What Are Merchant Fees & Merchant Services?

July 6, 2023

As we know, life is filled with hidden and unexpected expenses, especially when you are running a business. While most people know that nothing in life comes for free, it is often underestimated how much running a business costs. Generally, we will think of the bigger overheads, like rent or mortgages, electricity and gas bills, or wages, forgetting about other expenses like merchant and service fees. 


Merchant fees come into the equation if your business accepts card and digital payments as a form of payment. While the RBA states that the average cost for a merchant to accept card payments has declined over recent years, most merchants are displeased with the amount of merchant fees that they pay every month. The rise in card and digital payments has led to a substantial increase in the number of transactions, causing merchant fees to accumulate despite the decrease in the average cost of acceptance.

With that in mind, we are going to touch on some basic points around merchant fees, hopefully making the concept easier to digest and understand. 

What are merchant fees?

Merchant fees are the fees charged to your business by your payment processor (bank or payment provider) for processing card transactions. As the intermediary, the payment processor sits in the middle of your business, customers, card network and the issuing bank, ensuring the payments are cleared and then sent to your bank account. As payment for facilitating this, you are charged merchant fees by your payment processor. Basically, the merchant fees cover the cost of accepting card payments and the transportation of funds around the financial system that is involved. 


Please note, merchant fees are incurred only when you accept card or digital payments from a customer – cash payments do not attract the same fees.

What are merchant services?

Merchant services is an umbrella term that relates to everything a business needs in order to accept and process card and electronic payments, including the software, hardware and a variety of other required services. In order to run a physical or online business, you will need to engage with merchant services. A merchant service provider is a party who facilitates the acceptance and processing of payments.

How do merchant services work?

Merchant Services work to facilitate transactions through a secure process by acting as the middle man between your business, customers and your bank. When a customer taps, swipes or inserts their card or digital wallet, merchant services are working behind the scenes to collect your customer’s payment and transaction details. 


After receiving authorisation from the cardholder’s bank to determine the availability of sufficient funds, they will proceed to collect the funds from the cardholder’s account and transfer them to you. Impressively, this process occurs within a matter of seconds, ultimately giving you an approved message on your EFTPOS terminal.


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The cost of merchant fees will vary greatly depending on a number of factors, including whether your provider calculates these as a flat fee or as a percentage of each transaction amount. The amount will also differ based on the type of card used in the transaction and which card network the transaction was processed.

Merchant fees can be calculated a number of ways, but are typically done as a flat fee or as a percentage of the transaction amount.

Yes, all card transactions, debit and credit, incur merchant fees. While merchant fees typically come in at a lower cost for accepting debit card transactions than credit, they still sit at a rate of around 0.5-1% of the transaction.

A merchant service provider is a financial software partner that facilitates the acceptance and processing of payments. Merchant service providers act as the intermediary between your business, customers and the various banks or payment networks that are involved in each transaction.

All merchant fees are subject to GST.

If you are running a legitimate business, you can deduct merchant fees as a valid operating expense. The three fundamental principles for business deductions are:

  1. The expense should be related to your business and not for personal use.
  2. If the expense serves both business and private purposes, you can only claim the portion used for your business.
  3. You must maintain records to substantiate your claims.

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