Understanding How Much It Is Costing You to Get Paid: Merchant Fees


If you sell widgets, which you buy wholesale for a dollar each and retail for four dollars each, you make three dollars on each widget you sell, right? When you try to balance your accounts at the end of a particular month, you compute the costs of your wholesale widgets. You bought 2000 widgets for $2000.00. You sold 1500 for $6000.00. Your bank account should have grown by $4000 ($6000 revenue minus $2000 for the cost of the widgets).

However, when you check your bank statement, your balance has only increased by $3200.00. It seems your bank account is leaking money. You need to find the hole and plug it, quickly!

In this example, it is obvious to see something is wrong. Unfortunately, business math is not usually that straight forward. You may not realize that money is leaking out of your bank account. All you know is that you spent x amount and wound up with y amount of profit. You’re doing okay, so you may not realize how much you are losing in merchant fees.

I know what you’re thinking. “Merchant fees! Those are incidental costs. I’m not going to trip over dollars to pick up pennies.”

However, depending on who you use to process your payments, you could be paying merchant fees of up to 20%! That is a pretty significant “incidental” cost. That means instead of earning $4000.00 for your widgets, you only earn $3200.00. Let’s look a little closer look at merchant fees and make sure you are plugging the holes in your leaky bank account.

Different Strokes for Different Folks

There are different kinds of merchant services, but they basically fall into three different types: payment processors, merchant gateways, and proprietary systems.

Payment Processors

Payment processors are services like Stripe, Square, and Paypal. These are service that will process credit cards for you without having to go through a merchant account at your bank. There are slightly different payment terms for each of these, but you generally pay about 3% to use these services. In addition to a percentage of the sales, these payment processors will generally charge a fee per transaction, usually about 25 to 30 cents.

Payment processors are popular because they are pretty straight forward and easy to understand. However, they may not be the best solution. You may be able to stretch your expense dollars by choosing another type of service.

Merchant Gateways

The second type of merchant services are gateways. These are programs like authorize.net and wepay.com that will deposit the money directly into your bank account using the bank’s merchant account. These types of accounts vary in their pricing structure also. There are several fees that you want to comprehend, including setup charges, batch fees, monthly subscriptions.

A setup charge is a one-time amount when you open an account. Since setup fees are not reoccurring charges, they aren’t significant except that they discourage someone from swapping services. If you intend to jump from service to service, the setup fees each time you jump will be a cost to consider.

Batch fees are a charge that occurs when payments are processed and deposited or “batched.” If this is done daily, the batch fees will be charged daily. These charges protect the merchant gateway if someone signs up for the service, but doesn’t have any sales. Batch fees are not expensive normally, but you should be aware that you are being charged these fees if you sign up for a merchant gateway before you have launched, or started selling your product.

Merchant gateways may also charge a monthly subscription fee. When you are shopping for a merchant gateway service, just remember to account for this fee. Not all merchant gateways charge a subscription fee. If your gateway does, you may want to search for another service without a subscription fee if this cost is considerable.

Proprietary Systems

The final type of merchant service is a proprietary system that is built into the platform on which you sell your products. Examples of this type of service is Amazon.com and Kajabi Next. These proprietary systems are expensive, but can be attractive because they offer other advantages. For instance, Amazon.com has a complicated fee structure that includes referral fees, closing fees, shipping charges, and high-volume listing fees. If you don’t price your items carefully, you could lose money on every sale of your product. Referral fees alone can be as much as 6% to 25% plus $1.00 for each item sold.

Why would anyone pay these kind of fees to sell on Amazon? It’s because of Amazon’s enormous customer base. Placing your items for sale on Amazon.com doesn’t guarantee sales, but it certainly increases your chances. Unless you have a huge e-mail list, you probably can’t compete on your own website considering the traffic you will get from your product being listed on Amazon.

Another reason these proprietary systems can charge so much is that they have eliminated competition. If you sell on their platform, you have to use their merchant services. They have eliminated competition for other payment processors or merchant gateways by restricting customers to their merchant service. There are no other options.

If you have developed an online course, for example, but you haven’t had time to setup your website for e-commerce or you haven’t developed a strategy to drive traffic to your site, it may be beneficial to list your course with Kajabi Next to start making sales and prime the cash flow pump. Once you have developed a following and your courses have gained popularity, it may be better to switch selling your courses on your own website.

The Bottom Line

Merchant services are not always insignificant costs and may eat into your profits unless you study and understand the options available to you. If you feel overwhelmed by all the choices, consult a professional who can help you choose the service that is right for you and your business.

If your product or service is priced at $50.00 or more, the expense of credit card processors may be restrictive. It may be best to forego credit cards altogether and accept payments by ACH (Automated Clearing House, a method of direct transfer from one bank to another) or e-checks.

It is important to weigh your options instead of just randomly choosing a payment option. Do your due diligence and understand the various options. Don’t simply take the recommendations of your Facebook friends as the best choice for your business.