Merchant Fees in Ecommerce: What Are They & How Do They Work?
In the rapidly evolving ecommerce landscape, understanding the intricacies of merchant fees is essential for the success of online businesses, especially those operating under the dropshipping model. As more and more entrepreneurs launch their ecommerce businesses, they often underestimate the impact that merchant fees can have on their finances. Merchant fees, which encompass transaction charges, monthly service costs, and chargeback fees, can significantly impact a business’s profitability if not carefully managed.
With the rise of various payment gateways, including global players like PayPal, Stripe, and Square, retailers have numerous options, but this also means increased competition among service providers. Each payment processor comes with different fee structures, features, and integration capabilities, making the selection process challenging yet vital.
Additionally, the rise in consumer preferences for seamless online payment experiences has further complicated matters. Customers expect quick and secure transactions. Ecommerce businesses must strike a balance between providing diverse payment options and managing operating costs.
Let’s dive into the different types of merchant fees for ecommerce, the most popular payment processors, and effective strategies for minimising costs.
Introduction to merchant fees in ecommerce
Merchant fees are costs that ecommerce businesses must pay when they accept debit card payments or credit card transactions. These fees are a combination of several different costs and though they are typically just a percentage of the transaction amount (sometimes with an additional fixed fee), they can significantly impact profit margins. According to the 2022 Nilson Report, US merchants paid a record $160.70 billion in processing fees to accept $10.589 trillion in payments from credit or debit cards, and prepaid cards. This is likely due to credit card spending, which made up a larger share of these fees and cost more to accept.
Understanding the multiple types of merchant fees, how they work, and ways to minimise them is crucial for maintaining profitability.
Multiple types of merchant fees
Merchant account fees encompass a variety of costs that businesses incur when processing customers’ debit card payments or credit card transactions. Here, we’ve covered some of the most common types of merchant fees.
Transaction fees
Transaction fees are incurred by any business that maintains or processes online payments. A per-transaction fee is charged on most online transactions to cover the cost of processing payments and facilitating the transfer of funds. These fees are normally collected by payment processors or banks. Transaction fees are usually a percentage of the total sale amount plus a fixed fee. In Australia, these fees typically range from 1.5% to 3% of the transaction value. The specific rate may depend on the payment processor and the transaction volume.
Monthly service fees
Many payment processors charge a fixed monthly fee for maintaining an account. This fee may include additional services such as reporting and fraud protection. Many payment solutions may also cover customer support, including preparing and mailing monthly statements and general customer support enquiries related to declined transactions, refunds, or integration errors that affect customer experience. Monthly service fees can typically range from $10 to $50, depending on the provider and the level of service provided. Some payment solutions, such as PayPal and Stripe, don’t charge monthly fees for payment processing but instead focus on transaction fees, while others offer premium plans with enhanced support, analytics, and security options.
Chargeback fees
Chargebacks occur when a customer disputes a transaction with their card issuer, leading the payment processor to reverse the transaction and resulting in a loss of revenue for retailers. Chargebacks interrupt a dropshipper’s cash flow and impact their overall ratings.
Australian payment processors often impose a chargeback fee for handling chargebacks. This fee covers administrative costs associated with handling a dispute. This means for each chargeback that occurs, businesses will not only lose their revenue associated with a chargeback, but they’ll also get hit with a processing fee.
Frequent chargebacks can indicate poor product quality or customer service issues, impacting your business reputation and finances. To avoid chargebacks, dropshippers should prioritise customer satisfaction and provide good quality products.
Merchant fees from popular payment processors
The total value of the Australian payments market is expected to increase from $920 billion in 2024 to $1.97 trillion by 2029, according to a report from Mordor Intelligence. The days of manually processing payments are long gone. With the increased popularity of ecommerce, businesses are seeking ways to make payment easier and more streamlined for themselves and their customers. As a result, there are multiple payment gateways suitable for different business sizes on the market.
A payment gateway is a technology used by merchants to accept credit and debit card purchases from customers. It securely transmits the payment information from the customer to the acquiring bank, ensuring the transaction is processed quickly and efficiently.
Now, let’s check out some popular payment gateways on the market and their processing fees.
PayPal
PayPal is one of the most widely recognised online payment gateways. It’s the go-to choice for many businesses and consumers due to its user-friendly interface, robust PCI compliance, and other security measures. PayPal offers a comprehensive suite of payment solutions catering to both small and large businesses, making it a versatile option for various business needs.
PayPal’s standard domestic rate for credit card and debit card transactions and website payments pro-hosted solution is 1.75 per cent + a fixed fee of AUD $0.30 (varies based on currency received). This rate applies to all commercial transaction payments received using PayPal Online Card Payment Services. For receiving international transactions, an additional percentage-based fee of 1.85 per cent will be charged. For more information about other payment-related services, read through PayPal's pricing page.
Stripe
Stripe is popular among Australian businesses for its flexibility and transparent fee structure. It provides a suite of ecommerce solutions for Australian businesses, including the ability to accept various alternative payment methods.
Stripe offers two pricing plans: Standard and Custom. For the Standard plan, Stripe charges 1.7 per cent + AUD $0.30 for domestic cards and 3.5 per cent + AUD $0.30 for international cards. With the Standard plan, you can access a complete payments platform with simple, pay-as-you-go pricing. There’s no setup fees, monthly fees, or hidden fees. For Custom pricing information, you’ll need to contact their sales team.
With Stripe’s integrated per-transaction pricing, businesses get access to 100+ features, including fraud detection, payment options, reporting, and customisable checkout experiences. This makes Stripe a popular choice for ecommerce businesses.
Square
Square is a versatile payment solution offering competitive fees. Its ecosystem includes point-of-sale systems, ecommerce tools, and detailed analytics, which can help dropshipping businesses manage their operations effectively.
Square’s fee for online transactions in Australia is 2.2 per cent per transaction. Square’s fee structure makes it especially attractive to small businesses and startups that need to manage expenses tightly.
The simplicity of Square’s pricing structure and no-surprise fees can provide peace of mind for entrepreneurs who need a cost-effective solution. For a full breakdown, see Square’s pricing page.
What to look for when choosing a merchant service for your ecommerce store
When choosing a merchant service for your ecommerce store, look for one that offers a dedicated merchant account alongside robust payment processing solutions. A good merchant account securely connects your business to customers and payment networks, handling credit card and debit card transactions, and electronic transactions seamlessly. Here’s a breakdown of what to prioritise when choosing a merchant account for your ecommerce store to ensure a smooth and reliable checkout process. .
Ease of integration
An effective solution integrates seamlessly with your ecommerce store, allowing smooth setup and compatibility with tools you already use. Seamless integration can streamline operations and reduce manual tasks. Additionally, it supports quicker processing times and improves user experience, which are the key factors in reducing cart abandonment.
Multi-card processing
When operating an online store, accepting multiple card types and payment methods is crucial for catering to diverse customer preferences. Major providers like PayPal, Stripe, and Square accept a wide range of payment methods, including Visa, MasterCard, American Express, and digital wallets such as Apple Pay and Google Pay. This flexibility helps attract a wider customer base, especially customers who increasingly prefer alternative payment methods. Having the ability to process payments via different payment methods ensures that you won’t lose sales because of limited payment options.
Encryption and security
Security should be a top priority. Choosing providers that offer strong security measures, such as PCI compliance, data encryption, and fraud prevention can help protect customer information and build trust.
Look for a merchant account provider that offers a high level of data encryption and fraud prevention tools, as these features help prevent unauthorised transactions and chargebacks. For instance, Stripe offers an advanced fraud detection tool called Radar, which uses machine learning to identify and block fraudulent charges, while PayPal offers extensive fraud prevention and buyer protection, managing most security and compliance aspects to ease the burden on merchants. By choosing a merchant account service with robust security features, you protect your online store from data breaches and ensure compliance with Australian privacy regulations.
Low fees and customer support
Another important consideration when choosing a merchant account provider for your ecommerce store is pricing and customer support.
Consider your budget constraints. Look for a provider that offers competitive pricing and lower transaction fees. Higher payment processing fees can erode profit margins. Choose a service provider with competitive payment processing costs suited to your transaction volume and typical transaction size. Understand the fee structure, including monthly charges, hidden fees, early termination fees, interchange fees, incidental fees, processing fees, payment gateway fees, and other additional fees, so you can make an informed decision.
Additionally, reliable customer support is invaluable, especially during peak sales times. Determine the level of customer support you require - do you need 24/7 support, or is customer support during standard business hours sufficient? Having access to knowledgeable support can help you resolve payment issues quickly, avoid lost sales, and maintain customer satisfaction. Balancing low fees with excellent support ensures you have cost-effective and reliable assistance whenever needed.
How merchant fees affect ecommerce profitability
Merchant account fees are a crucial consideration for any ecommerce business, especially those operating on slim profit margins, such as dropshipping. These fees cover transaction processing, refunds, and chargebacks, and they directly influence a business’s profitability by reducing the revenue retained per sale.
Here’s a closer look at the ways merchant account fees affect profitability, and the strategies you can employ to minimise these costs.
Calculating true profit margins
Merchant fees impact a business’s profitability. The cost that comes with every swipe of a credit or debit card can eat into a business’s profits. It’s essential to calculate all direct and indirect business-related costs, including monthly fees and transaction fees, interchange fees, payment processing fees, payment gateway fees, and other fees, to understand their impact on profit margins.
For dropshipping businesses that often have lower average profit margins, these fees can mean the difference between a profitable and unprofitable business. Many ecommerce owners found that merchant fees can represent a significant percentage of their overall operational costs and may require a strategic approach to manage them effectively.
Strategies to minimise merchant fees
To effectively minimise merchant fees and boost your business’s profitability, you’ll need to choose a plan that aligns with your business needs, negotiate rates with the service provider, and offer other payment methods.
Choose the right plan
Some service providers offer various pricing plans designed for different transaction volumes and average sale sizes. Choosing a plan that aligns with your sales volume and transaction frequency can result in lower fees and substantial savings over time.
For instance, PayPal’s Interchange Plus model has a starting rate of 2.6 per cent plus a fixed fee that depends on the currency of the payment being processed. This can be beneficial for high-volume businesses, as the rates can be tailored to each transaction’s interchange fee. Other providers offer a flat fee model, where businesses pay a fixed, predetermined fee for each transaction. Though the flat fee model offers predictability and convenience, it may not be the most cost-effective option for businesses with a high transaction volume.
Negotiate rates
Many service providers, including Stripe and PayPal, offer negotiable rates, particularly for businesses with high transaction volumes. If your business’s sales volume is significantly high, negotiating with your service provider for lower processing fees per transaction can yield substantial savings. Dropshippers, especially those with steady sales, are often in a good position to negotiate these fees, and payment providers may offer discounts or custom rates based on business volume.
Consider alternative payment methods
Exploring newer payment solutions, such as Buy Now, Pay Later (BNPL) services, can also help reduce costs. Many BNPL services operate on different fee structures, which might be advantageous depending on the customer base and transaction volume. Although these services sometimes come with their own fees, they often appeal to customers and may increase conversion rates, which can offset costs.
Optimise for low-cost channels
Reviewing transaction types and payment channels that incur the lowest fees and directing customers toward those methods can help reduce costs. For example, offering bank transfer options as an alternative to card payments can lower fees, particularly for larger transactions.
Comparing merchant fees between payment gateways
Comparing merchant fees between different payment gateways is crucial when profitability often depends on optimising operational costs. Each gateway brings unique advantages and potential costs, so choose the one that aligns with your business’s specific needs and transaction patterns.
Key differences
Payment gateways vary in their fee structures, services, and the value they bring to businesses.
Processing card payments fee
Processing card payments fees are a major cost factor for ecommerce businesses. PayPal’s standard fee structure is 2.60% + fixed fee for domestic transactions and for international transactions, the fee for receiving domestic transactions applies plus the additional percentage-based fee for international commercial transactions for international ones. Stripe, on the other hand, offers a similar fee of 1.7% + AUD $0.30 for domestic cards but charges 3.5% + AUD $0.30 for international cards, which can be substantial for businesses dealing with a global customer base. Square has a straightforward fee of 1.6% per tap or insert, and 2.2% for each invoice, online, card-not-present transactions or manually entered transaction, which is beneficial for businesses that prioritise simple pricing with fewer add-on charges.
Monthly fees and set-up costs
Some payment gateways charge a monthly fee for added services or premium plans, while others operate solely on transaction-based fees with no setup costs. Square, for instance, does not charge monthly fees, making it attractive to startups and smaller ecommerce stores. PayPal also has a similar fee structure with no ongoing monthly costs, whereas certain features with Stripe may come at a premium, especially for advanced fraud protection.
Chargeback fees
Chargebacks can be costly and vary between providers. For example, Stripe and PayPal charge AUD $25 and AUD $15 respectively per dispute. Square doesn’t charge any add-on or additional costs when a customer disputes a charge and requests a reversal. Chargebacks not only impact the immediate transaction but can lead to additional costs if the chargeback rate increases. Payment providers offer various tools to help prevent chargebacks. Stripe has advanced machine-learning fraud detection systems, which could reduce the likelihood of disputed transactions, particularly in high-risk markets like dropshipping.
Additional services and integrations
Payment gateways also differ in the additional services they offer. Stripe is known for its highly customisable API, which allows businesses to create custom checkout experiences and manage subscriptions effectively. PayPal, on the other hand, is favoured for its user-friendly setup and brand familiarity, which may increase customer trust. Square’s suite includes a free POS system, making it a suitable option for ecommerce entrepreneurs who also operate offline stores.
Factors to consider when choosing a provider
Understanding the differences between different payment gateways is just one part of the decision-making process. Other critical factors when choosing merchant services for your business include:
Transaction volume
Businesses with high sales volume can often negotiate lower fees per transaction, particularly if the payment processor sees potential for consistent growth. Low-volume businesses, however, might prefer a gateway with minimal fees outside of transactions, like Square, which simplifies cost management. Knowing your transaction volume can help decide whether a percentage-based or flat fee structure is most cost-effective.
Type of products and ticket size
Dropshippers often deal with varying price points, from low-cost accessories to higher-value items. For high-ticket items, even a small percentage difference in fees can add up significantly. Therefore, it’s worth negotiating fees with the payment service provider if you’re selling high-ticket items. Some providers, like Stripe and PayPal, may be open to customised rates if the average transaction size justifies it.
Customer demographics
The payment method preferences of your target audience can influence conversion rates. PayPal’s global presence and digital wallet integration appeal to international customers, while younger demographics may prefer BNPL options or digital wallets like Apple Pay and Google Pay, which are accepted by Stripe. Ensuring the gateway aligns with customer preferences is crucial for enhancing sales.
Negotiating merchant fees
Many businesses overlook the option of negotiating merchant fees, but it can be a valuable approach, especially for high-volume sellers. It can lead to substantial savings over time, especially as sales volume increases.
Leverage sales volume
If your business processes a substantial number of transactions, providers like Stripe and PayPal might be willing to lower their rates to secure your account. This is particularly true for businesses projecting significant growth.
Highlight customer retention and growth
Payment service providers value businesses that not only drive high volume but also show signs of retaining customers. Demonstrating loyalty through consistent sales volumes can position your business as an asset to the provider, increasing your chances of securing better rates.
Consider additional features
Sometimes, lower fees come at the cost of customer support or additional features. For instance, Square’s support options and POS system are highly valued, but PayPal’s dedicated premium support can be more advantageous for a high-growth business experiencing frequent customer enquiries. Finding a balance between low fees and quality support can be more cost-effective than simply choosing the lowest-priced provider.
Summary
Merchant fees are a critical aspect of running an ecommerce business. Understanding the various types of fees, comparing different merchant service providers, and implementing strategies to minimise costs can significantly improve your profitability. Take the time to assess your options, negotiate rates with the service providers, and choose a provider that aligns with your business goals to maximise your success.
