What Is A Merchant Fee?

If you’re launching a new business in Australia, you might be wondering, “What is a merchant fee?” The umbrella term covers all fees a business pays to process an electronic transaction.

Although small on their own, merchant fees add up, especially for high-volume businesses with low profit margins. Understanding merchant fees, including the types, costs, and tax implications, can help you better manage your business.

What are merchant fees?

The merchant fee isn’t a single charge; it’s a cover-all term for any payment-related costs incurred by the merchant.

Merchant fees vary by payment method, payment type, payment processor, and bank. As they’re unavoidable, many businesses consider merchant fees as the cost of doing business.

How do merchant fees work, and why are they charged?

When a customer makes a card or a digital wallet purchase, multiple systems communicate to move money between accounts.

A payment gateway passes encrypted data between systems, an issuing bank confirms the availability of sufficient funds, and a payment processor verifies the transaction and transfers the funds to an acquiring bank.

Meanwhile, a card scheme – such as Visa, Mastercard, American Express, or eftpos – sets the standards, handles technical routing, and manages settlements in the background.

Merchant fees cover the cost of designing and operating all this interconnected infrastructure, as well as fraud and dispute-related expenses. Of course, merchant fees also give each entity a nice little profit – we’re not talking about charities here.

Who pays merchant fees in Australia?

The business, also known as the “merchant,” usually covers all payment-related fees, hence the name “merchant fees.” Many businesses bake payment costs into their pricing.

Australian businesses can currently pass on merchant fees to customers through surcharging, provided the surcharge does not exceed the actual payment processing costs. The merchant must also retain records as proof, and surcharges must be included in the final price if there is no way to pay without a surcharge.¹

However, the Reserve Bank of Australia (RBA) will change these rules on 01 October 2026. Australian businesses will no longer be able to charge card surcharges, and must include any merchant fees within the advertised price.²

Around 16% of Australian businesses currently charge card surcharges, totalling $1.6 billion per year.³

Types of merchant fees

Businesses must factor in a multitude of merchant fees when calculating operating costs.

Interchange fees

The customer’s card-issuing bank charges interchange fees that vary depending on many factors. Generally speaking, merchant fees for credit cards cost more than debit cards, online payments more than in-person payments, and international cards more than domestic cards.

Card scheme fees

For many Australian businesses, eftpos has lower fees than Visa or Mastercard.⁴ However, contactless payments often use more expensive international card schemes by default. Some payment processors allow Least Cost Routing (LCR), which uses the cheaper eftpos card scheme during contactless payments.

Merchant service fees

While merchants must cover card scheme and interchange fees, they generally don’t pay them individually. Instead, a payment processor – such as Stripe, PayPal, or Square – will usually bundle all fees together and charge the merchant a set amount per transaction.

Later, behind the scenes, the payment processor divides the proceeds among the parties and retains the remainder to cover its own costs and profits.

Account & subscription fees

Banks may charge a monthly fee to maintain a business account or merchant account.

Some payment processors operate on a Software-as-a-Service (SaaS) model with a subscription fee. However, many prefer per-transaction charges to attract smaller businesses.

EFTPOS terminal fees

Ongoing fees apply when leasing a Point of Sale terminal. Established businesses sometimes purchase a POS terminal outright to save money in the long term.

Chargeback & refund fees

Merchants may have to pay chargeback fees when a customer disputes and reverses a transaction. Likewise, payment processors may charge refund fees when a business processes a return.

Foreign exchange fees

When processing cross-currency payments, few entities use the “real” mid-market exchange rate. Instead, most insert a hidden markup into the exchange rate, often somewhere between 1% and 3%. At the higher end, this markup can potentially double processing costs.

Do merchant fees have GST in Australia?

In Australia, merchant fees usually include 10% GST. Therefore, a GST-registered business may be able to claim GST credits on such fees.⁵

According to the ATO, many businesses overlook input tax credit claims on merchant service fees.⁵ You can review merchant fee invoices to confirm GST inclusion and report the correct amount on a business activity statement (BAS).

How merchant fees impact your business

While they appear small on paper, merchant fees add up. According to the Reserve Bank of Australia, businesses collectively paid $2.4 billion in merchant service fees during the 2023/24 financial year.⁶

The extent of the impact largely depends on your profit margin. Low-margin sectors, such as hospitality and construction, often find that merchant service fees eat into profits. To cope, cafes might pass surcharges onto customers, while builders may encourage bank transfers instead of card payments.

Industries with higher margins, such as medical, accounting, and marketing services, aren’t as vulnerable. A 1-2% merchant fee isn’t a big deal when operating on a 50% profit margin. Many simply absorb payment processing costs to provide convenience to the customer.

Calculating your total merchant fees

Businesses can calculate total merchant fee costs by multiplying card payment revenue by the merchant fee rate. Say your business has a card revenue of $20,000 per month and pays 1.6% per transaction with Square.⁷ That would look like:

20,000 × 1.6% = A$320 per month, or $3,840 per year.

That calculation assumes all transactions are in-person card payments. Card-not-present payments attract higher fees due to the increased fraud risks. Many payment processors provide tools that generate merchant service fee totals so you don’t have to do the math.

Factors that affect your merchant fee rate

• Payment processor: Competing brands charge different fees, with some suited to businesses of certain sizes.
• Volume: High-volume businesses may pay lower merchant service fees.
• Card type: Credit cards attract higher interchange fees than debit cards.
• International cards: Cards issued overseas attract an international transaction fee.
• Card scheme: Certain card schemes cost more than others.
• Payment type: In-person fees cost less than card-not-present fees.
• Industry risk: Higher chargeback risk industries, such as gambling and travel, face higher interchange fees.
• Fee structure: Certain fee structures – fixed, interchange plus, or tiered – may cost more for some businesses than others.

How to minimise merchant fees

Like death and taxes, there’s no way to escape merchant service fees entirely. But businesses can take measures to reduce them.

1. Shop around: Research the best payment processors and find a good fit for your business.
2. Review statements: Periodically review merchant fees to understand costs and adjust your prices accordingly.
3. Prioritise flexibility: Payment processors with no lock-in contracts let you switch providers as you scale.
4. Consider structures: Flat-fee structures make it easier to predict costs.
5. Purchase equipment: Buying a POS outright is cheaper than leasing in the long term.
6. Negotiate: Some payment processors may provide discounts to high-volume businesses.
7. Encourage low-fee payments: Bank transfers don’t attract merchant service fees, and eftpos may be cheaper than Visa and Mastercard.4
8. Least Cost Routing: Some payment processors accept LCR to use the cheaper eftpos card scheme as a default for Tap-and-Go payments.
9. Consider exchange rates: When making cross-currency transactions, a money transfer service like Wise Business can offer better FOREX rates.

Wise Business: Simplify cross-border payments

Wise Business helps solve the problem of inflated cross-border expenses when you accept international payments. By using a multi-currency account, you can receive funds in various local currencies directly from connected platforms. This helps businesses avoid the steep international card fees and hidden foreign exchange markups often associated with traditional methods.

Expanding a business globally opens up exciting opportunities, but also new challenges like receiving payments across borders. Hidden foreign transaction fees and hefty currency conversions involved with international payments can eat into your profits and time.

Wise Business serves as a cost-effective solution where you can receive money from around the world at the speed and price of local payments.

Transform the way you receive payments with Wise Business:

• One-time fee of 65 AUD for local account details in 8+ currencies, including AUD, NZD, USD, and more—no recurring fees
• One account to hold, send, and convert money with no hidden fees or exchange rate markups
• Create and send professional invoices directly to your customers through Wise Business
• Create payment links to request money in specific currencies
• Seamlessly receive payments from customers, online sales, or PSPs like Stripe and Amazon.
• Wise is safe and secure - Trusted by 13 million people and counting

Sign up for the Wise Business account! 🚀

This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

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FAQs

1. What does “merchant fee” mean?
The merchant fee definition is any payment-related fee paid by the merchant.

2. What is the average merchant fee in Australia?
Merchant fees in Australia range from 0.3% for domestic eftpos payments to 2.5% for foreign credit cards (plus a hidden FOREX fee).

3. Can I pass merchant fees on to my customers in Australia?
An Australian business can currently pass on fees to customers.3 However, this will change on 01 October 2026, when surcharging will become illegal.⁴

4. Is a merchant fee the same as a payment processing fee?
Not quite. The payment processor fee is one fee, while the merchant fee covers all payment-related fees.

5. Is the merchant fee GST-free?
In Australia, most merchant fees include GST.⁵

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Sources:

1. ACCC: Card surcharges
2. RBA: Media release
3. Treasury: Ending card surcharges
4. Treasury: Debit cards least cost routing
5. ATO: GST administration
6. Reserve Bank: Issues for consultation
7. Square: Fees