Why do payment providers (e.g., Square, Stripe) charge a similar processing fee? How did they arrive at ~3% + x cents
In: Economics
It’s mostly down to free market and a little bit of existing footprint by credit card companies.
Companies like Visa or Mastercard charge a certain percentage of the sale price as a processing fee. This is usually about 2%, but it varies depending on the type of product and specific negotiations with specific companies.
With a company like Square, they need to offset that processing fee (since they’re the ones paying it), so that gets included in their base fee. Then, they can either add another percentage or a static amount for their own profit.
As for how they figured out what to charge, they would have taken a look at what their effective operational costs are per transaction. It might be something like 0.5 cents per transaction. If you just charge a percentage, you might not make that back on every small transaction, which is why a flat rate is nice. However, you don’t want to just charge a flat rate, since that means the only way you make a profit is by making more transactions, and not necessarily *bigger* transactions. You also have the problem with people using the system passing the whole fee directly to the customers upfront, (i.e., $1 to use Credit), which means less people use it. That’s where the percentage comes in.
As for the specific values, that’s pretty much just market forces. If they charge too much more, they get less business, so their total profit goes down. If they charge too much less, they might bring in more business, but will have less effective profit.
Services like payment processing are commodity-like services, so all companies need to charge about the same to drive business yet make enough to stay profitable. They all have similar costs such as payments to the card networks (Visa, MasterCard, etc) and presumably similar other costs, desire to remain competitive. If others charged 3% and they charged 5%, nobody would pick them. If they charged 2%, then they’d lose money and go out of business.
There are a few perspective to look at.
From a security perspective, allowing cashiers to handling cash is risky, they might steal, change the wrong amount etc.
From sales perspective, if consumers are have access to credit, they are more likely to spend and spend more and this generates revenue for the business
However why can’t business give their own credit to customers instead of relying on banks/providers? This is because it is hard to gauge every customer’s purchasing power,the business can easily give a credit limit that is too high and the customer is unable to pay back. Hence businesses rely on banks as assurance.
So now back to your question, how is the % arrived. I believe this is a number that is extensively research to fulfill a few criteria.
Maximum profit
Cannot be higher than most businesses profit margin
Cannot be lower than maintenance fee or upkeep
Ultimately, the provider will only earn more if the businesses grow bigger, so its a mutual relationship.
Pardon me if I’m not detailed enough, just giving my 3cents.
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