In general, transactional fees fall into two categories-those that are charged to the end customer or the consumer and those that are charged to an organisation or merchant, when it wants to allow payment services to its customers.
Direct Customer fees
Transactional fees typically apply only to the direct customers or account holders of a given bank (as the bank has no direct relationship with other consumers) and even then, only when a customer has gone beyond what is deemed to be the core commercial relationship that the bank is prepared to offer at no direct cost. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, or perhaps used an automated teller machine or ATM in another bank’s network. However, even here, a bank will allow many transactions without fees, if a customer maintains a positive balance (sometimes with a minimum threshold) or commits to regular income being paid in or saved every month. This is because banks worry a lot about customer “churn” and know that fees can often be a “switching factor” if they become too much of an irritant to an account holder (especially now that opening another account with a different bank can be done online very easily in many cases). The simple logic here is that it is more cost effective and profitable to keep good customers who transact regularly with a bank (and do so for the most part in the black) for what might be many years, than to risk losing them completely over a fair but nonetheless irritating fee that “pushes them over the edge”. But even though this results in what might be seen as a better deal for the end consumer, banks still have to find ways to recover their internal transactional costs and overhead in some way.
Outside cash and cheque payments, the majority of transactional fees that are charged by a merchant bank are credit and debit card use fees. Cards are typically issued to a consumer without charge, and with no transaction fees when they are paid off regularly each month. However, a merchant will be charged for every transaction that a customer makes with a credit and/or debit card and this may be a very complex affair. In some cases, the fee charged will be a single “aggregate rate” for say credit card use, such as 2.5% of the transaction size. Hence for a 100 consumer purchase, a charge of 2.50 will be made to a merchant. However, this rate may vary from one transaction to another and this is because the aggregate rate is made up of many sub fees that every merchant needs to know about.
Banks are now making a large proportion of their profits by charging fees to both end consumers or account holders (although they worry about overdoing this to prevent customer “churn”) and to merchants who want to offer payment services to their customers. In the latter, there are many direct and indirect fees in the mix that need to be closely scrutinised, as they can make the cost of providing a product or rendering a service a lot more expensive than may organisations think (up to 5% o revenue as we suggested in an earlier blog article). However, with the rise of the Internet and much more choice now being available to the merchant, the fee landscape for the merchant in particular is changing quickly and it may be possible for a merchant to gain greater value for their fee spending (especially as they come to better understand what different transactional fees may be charged). In the next article we will therefore look at whether merchant fees on payment transactions are likely to change over the next few years (and we predict that they will certainly change considerably).