Payment processing fees are often the most misunderstood cost for online businesses. This guide explains exactly how processors like Stripe and PayPal calculate their fees.
The Standard Pricing Model
Most payment processors use a "percentage + fixed" model:
Fee = (Transaction Amount × Percentage) + Fixed Fee Example: $100 transaction with 2.9% + $0.30 pricing Fee = ($100 × 0.029) + $0.30 = $2.90 + $0.30 = $3.20
Why the Fixed Fee Matters
The fixed fee ($0.30 for Stripe, $0.49 for PayPal) has a huge impact on small transactions:
| Transaction | Stripe Fee | Effective Rate |
|---|---|---|
| $5 | $0.45 | 8.9% |
| $10 | $0.59 | 5.9% |
| $50 | $1.75 | 3.5% |
| $100 | $3.20 | 3.2% |
| $500 | $14.80 | 2.96% |
Key insight: A $5 transaction costs you nearly 9% in fees, while a $500 transaction costs only about 3%. This is why many platforms set minimum purchase amounts.
Stripe vs PayPal Comparison
| Feature | Stripe | PayPal |
|---|---|---|
| Standard rate | 2.9% + $0.30 | 3.49% + $0.49 |
| International cards | +1.5% | +1.5% |
| Currency conversion | 1% | 3-4% |
| Chargeback fee | $15 | $20 |
| Instant payout | 1% | 1.5% |
Volume Discounts
High-volume merchants can negotiate better rates:
- Stripe: Custom pricing available at ~$80k/month
- PayPal: Merchant rate (2.59% + fixed) at $3k/month
- Typical discount: 0.1-0.5% reduction on percentage fee
Hidden Fees to Watch For
- Failed payment retries: Some processors charge for declined cards
- Refund fees: Stripe keeps the $0.30; PayPal refunds it
- Subscription billing: May have additional per-invoice fees
- 3D Secure authentication: Usually free, but check
- PCI compliance: Monthly fees from some providers
Optimization Strategy
To minimize processing fees: (1) encourage larger transactions over multiple small ones, (2) use payment methods with lower fees when possible, and (3) negotiate volume discounts once you hit the threshold.
