What are transaction fees?
Transaction fees are common across credit and payment cards.
Find out how they are calculated, how much they cost, and how to avoid them.
Transaction fees are one of the ways a financial services provider can charge customers for using an account or a payment card.
Account holders pay a small fee each time they ask the issuing bank or account provider to process a transaction cost.
The charge is normally very small. However, if you conduct a large number of transactions in a month, the total cost can be quite high.
How are transaction fees calculated?
Different card and account providers calculate their transaction fees in different ways. In general, the two main methods are:
- Flat fee: The account provider charges a fixed payment processing fee for each transaction, no matter how much money is transferred
- Percentage fee: The account provider retains a percentage of the transferred funds, usually around 2-3%
In the case of percentage fees, you may be charged a flat fee by your service provider, either in addition to the percentage or as a minimum charge if the payment or transfer is very small.
The two methods are significantly different. If you make a large number of small credit card transactions, you could end up paying more when lots of individual fixed fees add up.
By comparison, if you make a small number of large transactions, the small number of flat fees could likely be a lot less than a 2-3% fee based on the total amount of money you transfer.
An example of a transaction fee
Terms may vary, but a typical account might charge a small fixed fee of 20-30 cents per credit card payment, along with a percentage fee of 0.5-5.0% on top of this.
On a $100 wire transfer, the difference in fees could be significant:
- The lowest fee in this example would be 20 cents plus 0.5% of $100, making a total of 70 cents.
- The highest fee would be 30 cents plus 5.0% of $100, making a total of $5.30.
- A median transaction fee (25 cents plus 2.75%) would add up to an even $3.00.
As you can see, card fees can be very different depending on factors like how many transactions you carry out each month, the dollar value of each transaction, the type of transaction fee and the size of the fixed fee or percentage.
Other types of fees
In addition to transaction fees, there are other charges your account provider might ask you to pay, depending on your activity.
- Checking account fees
- Monthly/annual fees such as a monthly 'management fee,' especially on business accounts
- Overdraft charges if you withdraw too much money from your account
- Statement fees if you request a printed paper statement for your account
- Termination fees if you want to close your account, especially if you are still within a minimum contract period
Some of these are akin to transaction fees, e.g. the charge to cash a check or to enter an agreed overdraft facility.
However, many people consider transaction fees only to include things like
ACH and wire transfer charges.
Either way, it's important to be aware of the charges on your account, whether for a transaction like sending money or for other bank account activity like entering your overdraft.
Foreign transaction fees
Sometimes a cardholder might make a purchase in a foreign currency, which means that they may incur a foreign transaction fee charged by whichever financial institution that they are using at the time.
Foreign transaction fees tend to be imposed by credit and debit card companies, although this is not always the case. Some card issuers, for example, offer waivers on foreign transaction fees.
In the United States, foreign transaction fees are usually set at around 1%-3% of the value of the transaction amount, which is calculated in dollars.
You can learn more about foreign transaction fees and how to avoid them in this article.
Not all accounts charge monthly fees or transaction fees. In the example of a typical fee-free account, there are no fees for any of the most common charges and transactions, including:
- Check fees
- Inactivity fees
- Minimum balance fees
- Monthly maintenance fees
- Returned deposit fees
- Overdraft fees
A fee-free account means whether you make a lot of transactions or just a few, you won't rack up costs due to credit card processing fees.
An account of this nature also does not charge for periods of inactivity or for a very low account balance, which can make it a good option if you have a small amount of money to manage.
The above example is based on the terms of the Brex Cash account, which is protected by SIPC for balances up to $500,000 and does not charge any of the types of fees listed above.
Different accounts have different terms and conditions. An account might charge some transaction fees but not others, or might include a limited number of fee-free transactions per month.