Adfin | Feel like you’re overpaying for payment fees? Here's how fees work and why you might be paying to subsidise other businesses

Have you ever wondered why accepting electronic payments is so expensive? Here we’ll break down the components of those payment processing fees and outline how you can reduce them.

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What drives payment fees?

When accepting payments, a business typically pays two types of fees: a 'fixed fee,' which is a set charge per transaction regardless of amount, and a 'percentage fee,' which is calculated as a percentage of the transaction amount. To understand what drives those fees, we’ll first need to cover some key concepts for for payment gateway and processor operations.

Chargeback: If someone pays using a card or direct debit, they can request a chargeback, which is essentially a request to reverse the transaction. For example, if a customer believes their card was used fraudulently, they can ask their bank to issue a chargeback. Payment networks like Visa, Mastercard, and Bacs have rules that determine if a chargeback request is valid.
Fraud: this comes in many forms when accepting payments. Types of fraud can be placed into two buckets: some text
1. Payer fraud: When someone uses stolen payment credentials or initiates a payment with the intention of later disputing it to try and reverse the transaction.
2. Business fraud: When a business impersonates another legitimate business to request payments or when it falsely advertises products or services that don’t exist.
Liability: typically either the payer’s bank or the business accepting the payment is liable for the payment reversal in the case of fraud or a chargeback. The rules for when each party is liable are also governed by the payment schemes.

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Where do your payment fees go?

While small businesses pay the entire payment processing fee to their payment gateway or processor,, the provider itself only retains a portion of this fee. This retained portion helps cover operating costs, which vary based on chargebacks, fraud, and liability. Here’s what the breakdown of credit card processing fees looks like:

The payer’s bank fee: for card payments, this is referred to as “interchange” and is between 0.2% - 0.3% of a personal card and 1.0 - 1.9% for a business card.

The payment scheme fee: paid to the operator of the payment network (e.g. Visa, Mastercard, Bacs) - this is typically a low fixed fee plus a % of transaction value. This normally makes up 0.05% - 0.20% of a payment value.

Payment provider fees: the portion which is retained by your payment processor. These cover fees and additional margin for: some text
1. Payment processing - to cover the provider’s technical investments and ongoing costs to process payments
2. Fraud prevention - for tools used to prevent payer and business fraud
3. Chargebacks prevention and dispute management - for the tools to prevent and manage chargebacks, and the administrative overheads
4. Credit risk arising from liability when processing payments - in the event a business accepting payment fails and goes into administration, the payment provider has the liability for all chargebacks raised against the business that the business cannot fulfil, creating a credit risk

Here’s the catch - certain industries have a much higher rate of fraud, chargebacks and credit risk. In particular businesses operating in online retail, travel and gambling / trading. Although the underlying costs of serving these businesses are higher, payment processors blend their fee into a single, standard rate offered to all businesses.

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What does this mean for you?

If you are in a lower risk industry (e.g. accounting and bookkeeping) and use a payment gateway that serves higher risk industries, you are in effect subsidising the fees for those customers. You are paying the same amount for your payments as an online retailer, despite having a lower cost to serve. In general, high risk businesses can be 0.5 - 0.8% more expensive to serve for payment processors.

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How can you avoid this?

At Adfin, we’ve built our business payments platform to help services businesses, including accountants and bookkeepers, get paid faster and at lower cost. By focusing on industries with lower rates of fraud and chargebacks, we can pass our savings directly back to our customers.

We keep things simple. It’s free to create an account, there are no monthly fees, and no minimums. We just charge 1.0% + 20p per successful transaction, which is competitive when compared to Stripe fees or Worldpay charges in the UK.

Interested in learning more about our payment processing system and how it can improve your cash flow management? Visit our Pricing and Transparency Manifesto to see how Adfin can work for your business.

By understanding the various components of merchant fees, businesses can take steps to optimize their payment strategies. Different types of transactions may come with varying costs, so selecting the right payment processor is essential.

Feel like you’re overpaying for payment fees? Here's how fees work and why you might be paying to subsidise other businesses

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