. These per transaction fees prove to be the main reason why some companies require consumers to spend a minimal amount in order to charge a purchase on their debit or credit cards.

As an obvious example, there is simply no justification for allowing a .50 charge on a credit card if the per transaction fee will amount to .30 of this. This is why many merchants elect to establish a between $5 and $10 minimum for payments by either debit or credit cards. The fact is that those smaller companies which simply cannot self-absorb the high credit card fees will be the ones who most frequent enforce such minimum transaction amounts for credit or even debit card payments in their stores. They simply lack the high volumes of credit card processing transactions necessary to obtain the rebates and other discounts which the mega payment processors give out to their larger and higher volume payment processing merchants as an incentive to keep them charging away.

Transaction fees could also apply to purchasing or selling stocks, bonds, mutual funds, ETFs, and other financial securities. These are sometimes known as simply commissions when investors encounter them. Both the buying and selling sides of trades will encounter such fees whatever the underlying instrument they are purchasing proves to be. The relatively high cost of commissions on trades (as a percentage of the total trade dollar amount) has created the rise of a whole class of discount brokers in both the stock markets and Forex markets. Charles Schwab was the first and best known national discount broker which arose in the world of stocks and mutual fund trading for individual investors back in the late 1970s.

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The term 'Transaction Fee' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.