Online payments: Merchant fee estimating

December 21, 2010

There are a lot of options when picking an online payment gateway to accept credit cards from your clients. And there are few factors to consider: features, support, or what it integrates with. However, the biggest factor is usually price. When pricing payment gateways, there is some guesswork, but you can easily estimate your monthly cost to see how the gateway is priced. Especially if you see it’s at a premium, which can be worth it.

First, you need to understand the following: transactions fees, discount rates, and a monthly fee. Transaction fees are what the payment gateway and/or merchant accounts charge you every time you process a payment. A discount rate is how much, in percent, the payment gateway and/or merchant account charges you from each transaction. And the monthly fee is a flat fee each month – usually for more premium offerings.

These terms and pricing will also depend on your combination and choice of a merchant account and payment gateway. For example, PayPal does not require a merchant account but it has discount rate like one, while’s payment gateway does have a discount rate, but the merchant account required to use it does.

If you have time to compare gateways, then you just need to understand a fee and need to do the math. This is roughly what the monthly cost will look like:

Monthly fee + Transaction fee x number of transactions + Total amount of transactions x discount rate = monthly cost

If you’re already running a business, you’ll have an idea of your total amount of cash and number of transactions so you’re able to calculate it. If not, start small with your estimate or just use an online payment gateway that has no setup cost such as PayPal until you get a better grasp of your numbers. Be aware that a lot of setup fees are non-refundable.

To help you understand the math, here are two examples using and PayPal Standard.

Example 1: $20,000 a month in 200 transactions
Payment Gateway
Monthly Gateway = $17.95
Per Transaction = $0.10
Batch Fee = $0.25 (charged each day you run a transaction)
Payment Gateway: = $17.95 + $0.10 x 200 + $0.25 x 20 = $42.95
Merchant Account
Monthly Service/Statement Fee = $9.95
Transaction Fee = $0.25
VISA/MasterCard Qualified Discount Rate = 2.19%
Merchant Account = $9.95 + $0.25 x 200 + 0.0219 x $20,000 = $497.95
Total = $540.90
PayPal Standard
Discount Rate at $10,000/month = 2.19%
Per Transaction = $0.30
Payment Gateway = $0.30 x 200 + $0.0219 x $20000 = $498.00

As you can see, PayPal is cheaper by about $40 in this scenario.

Example 2: $3000 a month in 3 transactions
Gateway = $17.95 + $0.10 x 3 + $0.25 x 3 = $19.00
Merchant Account = $9.95 + $0.25 x 3 + 0.0219 x $3000 = $76.40
Total = $95.40
PayPal Standard
Discount rate = 2.9% for $3000 and less.
PayPal Standard = $0.30 x 3 + 0.029 x $3000 = $87.90

In this example PayPal is barely cheaper. However, with these low numbers, PayPal makes sense as it is free to setup and get up and running.

If you were to try this over hundreds of scenarios, you’ll find that is always a little more expensive (tens of dollars) than a product like PayPal Standard. However, offers a number of great features such as auto-billing, automatic deposit into your merchant account, storing your client’s credit card, and is a simple paying experience for your client – just like some of the other online payments offerings that work with FreshBooks. A lot of businesses that do a lot of billing think it’s worth the investment.

about the author

FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.