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💰 Understanding Fee Pass-Through: Why Fees Cost More Than You Think

The Simple Problem

When customers pay extra fees, those fees make the fees even MORE expensive than you think.

Easy Example

Let’s say you’re selling a $10 sandwich and you want to pass a 3% credit card fee to your customer.

What you might think happens

  • Sandwich: $10
  • You add 3% fee: $0.30
  • Customer pays: $10.30
  • You keep: $10.00

What ACTUALLY happens

  • Sandwich: $10
  • You add 3% fee: $0.30
  • Customer pays: $10.30
  • BUT the credit card company charges 3% on the FULL 10.30(notjustthe10.30 (not just the 10)
  • So the actual fee is: 10.30×310.30 × 3% = 0.31
  • You actually keep: $9.99

Why this is confusing

You thought you’d charge 3%, but you actually lost more money because the fee got charged on the fee itself!

Real-world comparison

It’s like sales tax. When you buy something for 10andthere′s1010 and there's 10% tax, you pay 11 total. If the store had to pay a “handling fee” on the sale, they’d pay that fee on the full 11,notjusttheoriginal11, not just the original 10.

The bottom line

Fees always get charged on the total amount the customer actually pays, including the extra fees on top of the subtotal.

In Depth Calculations

When you pass fees onto your end users, the fee as a % basis will be higher than you expect. This is because card fees are charged on the total amount of the purchase, not the subtotal/settlement amount. This is how all fees for all payment systems in existence operate, when Visa charges interchange fees it is on the total amount of the transaction, so even though the merchant is getting 10thefeeson10 the fees on 10.50 will be higher. The same applies for chargeback protection variable fees, because chargeback protection insures the entire purchase amount the variable fee for chargeback protection applies to the entire amount.

📘 Fees are charged on the total amount of the purchase, not the subtotal/settlement amount

The formula used for calculating the total amount (T) is as follows:

  • Total Amount (Total)
  • Variable Fee (Variable)
  • Fixed Fee (Fixed)
  • Subtotal (Subtotal)
  • Gas Fees (Gas) - Might not be applicable

The formula is:

Total = Variable * Total + Subtotal + Fixed + Gas

📘 Notice how in the formula above, the Variable is multiplied by the Total

To solve for the total amount (Total), rearrange the formula:

Total = - (Subtotal + Fixed + Gas) / (Variable - 1)

Example Calculation

  • Subtotal (S) = $100
  • Variable = 0.045
  • Fixed Fee = $0.45

Using the formula:

Total = - ($100 + $0.45) / (0.045 - 1)
Total = - $100.45 / -0.955
Total = $105.18

📘 The total transaction amount rounded up would be (T) = $105.18, which is 5.18% higher than the raw variable fee 4.5%

There are two ways to handle transaction fees in your Coinflow account. Customers can pay both the product price and all fees, meaning the total amount charged to their card includes everything and you receive the full product price after the fees are automatically deducted by the payment processor.

Merchant Pays Fees

Alternatively, if you choose to have the merchant pay the fees, customers are only charged the product price, but the fees are then subtracted from your settlement amount before you receive payment. If you want to switch from the default setting where customers pay fees to having the merchant pay fees instead, you’ll need to contact the Coinflow team to reconfigure your account. When merchant pays the fees then the pricing will line up exactly as expected according to your MSA because Subtotal = Total, so the formula from above becomes:

Fees = Variable * Subtotal + Fixed
Meaning the merchant settlement would be: Subtotal - Fees
Settlement = Subtotal - (Variable * Subtotal + Fixed)

Example Calculation

  • Subtotal (S) = $100
  • Variable = 0.045
  • Fixed Fee = $0.45

Using the formula:

Fees = $100 * 0.045 + $0.045
Fees = $4.95
Meaning the merchant settlement would be 
Settlement = $100 - $4.95
Settlement = $95.05

📘 The fee as a % basis is 4.95% (remember the fixed fee, which has an outsized impact on smaller purchases), but this fee perfectly matches what is outlined for variable and fixed rates because Total = Subtotal