💰 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 expected due to compounding on the total amount.

🍔 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 Think Happens

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

🚫 What Actually Happens

• Sandwich: $10
• Add 3% fee: $0.30
• Customer pays: $10.30
• BUT, the credit card company charges 3% of $10.30 = $0.31
• You actually keep: $9.99

🤯 Why This Is Confusing

You thought you'd charge a 3% fee, but you ended up losing money — because the fee was charged on the fee itself!

🛍️ Real-World Comparison

It's like sales tax:
If you buy a $10 item and there's 10% tax, you pay $11 total.
If the store is charged a processing fee, it applies to $11, not just the $10.

✅ The Bottom Line

📘

Fees are always charged on the total amount the customer pays, including any fees you’ve added on top.

📐 In-Depth Calculations

When you pass fees to users, the effective fee percentage is higher than you expect, because fees apply to the total, not the subtotal.

This is standard for all payment systems, including Visa, which charges interchange fees on the total transaction amount.

💡

This also applies to chargeback protection variable fees, since they insure the entire purchase amount.

🧮 Formula for Total Amount When Customer Pays Fees

Let’s define:

• Subtotal – Product/service price
• Variable – Percentage-based fee (e.g. 4.5% → 0.045)
• Fixed – Fixed processing fee (e.g. $0.45)
• Gas – Any gas/network fee (optional)

💡 Fee-Inclusive Formula:

Total = Variable * Total + Subtotal + Fixed + Gas

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

🧾 Example Calculation

• Subtotal = $100
• Variable = 0.045
• Fixed = $0.45

Plug into formula:
Total = - ($100 + $0.45) / (0.045 - 1)
Total = - $100.45 / -0.955
Total = $105.18

📘

Final transaction amount = $105.18

Effective fee = 5.18%, not 4.5%, due to the compounding effect

🧾 Handling Fees in Rapid

There are two ways to manage fees:

1. Customer Pays Fees (Default)

• Customers pay the product price + all fees
• You receive the full product price after fees are deducted
• Use the full Total calculation above

2. Merchant Pays Fees

• Customer pays only the product price
• Fees are deducted from your payout
• You must contact Approvely to configure this setting

In this case:
Fees = Variable * Subtotal + Fixed
Settlement = Subtotal - Fees

✅ Example:

• Subtotal = $100
• Variable = 0.045
• Fixed = $0.45

Fees = $100 * 0.045 + $0.45 = $4.95
Settlement = $100 - $4.95 = $95.05

📘

Fee % = 4.95%, matching your fee breakdown precisely since Total = Subtotal

📎 Summary

• When customers pay fees, the effective % is higher than the listed variable rate.
• When merchants pay fees, the fee breakdown is exact as per your MSA.
• Always consider fixed fees, which disproportionately affect small transactions.