What are merchant processing fees?

Definition

Merchant processing fees are the percentage and per-item charges a processor keeps when a customer pays by card. On the books, this is an Income Statement cost, not a smaller sale and not a bank account fee.

An online shop records the cut withheld from this week's card deposits on this line. The customer paid the full ticket; the processor kept its share before the deposit landed.

Accrual books record the week of the card sale, even if the deposit arrives a day later. The fee belongs with the sales it rode on.

This cost is the period's card-acceptance charges. It is not the bank's monthly account fee, and it is not the merchandise that left with the order.

Where it shows up

P&L: Located in operating expenses, moving with card sales.

Balance Sheet: Related to the net deposit landing in cash.

Cash flow: Decreases when the processor keeps its cut, reported cash from operating activities decreases.

See also: Merchant Account · Payment Processor Settlement · Variable Costs

When you look at your Income Statement, this cost sits in the keep-the-doors-open block and moves with card sales. Order sales sit above it as revenue.

When the figure is high, the shop took more card payments or a higher rate applied. When it is low, more customers paid by other means, or card volume was light.

The Balance Sheet does not keep this period's processor cut after the close. Cash rises only by the net deposit after the fee.

On the Statement of Cash Flows, the withheld cut is the cash event. Cash from operating activities is lower by the amount the processor kept.

Variable costs rise and fall with sales. This fee usually behaves that way, because it is a percent of card sales.

Operating expenses are the ongoing costs of running the shop that are not the goods that sold. This processor cut is one of those lines, even though it moves with sales.

How it works

The processor withholds its cut from the card deposit. The shop's cash is already lower by that cut.

The books debit this cost and credit cash for the withheld amount. That entry makes the fee visible and brings cash in line with the net deposit.

If you skip the entry and record only the net cash as the sale, revenue is too low and this cost is missing. The customer still paid the full ticket.

Stay with the processor's cut when you read the line. A monthly bank account charge is a different cost, even though both reduce cash.

A reversed card payment can add a separate charge. That extra amount still belongs with this period's acceptance costs if the processor billed it.

Do not bury the fee inside sales. The ticket the customer paid is still revenue; this line shows what it cost to accept the card.

Gross margin is the leftover after product cost, as a percent of sales. This fee sits below that leftover and will shrink the operating result if you ignore it.

After the month closes, this line is part of the period's profit story. Next month starts the count again from zero.

Example

Northline Goods collects $8,000 of card sales this week. The processor keeps $240 and deposits $7,760.

The shop records the withheld cut:

Debit: Merchant processing fees $240

Credit: Cash $240

This cost hits the Income Statement, and cash (an asset) is $240 lower than the full ticket total. The processor already kept its share.

Order revenue this week is still $8,000. After the $240 acceptance cost, $7,760 is left from those card sales to cover product, ads, and everything else.

If the same week also had a $15 extra assessment, that piece joins this line. It is still the processor's charge for accepting cards.

A later deposit that arrives net of a $90 cut is the same story on a new week. Record the $90 here; do not shrink that week's sales to hide it.

Common mix-ups

Merchant processing fees are not the same as bank fees. Bank fees are the bank's charges on the checking account; this line is the cut for taking cards.

Merchant processing fees are not the same as a smaller sale. The customer paid the full ticket; this line is what it cost to accept the card.

Merchant processing fees are not the same as the net deposit. The deposit is the cash that landed; this line is the amount the processor kept.

Related terms

• Merchant Account: The account that lets a business accept card payments.
• Payment Processor Settlement: The batched deposit a processor sends after netting out its fees.
• Variable Costs: Costs that rise and fall directly with sales volume.
• Bank Fees: Charges the bank deducts for account services and transactions.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Chargeback: A card payment reversed at the customer's request.
• Cash Application: Matching incoming customer payments to the right open invoices.