Why you Should Learn About Transaction Fees

Dialed In Bookkeeping
11 Jan 2022
min read

What are these Transaction Fees That X Company Keeps Taking from me?

Transactions fees, to some business owners, are the devil himself.

As a basic definition, a transaction fee is a fee assessed to you (the one receiving the money) paid to a Payment Processor for facilitating a payment from your customers bank account to yours.

They get paid to help make transactions go faster and to make it easier for your customers to pay you.

A few of the major processors that you will see in software CRM's are below

  • Quickbooks Payments
  • Stripe
  • Square
  • PayPal
  • Apple Pay
  • Samsung Pay

As well as a whole host of others.

Usually these rates are around 3% for a payment processed with a credit card, and 1% for a payment processed with a credit card.

Now, those are the major players. You will also see some regional and smaller local players that will pitch you on some card swiper deal that is only 1.85% or something like that (this is just an example).


That 1.85% is typically a base fee.

From there, there are different "Tiers" of processing rate based on the bank type, credit or debit card, if the card is paid via Apple Pay or via a card swipe. These will be smaller fees that are "in addition" to the 1.85%.

From all of our market research, there is a low chance you can find a reputable and safe credit card processor built in to a software tool that can charge you less than 2.4%.

Why is that? Glad you asked!

How Does Payment Processing Work?

While we do not have the inner working, essentially what happens is:

Customer starts a, for example, $100 payment.

That money goes temporarily into a hold account from the payment processor while they collect the funds.

Once the funds hit the hold account, the payment processors take their cut.

If the rate is 3% + $0.25, the remaining $96.75 will wind up in your bank account.

Pretty simple, really. Which is why you pay them.

Now, to make things a little more complicated, most CRM tools that accept payments for you (Jane App, Jobber, etc.) have a payment processor baked in to their tool.

This means that on top of what the CRM has to pay Stripe, they usually take a little off the top as well.

There is definitely a case for this: they made an interface perfect for you and your business type, and used (for example) Stripe to also allow for payments. So, they charge a little extra.

Thus, on top of that, the 3% might become 3.5%, and now you are only ending up with $96.25 remaining in your account.

Now you are probably thinking "Ok, I understand their part of the value chain here, why should this be something I pay attention to?"


Why You Need to Know Your Transaction Fees

Say you are planning out a new endeavor, like hiring out a salesperson.

You know that you can pay him or her 40K per year plus 10% of each sale, and say they are in charge of $500K in sales per year, their year end will be a 90K payout in total.

So you map this out based on historic what you see on your bank account statements.

  • 500K in Sales
  • -10k in Commissions
  • -350K in COGS
  • Gross Profit of 140K
  • Gross Profit % of 28%

Not a bad day.

But the thing is, that number is wrong.

Why is that you say?

Well, that is because Transaction Fees typically do not show up on bank account statements...!

They happen before the money hits your account. Thus your numbers would be off.

Here's what you'd really end up with

  • 500K Sales
  • -10K Commissions
  • -350K in COGS
  • - 15K in Transaction Fees
  • Gross Profit of 125K
  • Gross Profit % of 25%

Say that your goal for the year was to hit that 28% above. You now know that you are not going to hit your goal and are going to be 15K short.

Thus, you now need to adjust your plan, or else you run the risk of missing your goals.

If you run at about a 15-30% Net Profit, an unaccounted for 3% on your transaction fees will wind up costing you 10-20% of your (yes you, the owner) distributions.

Over a few years of this mistake you are going to start being quite unhappy.

Alongside of this, if you do ever get audited and you have been reporting 3% less sales than you were supposed to, you are in for a not so happy bill on your end!

How to Keep Track of your Transaction Fees

Luckily for us, there is a pretty simple - albeit annoying - process of keeping track of transaction fees so that they reflect appropriately on your profit and loss statement.

The first thing you want to do is put in a "[Insert Payment Processor] Processing Account" Bank account in your chart of accounts within your accounting system.

Then, whenever you do your reconciliations (typically monthly), you go in to your CRM or Payment Processor and export all the payment received for the previous month.

You then have to split the total payments received in to one big sales deposit, and all the total transaction fee amounts in to one big expense. Both in your new Chart of Account Processing Account.

If you are Job Costing your project, you have to go even a step further and separate each transaction by the Project name.

If you are running multiple jobs per month, this is going to be a headache, but you should be doing it.

You'd also need to do this for the transaction fees. Splitting each one in to each job.

Luckily for some, Quickbooks payments and PayPal do separate out these two different transactions for you automatically, so that helps.

Unfortunately for many, if you use Stripe (Stripe is the most commonly used payment processor for web based SaaS CRM's at the moment), then you are going to have to go in to your transactions dashboard and bring all this info in manually.

Regardless, it is worth someone's time to do this because if you do not have accurate financials you are essentially steering the Titanic while drunk! (A bad idea)

In the End, It's Worth It

There is no doubt that it is 100% worth paying this fee.

Having payment processors enables more customers to make more purchases faster.

It's the equivalent of moving from trading conch shells to using coins that are smaller and easier to transport.

So, since you are going to have to do it, we hope that this article was helpful in identifying something small that deserves your attention (at least for an hour a month!)

....What About the Web 3 Application?

Ah yes, thank you for the reminder.

If you are not familiar with Web3, you will be soon. Web 3 is turning the internet upside down.

Instead of you having your data and access owned by the companies that own the platforms you use, your personal data or "Avatar" is something you bring with you from platform to platform.

Think of it like a videogame. If you walk in to a shop in a videogame, they don't ask you to log in - that'd be dumb. You have your inventory of coins, items, tokens and you can go ahead and use them as you go from place to place.

That is what Web3 is doing.

If you want an amazingly prescient example, go watch the movie Ready Player One. It'll be like that (in premise - hopefully none of the crazy bad stuff...)

Ok, so how will that impact transaction fees?

Well, it depends, but it will certainly effect things.

First of all the rate of a transaction fee is variable because of the risk profile associated with a fraudulent transaction happening. This is for instance a stolen credit card, or someone paying without available funds.

With Web3 and cryptocurrencies, the fraud could happen, but not the negative balance.

With all transactions stored on the same blockchain, the platforms are able to confirm that all pending payments + the current balance in one Avatar's Wallet (Avatar is a normal person here, just saying Avatar because there is the possibility of someone being completely anonymous) is not less than the potential payment, and can make the payment instantly without a fee.

If you want to see this in action now, go download the app "Strike" and buy some bitcoin. Then have a friend do the same. Then send your friend some bitcoin.

It takes 2 seconds to transfer the crypto from one wallet to another and there is no fee.

Well, isn't that like Venmo you might say?

Well yes it kind of is, but there is a main difference.

Platforms like Strike, or others that will come built on decentralized blockchains, have no business costs.

Why does that matter?

Well, the reason why your transaction fee is 3% is because that Payment Processor has to do certain things to run its business and generate profits. Things like hire lawyers and have office space and hire engineers to run their security protocols.

With a decentralized blockhain application, there is none of that business cost. Just code that is running on all the servers that are running that blockchain (Bitcoin, in this instance).

....if you are getting lost here, just think of this: With Web 3 (This is happening right now, this is not in the future) payment processors have operating costs of near 0%. They have a cost of goods sold also near 0%. This means they can charge you nearly 0% to do the transaction.

Their profit and loss statement would look like this

  • Sales 10 million
  • C0GS - 100K
  • Overhead - 1 million
  • Net Profit = 8.9 million

And that 10 million in sales could be from 0.001 (1/10th of 1 percent) of 10 billion processed.

And the people who build that technology will have profited mightily.

Now, the total global e-commerce only market size in 2021 is around 5 Trillion.

10 billion of 5 Trillion dollars is only 0.2% of that total market (2/10th of 1 percent). So, as the numbers go, this is not even that crazy of an event. If a developer can get 2/10ths of 1 percent of online shoppers to use their platform to buy and sell goods using a blockchain back crypto currency (the key here will be to make it dead simple and easy), then they can make 9 million or so per year.

And that will also be great news for you, dear reader!

No that simulation we had above will have you hitting your margins of 28%!

In short, Web3 has the opportunity to drive the prices way way down when it comes to transaction fees.

It will also drive down friction on all levels of acquiring customers and staff as all credentialing will be based on irrefutable histories on a blockchain that can be tied not only to transactions, but to behavior.

Honestly it is one of the coolest things, if not the coolest thing, going on right now and we encourage you to learn more.

As a final note, I have to say two things on this:

1 - I am not an expert on this. I am learning every day and I barely participate in the space at this point. Thus, i am just hypothesizing on how I see Web3 technology impacting my clients.

2 - This is not financial advice

3 (Bonus because I don't want to edit the above list) There is something called Triple Entry Bookkeeping that is going to be happening because of this as well. I am not well read on it yet, but it will end up transforming the way accounting works in the future.

Dialed In Bookkeeping
January 5, 2024

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