Setting up your own online store? Here's a breakdown of the transaction fees charged by payment services

If you want to sell something online, it is now something that you can do quickly, and without any technical expertise. There are marketplaces, tonnes of marketplaces, and third-party integrations to make your own store. Before you charge in, it is a good idea to understand what the costs involved are.

It pays to know how much you will make on each sale. I made the mistake of overlooking this initially. I was selling a product for €3, and I wasn't totally sure what the fees were. After making a couple of sales, I reviewed the transactions and I saw that the fees added up to 20% of the sales amount. Yikes!

Keep in mind that if you sell something for €1 or €100, fees are going to have a different impact on your profits. If you can identify what the profit margin is at different price points, it can help you decide what you will sell. So, this is a worthwhile exercise to do before you start.

If you are selling a digital product, your biggest expense is payment processing fees, or platform fees if you are selling on a marketplace. A lot of the marketplaces use third-party services such as PayPal and Stripe to handle payments, and if you make your own store you will use one of these too.

If you are selling a physical product, then you have to consider the cost of production, delivery, and time it will take for support. There are marketplaces that will handle this for you for a bigger slice of your profits.

In this article, I will focus on the costs for handling payments. I will look at the fees for online commercial transactions charged by the major payment service providers. I am not evaluating other features of their services, which may be a factor for you in choosing a payment service provider, I am purely interested in the costs involved.

I will look at the fees for Ireland. While you may not live in Ireland, this will still provide a good outline of how the fees are arranged by each payment service provider. Please don't follow what I have outlined blindly. Take a look at the websites for the payment service providers, I have included links where applicable, change the website's settings to your country of residence, and ensure that you understand the details specific to you.

Fees compared

Fees charged on transactions generally range between 3% and 6% of the transaction value with payment service providers. Each provider arranges their fee slightly differently, so it makes it a bit tricky to do a direct comparison. They all take a percentage cut from each transaction, and there is an accompanying fixed amount charged. They diverge when it comes to selling internationally and handling currency conversion.

To make a fair comparison, let's look at the fees as a percentage of transaction amount. We can take each of these different factors into consideration separately. I have excluded VAT (Value Added Tax) and GST (Goods And Services Tax) from all calculations. I have highlighted the best rates in light green where there is a clear case for choosing one of the other.

For domestic sales, if you are selling products under 5 Euro, the lowest fees are with PayPal at their micropayment rate. There is a big gotcha with micropayments - the rate applies to all transactions, so you will end up paying higher fees on transactions greater than 5 euro. This is not ideal if you sell a range of products.

Stripe and Square charge the same rates. The one difference is that Square deducts VAT (Value Added Tax) at source on your behalf in Ireland. They are a better choice than PayPal for all price points above 5 Euro.

PayPal's fees are higher for international sales. Stripe and Square charge the same fees for domestic and international sales. It only makes sense to go with PayPal, if you are only selling products for 3 euro or less, and you can apply the micropayments rate. This probably is not practical.

Currency conversion is done differently by each provider. For PayPal and Stripe, currency conversion can be avoided if you have a bank account linked to your account that shares the currency of the transaction, but there are some differences in how they perform this check.

Some people use services such as Wise to have a multi-currency account that can accept different currencies, and who can perform the currency conversion at a more competitive rate. I am not experienced in this, so please explore this topic for yourself.

Square charges customers in the currency of your store, so the customer's bank will be responsible for any currency conversion. Customers may not appreciate this!

Payment service provider fees in detail

Let's look at the details of the fees for each provider, and any conditions that may apply.

Paypal

PayPal is the most established provider and serves the most countries worldwide. However, they are not the cheapest, and their fees are quite convoluted.

With PayPal, you can open a personal account, or a business account (also called a merchant account). Fees generally vary according to your country, and whether the transaction is domestic or international. You can read about the personal fees here, and the merchant fees here.

If you are selling on a platform like GumRoad, you can use a personal PayPal account if you want to, and the fees should be the same. You can change a personal account into a business account, but not vice versa.

For domestic transactions, there is a charge of 3.4% of transaction amount + fixed fee based on the currency (€0.35 for Euro) for every transaction.

For international transactions, you will be charged an additional 0.5% to 2% based on your region and the region of the buyer.

Currency conversion may be required to withdraw your balance from your PayPal account when your bank account has a different currency to the balance in your PayPal account. You can expect to pay approximately 3% above the base exchange rate. The rates do not appear to be based on wholesale market currency rates, so it is likely to cost you more than 3% in real terms. Again, this amount may vary depending on the currency involved.

You can use services such as Wise to get a multi-currency account, this allows you to withdraw from PayPal without converting the currency. Then, you can convert the money to another currency on Wise at a better rate, you can read more about that in this article.

With a merchant account, you can apply for micropayments. They will save you on fees for transactions less than 5 euro. The catch is that if you upgrade to the micropayment rate, this rate will apply to all commercial transaction payments received into your PayPal account. So, you really only want to do this if you only sell products at less than 5 euro.

The fees for micropayments are:

• Domestic: 5% of transaction amount + fixed fee based on currency (€0.05 for Euro).
• International: 6% of transaction amount + fixed fee based on currency (€0.05 for Euro).

It does not seem to be possible to apply for micropayments through their website. When I contacted the support team to ask how to apply, they said they can't set-up it up through web chat. They asked me to call a particular department (PPS department) instead. I didn't do it as it wasn't something I wanted done.

Stripe

Stripe has been around since 2009, and focuses more on offering integrations for ecommerce. It serves a decent amount of countries, but it is predominantly Europe and North America, for now.

Stripe's payment processing fees are quite straightforward, for Ireland the pricing is:

• Domestic transactions: 1.4% of transaction amount + fixed fee based (€0.25 for Europe)
• International transactions: 2.9% of transaction amount for non-European cards + 2% currency conversion fee if required + fixed fee (€0.25 for Europe).

You may be able to avoid currency conversion fees if you have multiple bank accounts linked to your Stripe account.

Square

Square was founded in 2009 and is more focused on physical point-of-sales and mobile apps, but it does offer online payment processing also. It only serves a few markets, currently that is: Australia, Canada, France, Ireland, Japan, United Kingdom, and the United States.

Square's payment processing fees for Ireland are:

• 1.4% of transaction amount + €0.25 + VAT per transaction with EU + EEA cards.
• 2.9% of transaction amount + €0.25 + VAT per transaction with UK/Non-EEA cards.

You can reduce the fees slightly if you get a Premium Plan for €60/mo. The fixed portion of the fee is reduced from 25 cents to 15 cents for each transaction.

Square charges the customer in the currency of your store. So, the customer is responsible for currency fees

Payoneer

Payoneer facilitates international fund transfers, and is used by marketplaces such as Fiverr, 99Designs, and iStock for payouts. It doesn't appear that Payoneer can be used as a third-party integration for individuals. So, you may only encounter Payoneer if you use as a third-party service for payouts for digital marketplaces, or if you invoice customers for business-to-business sales.

The fees are:

• Payoneer to Payoneer payments: Free.
• Direct payments by a client by credit card (all currencies): 3% of transaction amount.
• Payment through a marketplace: The marketplace set the rates.

Withdrawals are charged:

• Withdrawals in local currency from a Payoneer balance of the same currency: €1.50 in EUR, or $1.50 in USD.
• Withdrawals in non-local currency: Up to 2% of transaction amount. The exchange rate of transactions with conversion is based on wholesale currency market rates obtained at the time of transaction from a range of financial institutions. For more info, read this article.

Conclusion

Stripe and Square offer the most straightforward, competitive all round rates. PayPal's rates are not straightforward. If you are selling products at less than 5 Euro, PayPal's micropayment rates are the most favourable rates around, but it may not be practical to use PayPal as a single provider just for this instance.

Ultimately, the best provider depends on where you are, what you are selling, and what markets you are serving. You may be in a country that is not served by a particular provider, so the choices are not equal everywhere.

If I missed out on something, please let me know!

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[Rob OLeary]