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.
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