A transaction fee is the amount a business pays to process a customer’s payment. It may be charged as a percentage of the sale, a fixed amount per payment or a combination of both.
For example, if a payment provider charges 1.5% plus 10p, processing a £20 sale would cost 40p. The business would receive £19.60 before any other account or service charges.
How Do Transaction Fees Work?
When a customer pays by card, the money does not move directly from the customer’s bank account into the merchant’s account. Several organisations are involved in authorising, processing and settling the payment.
A typical card transaction involves:
- The customer presents a debit or credit card.
- The payment terminal or online checkout sends the transaction for authorisation.
- The card network passes the request to the cardholder’s bank.
- The bank approves or declines the payment.
- The approved payment is processed and later settled into the merchant’s account.
- The payment provider deducts the applicable fees.
The entire authorisation process may take only a few seconds, but the provider still needs to operate the payment network, manage security checks and transfer the funds. Transaction fees contribute towards these services.
What Is Included in a Card Transaction Fee?
The amount shown on a merchant’s statement may combine several different charges. These costs are commonly presented together as a merchant service charge.
Interchange Fee
The interchange fee is paid by the merchant’s acquiring bank or payment provider to the customer’s card-issuing bank.
For most domestic UK consumer cards, interchange fees are capped under the UK Interchange Fee Regulation. The caps are generally:
- 0.2% for consumer debit card transactions
- 0.3% for consumer credit card transactions
These caps apply to the interchange component, not necessarily to the complete fee charged to the business. Commercial cards and some cross-border payments may be treated differently.
Card Scheme Fee
Card networks charge fees for using their payment infrastructure. These may include processing, authorisation and network service charges.
Scheme fees can vary according to the card type, transaction method and location of the card issuer. They are generally included within the merchant’s complete processing cost.
Acquirer or Payment Provider Charge
The acquirer or payment provider adds its own charge for processing the payment and providing the merchant service.
This charge may cover:
- Payment authorisation
- Settlement into the business bank account
- Security and fraud monitoring
- Merchant support
- Online payment gateway access
- Reporting and reconciliation
- Payment terminal integration
The provider may present all costs as one simple rate or separate the underlying components on the merchant statement.
Common Transaction Fee Structures
Payment providers calculate fees in different ways. A lower advertised percentage does not automatically produce a lower total cost.
Percentage-Based Fee
A percentage fee is calculated according to the value of the sale.
If the rate is 1.5%:
- A £5 payment costs 7.5p
- A £20 payment costs 30p
- A £100 payment costs £1.50
This structure is simple, but the fee increases as the transaction value increases.
Fixed Fee
A provider may charge a set amount for every successful payment, regardless of the value.
For example, a fee of 20p would apply equally to a £3 sale and a £100 sale. Fixed charges have a greater effect on businesses processing many low-value transactions.
Percentage Plus Fixed Fee
Online payment providers commonly charge a percentage plus a fixed amount.
Using a rate of 1.5% plus 20p:
| Transaction value | Percentage charge | Fixed charge | Total fee |
| £5 | 7.5p | 20p | 27.5p |
| £20 | 30p | 20p | 50p |
| £100 | £1.50 | 20p | £1.70 |
A combined structure can be comparatively expensive for cafés, bakeries and other businesses with a low average transaction value.
Blended Pricing
Blended pricing applies one published rate to a broad group of transactions. The provider combines interchange, card scheme and processing costs into that rate.
This makes monthly costs easier to understand. However, the business may not be able to see how much of the fee comes from each underlying component.
Interchange-Plus Pricing
Interchange-plus pricing separates the interchange fee from the provider’s margin and other card costs. It may also be described as interchange++ when scheme fees are shown separately.
This structure offers greater transparency, but monthly statements can be more difficult to read. The final cost may vary depending on the types of cards customers use.
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Contact POSApt →Which Payments Can Have Transaction Fees?
Transaction fees are not limited to physical card terminals. They can apply whenever a provider processes, transfers or converts money.
In-Person Card Payments
These are payments made through a card terminal using contactless, chip and PIN, or a mobile wallet such as Apple Pay or Google Pay.
In-person payments often have lower fees because the customer’s card or device is present during the transaction, reducing some types of payment risk.
Online Payments
Online transactions are usually classified as card-not-present payments. They may attract higher fees because the physical card cannot be checked at the time of purchase.
An online payment fee may include:
- A percentage of the sale
- A fixed processing amount
- Payment gateway fees
- International card charges
- Currency conversion charges
- Fraud prevention services
Businesses should check whether their online ordering or e-commerce platform adds its own charge on top of the payment provider’s fee.
Payments Taken by Telephone
Telephone payments are also card-not-present transactions. The staff member enters the customer’s card details into an approved payment system.
These payments can carry higher fees and additional security requirements. Card details should never be recorded casually or entered into a system that is not approved for payment processing.
Digital Wallet Payments
Payments made through Apple Pay or Google Pay are generally processed as card transactions. The merchant normally pays the rate associated with the underlying card and its payment provider agreement.
The customer’s use of a digital wallet does not necessarily create a separate merchant fee.
Bank Payments
Bank transfers and Direct Debits can have different fee structures from card payments. Providers may charge a fixed fee, a percentage or a monthly service charge.
Direct Debit may be suitable for recurring payments, memberships and subscriptions. It is less suitable for businesses that need immediate confirmation of a one-off counter sale.
International Payments
A transaction may cost more when the customer’s card was issued outside the UK or when currency conversion is required.
Additional costs can include:
- International card fees
- Cross-border interchange
- Currency conversion charges
- Foreign exchange margins
UK–European Economic Area online card transactions can carry different interchange costs from domestic payments. Businesses serving overseas customers should request a separate breakdown of international charges.
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How Much Do Transaction Fees Cost a Business?
The cost depends on sales value, transaction volume, average transaction size, payment method and the types of cards used.
Consider two businesses that each process £30,000 in monthly card sales:
| Business | Monthly transactions | Average sale | Percentage fee at 1.5% | Fixed fee at 10p | Estimated total |
| Café | 3,000 | £10 | £450 | £300 | £750 |
| Furniture shop | 300 | £100 | £450 | £30 | £480 |
Both businesses process the same sales value, but the café pays more because it completes more individual transactions.
This is why low-value, high-volume businesses should pay close attention to fixed per-transaction charges. A provider with a slightly higher percentage and no fixed fee could be more economical than one advertising a lower percentage plus a fixed amount.
What Other Payment Charges Should Businesses Check?
The transaction rate is only one part of a merchant payment agreement.
Before selecting a provider, check for:
- Monthly account fees
- Terminal rental
- Terminal purchase costs
- Payment gateway fees
- PCI compliance or non-compliance charges
- Refund charges
- Chargeback fees
- International card fees
- Authorisation fees
- Minimum monthly service charges
- Early termination fees
- Settlement or payout fees
- Premium support charges
Ask the provider to calculate the complete monthly cost using the business’s expected turnover and transaction volume. This produces a more useful comparison than looking at a headline percentage.
Are Transaction Fees Refundable?
This depends on the provider’s terms.
When a business refunds a customer, the provider may return the original percentage fee, retain it or charge an additional refund fee. Some providers return part of the processing cost but keep the fixed transaction charge.
For example, a business might refund a £50 sale to the customer but still lose the fee charged when the original payment was processed.
Businesses processing frequent returns should review refund charges before choosing a payment provider.
What Is a Chargeback Fee?
A chargeback occurs when a cardholder disputes a transaction through their bank. The disputed amount may be removed from the merchant’s account while the case is reviewed.
The payment provider may also charge an administration fee. If the merchant successfully challenges the dispute, some providers return the chargeback fee, while others retain it.
A business may need to provide:
- Proof of purchase
- Delivery confirmation
- Customer communication
- Refund policies
- Signed agreements
- Evidence that the service was provided
Clear transaction records and integrated sales data can make it easier to respond to a dispute.
Can UK Businesses Add Card Fees to Customer Payments?
UK businesses generally cannot add a surcharge simply because a consumer pays with a personal debit card, credit card or certain electronic payment methods.
A business can set its overall prices at a level that covers operating costs, including payment processing. However, it should not add a separate consumer card fee at checkout where the surcharge prohibition applies.
The rules can differ for some commercial cards and other payment arrangements. Any permitted surcharge must generally reflect the actual cost of accepting that payment method. Businesses considering a payment surcharge should check the current regulations and obtain professional guidance where necessary.
How Can a Business Reduce Transaction Fees?
Businesses can reduce payment costs by examining how fees apply to their actual sales pattern.
Calculate the Effective Rate
The effective transaction rate shows the total payment cost as a percentage of card turnover.
Use this formula:
Effective Rate = (Total Payment Costs ÷ Total Card Sales) × 100
If a business pays £600 in processing and payment-related charges on £30,000 of card sales, its effective rate is 2%.
Include fixed transaction charges, gateway costs and compulsory account fees in the calculation.
Compare Providers Using Real Sales Data
Provide each prospective payment company with the same information:
- Monthly card turnover
- Number of monthly transactions
- Average transaction value
- In-person and online sales split
- Proportion of international cards
- Number of payment terminals
- Required settlement time
This allows each quote to be assessed using the same trading profile.
Review Low-Value Transactions
A fixed fee can significantly reduce the margin on a low-value purchase. Businesses with many small sales should compare percentage-only pricing with percentage-plus-fixed-fee models.
Negotiate as Turnover Grows
Payment providers may offer customised rates to businesses with higher or increasing card turnover. Merchants should review their agreement periodically, particularly after a substantial change in sales volume.
Avoid Paying Twice for the Same Function
A business may pay separate charges to its POS provider, online ordering platform, payment gateway and card processor. Connected services can simplify the process, but every layer should have a clear purpose and cost.
How Do Transaction Fees Affect POS System Costs?
A low POS software subscription can be accompanied by higher payment processing costs. Another provider may charge more for software but offer a more favourable card rate.
The total POS and payment cost should therefore be calculated together:
Total Monthly Cost = POS Subscription + Payment Fees + Hardware + Required Add-ons
A business processing £5,000 per month may be more sensitive to the software subscription. A business processing £100,000 per month is likely to be more affected by the transaction rate.
Contract flexibility, included features and support should also be considered. The cheapest payment percentage may offer limited value if the business must pay separately for online ordering, loyalty, reporting or essential assistance.
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Frequently Asked Questions About Transaction Fees
Who Pays the Transaction Fee?
The merchant normally pays the payment processing fee. The provider deducts it from the sale proceeds or includes it in a regular invoice.
Is a Transaction Fee the Same as an Interchange Fee?
No. Interchange is one component of many card processing arrangements. The complete merchant fee can also include card scheme charges and the payment provider’s own processing margin.
Are Debit Card Fees Cheaper Than Credit Card Fees?
They can be, particularly under pricing models that pass through the underlying interchange costs. A blended-rate provider may charge the same published rate for both.
Do Contactless Payments Cost More?
Contactless payments generally follow the rate applying to the underlying card and merchant agreement. The contactless method itself does not always create a separate charge.
Are Transaction Fees a Business Expense?
Payment processing charges are normally recorded as business expenses. Their accounting and tax treatment should be confirmed with an accountant, particularly when invoices include several different services.
What Is a Good Transaction Fee?
A good rate is one that produces a competitive total cost for the business’s transaction profile. The percentage, fixed fee, monthly charges, card mix and contract conditions must be assessed together.
Final Thoughts
A transaction fee is the cost a business pays to have a customer’s payment authorised, processed and settled. It may include interchange, card scheme costs and the payment provider’s charge.
Businesses should compare the total amount they will pay across an ordinary month, using their real sales volume and average transaction value. This reveals the effective cost more accurately than an advertised percentage alone.
For businesses choosing a POS system, transaction fees should be assessed alongside software, hardware, support and required features. The most suitable option is the one that provides a manageable complete cost while supporting the way the business accepts and manages payments.
Research note: UK payment terminology and surcharge rules were checked against current government and Payment Systems Regulator information.