When a customer pays online or in person with an electronic payment method (e.g., credit card, digital wallet), the business must pay a transaction fee that affects its revenue, margins, and pricing decisions. This cost can grow quickly at scale, with US businesses paying over $187 billion in card fees in 2024. Understanding transaction fees helps businesses plan more accurately, price with confidence, and scale without surprises.

Below, we’ll break down how transaction fees work, how they’re calculated, and how they affect a business’s margins.

What’s in this article?

• What is a transaction fee?
  
• How do transaction fees work in payment processing?
  
• What types of transaction fees do businesses typically pay?
  
• How are transaction fees calculated?
  
• Why are transaction fees charged?
  
• Who pays transaction fees: the business or the customer?
  
• How do transaction fees affect pricing and profit margins?
  
• How Stripe Payments can help
  

What is a transaction fee?

A transaction fee is what a business pays to accept and process a payment. The fee makes it possible for money to move quickly, securely, and reliably from a customer to a business when someone pays with a card, a digital wallet, or another electronic method.

How do transaction fees work in payment processing?

Every electronic payment sets off a short but coordinated sequence of steps across banks, networks, and payments infrastructure. Here’s how the process works:

• Payment initiation: The process starts when a customer submits a payment online or in person, triggering a request to move funds from their account to the business’s account.

• Authorization: The payment details are sent through a payment processor to the customer’s bank, which checks that the funds or credit is available and that the transaction doesn’t have signs of fraud.

• Network routing: Card networks route the authorization request and response between the customer’s bank and the business’s acquiring bank or processor.

• Approval or decline: The customer’s bank approves or declines the transaction and sends that decision back through the network, often in seconds.

• Clearing and settlement: Approved transactions are finalized in batches. Funds move from the issuing bank to the acquiring bank, then to the business, minus applicable fees. This part often happens 1–3 days after the transaction.

• Payout to the business: The business receives the net amount after fees are deducted, often on a predictable payout schedule rather than instantly at the moment of purchase.

• Fee distribution: The transaction fee is split among participants, with portions going to the issuing bank, the card network, and the payment processor. Each portion covers a specific part of the process.

What types of transaction fees do businesses typically pay?

A transaction fee is a bundle of smaller costs tied to different parts of the payment process. Some costs are fixed by the payment system, and others are set by the provider a business works with.

Transaction fees can include:

• Interchange fees: The business’s acquiring bank pays these fees to the cardholder’s issuing bank. They usually make up the largest share of a card transaction’s cost. They’re set by card networks, vary by card type and transaction risk, and cannot be negotiated by the business.

• Card network fees: Card networks charge assessment fees for routing transactions across their infrastructure. The fees are typically a percentage of the transaction amount and apply to every card payment.

• Payment processor fees: The payment processor charges these fees for handling the transaction and managing authorization and settlement. Unlike interchange and card network fees, this component can vary by provider and pricing model.

• Gateway fees: Some setups charge a separate fee for safely transmitting payment data, often on a per-transaction or monthly basis. When the gateway and processor are bundled, this cost is usually included in the overall transaction fee.

• International and cross-border fees: Payments that involve cards issued in another country frequently incur additional fees because of higher processing costs and increased risk. Currency conversion can add another layer of fees when the customer pays in a different currency than the one in which the business settles.

• Alternative payment method fees: Bank transfers, direct debits, and local payment methods typically have lower fees than cards do, though they might come with caps or flat charges. Digital wallets often follow the underlying card fee structure, unless they use bank-based payment networks.

• Chargeback fees: When a customer disputes a transaction, businesses are usually charged a fixed fee to cover the administrative cost of handling the dispute. This fee applies regardless of whether the business wins or loses the chargeback.

• Compliance and account-related fees: Some providers charge for Payment Card Industry (PCI) compliance support, monthly account maintenance, or reporting tools. These fees aren’t tied to individual transactions, but they still affect the overall cost of accepting payments.

How are transaction fees calculated?

Transaction fees are calculated using a mix of fixed rules and payment providers’ pricing choices. The result is a fee that reflects how a payment is made, how much it’s for, and how much risk and infrastructure are involved.

Here’s what the calculation can include:

• Percentage-based component: Many transaction fees include a percentage of the total payment amount, which scales with the transaction’s size. This covers costs that increase as payment value rises, such as interchange fees charged by issuing banks.

• Fixed per-transaction component: A flat fee is often added to the transaction, regardless of size. This accounts for baseline processing costs such as authorization, data transmission, and settlement.

• Processor pricing model: Some providers use a flat, blended rate in which all underlying costs are rolled into one fee. Others use interchange plus pricing, in which the interchange and network fees are passed through and a fixed markup is added.

• Payment method: Credit cards typically carry higher fees than debit cards or bank transfers do because of the higher risk and additional services such as credit and rewards. Alternative payment methods might use different networks with their own fee structures.

• Transaction channel: Online and manually entered payments typically cost more than in-person card-present transactions because of increased fraud risk. The same card can produce different fees, depending on how it’s used.

• Geography and currency: Domestic transactions usually cost less than international ones. Cross-border payments and currency conversion introduce additional fees.

• Risk profile of the transaction: Transactions associated with higher fraud or chargeback risk can incur higher costs. Certain industries or transaction types can see higher average fees as a result.

Why are transaction fees charged?

Moving money safely and reliably requires real infrastructure, coordination, and risk management. Every digital payment relies on systems that must work on demand.

Transaction fees are used to:

• Fund payments infrastructure, including always-on networks, data centers, and secure communication between financial institutions

• Compensate issuing banks that have taken on credit risk, fraud risk, and the work of approving and settling the transaction

• Operate card networks, which coordinate the flow of information and money between banks across countries and currencies

• Manage fraud and security, such as screening transactions for fraud, encrypting sensitive data, and complying with security standards

• Enable faster authorization and settlement for customers and businesses

• Staff customer support and resolution teams

• Help fund compliance programs that align with financial regulations such as data protection, Anti-Money Laundering (AML), and consumer protection rules

Who pays transaction fees: the business or the customer?

In many cases, transaction fees are charged to the business, not the customer. How that cost is handled afterward comes down to the business’s pricing strategy, customer expectations, and local rules.

Many businesses account for transaction fees when they set prices, which keeps checkout simple and avoids surprising customers with extra charges. Some businesses pass fees through explicitly: in certain industries or regions, businesses add a surcharge or convenience fee for specific payment methods. This shifts the cost to the customer but can introduce friction if the customer feels doing so is unexpected or unfair. Certain regions restrict or prohibit surcharging on card payments, while others allow it within limits.

Even when passing fees through to the customer is allowed, that can affect trust and conversion. Some businesses would rather absorb fees than risk abandoned checkouts or damaged relationships. Offering lower-cost options such as bank transfers and debit cards can lower fees without raising prices. Encouraging those methods subtly can shift costs without making them visible.

How do transaction fees affect pricing and profit margins?

Transaction fees shape how much revenue a business keeps from each sale. Fees are usually deducted before funds reach the business, which means gross revenue and usable revenue are never the same. Many businesses price products with transaction fees in mind to keep margins steady after payment costs are applied. When price flexibility is limited, fees become a fixed pressure on profitability.

Transaction size and volume matter. Fixed per-transaction fees make up a larger share of low-value payments, which is why minimum purchase amounts or alternative pricing models often appear in businesses with small average order values. As transaction volume grows, fees can become one of the largest variable costs on a business’s balance sheet. What feels negligible at low volume can become significant once a business processes millions of transactions.

When they choose their payment stacks, businesses often balance consumer preferences with fee impact rather than refine for cost alone. Higher-cost payment methods can increase conversion, while lower-cost methods can protect margins. Reducing chargebacks, avoiding unnecessary currency conversion, and choosing the right pricing model all can help limit fee-related margin erosion.

How Stripe Payments can help

Stripe Payments provides a unified, global payment solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment user interfaces (UIs), access to 125+ payment methods, and Link, a wallet built by Stripe.

• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.

• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

• Improve payment performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.