How Payment Processing Fees Work: Stripe vs PayPal vs Square

How Payment Processing Actually Works

Every time a customer swipes, taps, or types in a credit card number, a complex chain of events happens in seconds. Understanding this chain is the key to understanding why you pay fees and how to minimize them.

The Four Parties Involved

1. Cardholder -- the customer making the purchase
2. Merchant -- your business accepting the payment
3. Issuing bank -- the bank that issued the customer's card (e.g., Chase, Bank of America)
4. Acquiring bank / payment processor -- the service that processes the payment on your behalf (Stripe, PayPal, Square)

The card networks (Visa, Mastercard, American Express, Discover) sit between these parties, facilitating and governing the transaction.

The Three Components of Every Processing Fee

When you pay a processing fee, it is actually made up of three distinct components:

| Component | Who Sets It | Approximate Range | Negotiable? | |-----------|------------|-------------------|-------------| | Interchange fee | Card networks + issuing banks | 1.15% - 3.25% + $0.05 - $0.10 | No | | Assessment fee | Card networks (Visa, MC) | 0.13% - 0.15% | No | | Processor markup | Your payment processor | 0.10% - 0.50% + $0.00 - $0.20 | Sometimes |

Interchange fees are the largest component and go to the card-issuing bank. They vary based on:

• Card type (debit vs. credit, rewards vs. basic)
• Transaction type (in-person vs. online)
• Merchant category (grocery, restaurant, e-commerce)
• Business size (higher volume can qualify for lower interchange)

Assessment fees are small percentages collected by Visa, Mastercard, and other networks. These are relatively fixed and transparent.

Processor markup is where Stripe, PayPal, and Square make their money. This is the only component that varies between processors and the one you should compare when choosing a provider.

Stripe Fee Structure

Stripe is a developer-friendly payment processor popular with online businesses, SaaS companies, and tech startups.

Standard Pricing

| Transaction Type | Fee | |-----------------|-----| | Online card payments (domestic) | 2.9% + $0.30 | | In-person card payments (Terminal) | 2.6% + $0.10 | | ACH direct debit | 0.8% (capped at $5.00) | | International cards | +1.5% on top of standard rate | | Currency conversion | +1.0% | | Invoicing payments | 0.4% - 0.5% additional | | Recurring billing (Billing product) | 0.5% - 0.8% additional on top of card fees |

Additional Stripe Fees

• Chargebacks: $15.00 per dispute (refunded if you win)
• Payouts: Free for standard 2-day payout; 1% for instant payouts (minimum $0.50)
• Radar (fraud prevention): Included at basic level; $0.05-$0.07/transaction for advanced
• Connect (marketplace payments): $2.00/month per active connected account
• Billing (subscription management): 0.5% for Starter, 0.8% for Scale tier

Volume Discounts

Stripe offers custom pricing for businesses processing over $100,000 per month. Discounts typically bring the effective rate to 2.2% - 2.5% + $0.30 for large-volume merchants.

Best For

• Online businesses and e-commerce
• SaaS and subscription companies
• Businesses needing extensive API customization
• Marketplaces and platforms
• Developers who want full control

PayPal Fee Structure

PayPal offers multiple products spanning online payments, in-person processing, and peer-to-peer transfers. The fee structure varies by product.

Standard Pricing

| Transaction Type | Fee | |-----------------|-----| | PayPal Checkout (online) | 3.49% + $0.49 | | Standard card processing | 2.99% + $0.49 | | Advanced card processing | 2.59% + $0.49 | | QR code transactions (over $10) | 1.90% + $0.10 | | QR code transactions (under $10) | 2.40% + $0.05 | | PayPal invoicing | 3.49% + $0.49 | | International payments | +1.5% cross-border fee | | Currency conversion | 3.0% - 4.0% spread |

Additional PayPal Fees

• Chargebacks: $20.00 per dispute (not refunded even if you win in some cases)
• Withdrawal to bank: Free (1-3 business days) or instant for 1.75% (capped at $25)
• Micropayments (if eligible): 4.99% + $0.09 per transaction
• PayPal Here (card reader): 2.7% for swiped, 3.5% + $0.15 for keyed
• Monthly fees: $0 for standard; $30/month for PayPal Payments Pro

Volume Discounts

PayPal offers tiered pricing for merchants with monthly volumes above $3,000, with rates improving at $10,000 and $25,000 thresholds. The best published rates reach approximately 1.90% + $0.49 for very high volume.

Best For

• Businesses wanting buyer trust and brand recognition
• International sellers (PayPal is accepted in 200+ countries)
• Occasional sellers who do not want monthly fees
• Businesses where customers already have PayPal accounts

Square Fee Structure

Square started with in-person payments and has expanded to a full commerce ecosystem including online sales, invoicing, and banking.

Standard Pricing

| Transaction Type | Fee | |-----------------|-----| | In-person (tap, dip, swipe) | 2.6% + $0.10 | | Online transactions | 2.9% + $0.30 | | Invoices (paid online) | 3.3% + $0.30 | | Manually keyed transactions | 3.5% + $0.15 | | Square Online checkout | 2.9% + $0.30 | | ACH bank transfers | 1.0% (minimum $1.00) |

Additional Square Fees

• Chargebacks: No fee to the merchant (Square absorbs chargeback costs up to $250/month on eligible accounts)
• Instant transfers: 1.75% per transfer
• Standard transfers: Free (1-2 business days)
• Hardware: Square Reader ($0-$49), Square Terminal ($299), Square Register ($799)
• Monthly software fees: $0 for basic POS; $60/month for Restaurant/Retail Plus plans

Volume Discounts

Square offers custom pricing for businesses processing over $250,000 annually. Custom rates can bring in-person processing down to approximately 2.2% - 2.5% + $0.10.

Best For

• Retail stores and restaurants
• Mobile businesses (food trucks, farmers markets, pop-ups)
• Businesses wanting an all-in-one POS ecosystem
• Sellers who want simple, predictable pricing
• Businesses wanting chargeback protection

Side-by-Side Comparison

Fee Comparison on a $100 Online Transaction

| Processor | Rate | Fee on $100 | You Receive | |-----------|------|-------------|-------------| | Stripe | 2.9% + $0.30 | $3.20 | $96.80 | | PayPal (standard) | 3.49% + $0.49 | $3.98 | $96.02 | | PayPal (advanced) | 2.59% + $0.49 | $3.08 | $96.92 | | Square | 2.9% + $0.30 | $3.20 | $96.80 |

Fee Comparison on a $25 In-Person Transaction

| Processor | Rate | Fee on $25 | You Receive | |-----------|------|------------|-------------| | Stripe Terminal | 2.6% + $0.10 | $0.75 | $24.25 | | Square | 2.6% + $0.10 | $0.75 | $24.25 | | PayPal Zettle | 2.29% + $0.09 | $0.66 | $24.34 |

Annual Cost Comparison by Volume

Assuming average transaction of $50, mixed online and in-person:

| Annual Volume | Stripe (est.) | PayPal (est.) | Square (est.) | |--------------|--------------|--------------|---------------| | $50,000 | $1,600 | $1,850 | $1,550 | | $100,000 | $3,150 | $3,600 | $3,050 | | $250,000 | $7,500 | $8,500 | $7,250 | | $500,000 | $14,000 | $16,000 | $13,500 |

Note: These are estimates. Actual fees depend on transaction sizes, card types, and whether transactions are in-person or online.

Hidden Fees to Watch For

Chargeback Fees

A chargeback occurs when a customer disputes a charge with their bank. Fees range from $15 (Stripe) to $20 (PayPal). Square's chargeback protection is a significant advantage, but only covers eligible transactions up to a monthly cap.

PCI Compliance Fees

Some processors charge monthly PCI compliance fees of $10-$30. Stripe, PayPal, and Square handle PCI compliance for you at no extra charge when using their standard integrations.

Statement and Account Fees

Watch for:

• Monthly minimum processing fees
• Monthly statement fees
• Account inactivity fees
• Annual fees
• Early termination fees

Stripe, PayPal, and Square generally do not charge these, but older merchant account providers often do.

International and Currency Fees

Cross-border transactions add 1.0% - 1.5% on top of standard rates across all three processors. Currency conversion adds another 1.0% - 4.0%. If you sell internationally, these fees add up quickly.

Strategies to reduce international fees:

• Accept payments in local currencies (some processors offer this)
• Use a processor with lower international rates
• Price products higher for international markets to absorb fees
• Consider regional payment processors for major markets

Choosing the Right Processor for Your Business

Online-Only Business

Best choice: Stripe

• Best developer tools and API
• Clean, modern checkout experience
• Excellent subscription and recurring billing support
• Broad payment method support (wallets, BNPL, bank transfers)

Brick-and-Mortar Retail

Best choice: Square

• Free POS software
• Affordable hardware options
• Built-in inventory management
• Simple flat-rate pricing
• No monthly fees for basic plan

Service-Based / Freelancers

Best choice: Square or PayPal

• Easy invoicing built in
• No monthly commitments
• Quick setup
• Clients can pay via multiple methods

High-Volume E-Commerce

Best choice: Stripe (with custom pricing)

• Negotiate volume discounts
• Advanced fraud prevention reduces chargebacks
• Seamless integration with major e-commerce platforms
• Revenue recognition and financial reporting tools

International Sales

Best choice: Stripe or PayPal

• PayPal's brand recognition is strong globally
• Stripe supports 135+ currencies and dozens of local payment methods
• Both handle currency conversion

Strategies to Minimize Payment Processing Fees

1. Encourage Lower-Cost Payment Methods

ACH and bank transfers cost significantly less than credit cards:

• ACH via Stripe: 0.8% (max $5)
• ACH via Square: 1.0% (min $1)
• Credit card: 2.6% - 3.5%

Offer a small discount for customers who pay via bank transfer, especially for high-value transactions.

2. Optimize for In-Person When Possible

In-person (card-present) transactions have lower interchange rates because fraud risk is reduced. If you operate both online and in-person, encourage in-store purchases for large transactions.

3. Negotiate Volume Pricing

Once you consistently process over $10,000/month, contact your processor to discuss volume pricing. Even a 0.3% reduction on $250,000 annual volume saves $750 per year.

4. Reduce Chargebacks

Each chargeback costs $15-$20 plus the refunded amount. Reduce chargebacks by:

• Using clear billing descriptors (so customers recognize the charge)
• Responding promptly to customer complaints
• Maintaining clear refund policies
• Using fraud prevention tools
• Sending order confirmations and tracking information

5. Review Your Processing Statements

Monthly review of your processing statement can reveal:

• Transactions processing at higher-than-expected rates
• Excessive keyed-in transactions (higher fees than chip/tap)
• Opportunities to batch transactions differently
• Fees for services you do not use

6. Pass Fees to Customers (Where Legal)

Some businesses add a credit card surcharge (typically 2-3%). This is legal in most U.S. states but must be disclosed clearly. Alternatively, offer a cash discount, which is more customer-friendly.

Conclusion

Payment processing fees are an unavoidable cost of doing business, but understanding how they work puts you in a position to minimize them. The difference between the cheapest and most expensive processor can easily be thousands of dollars annually for a growing business.

Choose your processor based on your business type, average transaction size, volume, and whether you need online, in-person, or both capabilities. Then actively manage your fees through negotiation, payment method optimization, and chargeback prevention.

Use our payment fees calculator to model your actual costs across processors, our profit margin calculator to see how fees impact your bottom line, and our invoice generator to create professional invoices with integrated payment options.