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Total Payment Cost Model

Most SMBs budget 3% for "payment processing" and are shocked when actual costs hit 4-6%. Processing fees are just the start. Chargebacks, fraud tools, reserves, and working capital all cost money.

This page shows you how to calculate your true all-in payment costs.

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Why Your Payment Costs Are Higher Than You Think​

What SMBs budget: 3% processing fees What SMBs actually pay: 4-6% effective all-in cost

The hidden costs:

  • Chargeback fees ($15-25 each)
  • Lost product on chargebacks
  • Fraud prevention tools ($200-5K/month)
  • Chargeback alerts ($300-1K/month)
  • Labor (responding to disputes, reviewing fraud)
  • Reserves locked up (10-30% of revenue)
  • Working capital cost of 2-3 day settlement delay

At $500K/month volume with 0.5% CB ratio:

  • Processing: $16,000 (3.2%)
  • Chargebacks: $1,875 (fees + product)
  • Tools: $800
  • Labor: $1,000 (20 hours/month at $50/hr)
  • Working capital: $500 (interest on locked funds)
  • Total: $20,175/month (4.0% effective)

That's 25% more than you budgeted.

Complete Cost Model Worksheet​

Step 1: Processing Fees (Base Cost)​

Your DataCalculation
Monthly volume: $______A
Processor rate: % + $B
Average transaction: $______C
Transaction count: ______D = A / C

Processing fees = (A × B%) + (D × B$)

Example:

  • Volume: $500,000
  • Rate: 2.9% + $0.30
  • Avg transaction: $75
  • Count: 6,667 transactions
  • Fees: $14,500 + $2,000 = $16,500

Step 2: Chargeback Costs (Often Underestimated)​

Your DataCalculation
Chargeback ratio: ____%E
Chargeback count: ______F = (D × E%)
Chargeback fee: $15-25G
Product cost per CB: $______H (avg product value × 0.7)
Shipping cost per CB: $______I
Labor per CB: $______J ($10-30)

Chargeback cost per incident = G + H + I + J

Total chargeback cost = F × (G + H + I + J)

Example:

  • CB ratio: 0.5%
  • CB count: 33 chargebacks
  • Fee: $15
  • Product lost: $50
  • Shipping: $8
  • Labor: $12 (30 min at $25/hr)
  • Cost per CB: $85
  • Total: $2,805/month

Step 3: Fraud Prevention Tools​

Tool CategoryYour CostWhen You Need It
Processor built-in$0-100Under $100K/month: sufficient
Dispute alerts$200-1,000Over $100K/month: must-have
Fraud detection$500-5,000Over $500K or CB >0.7%: needed
Manual review$1,000-3,000Over $1M/month: consider
Analytics$0-500Nice-to-have at any scale

Your tool costs: $______ /month

Example ($500K/month):

  • Stripe Radar: $0 (included)
  • Verifi dispute alerts: $400
  • Total: $400/month

Step 4: Labor Costs​

TaskHours/MonthRateCost
Chargeback responsesCB count × 0.5 hrs$__/hr$____
Fraud reviewFlagged orders × 0.25 hrs$__/hr$____
Reconciliation4-8 hrs$__/hr$____
Processor management2-4 hrs$__/hr$____
Reporting/analysis2-4 hrs$__/hr$____

Total labor: $______ /month

Example ($500K/month, 0.5% CB ratio):

  • 33 chargebacks × 0.5 hrs × $50/hr = $825
  • 100 fraud reviews × 0.25 hrs × $50/hr = $1,250
  • Reconciliation: 6 hrs × $50 = $300
  • Management: 3 hrs × $50 = $150
  • Total: $2,525/month

Step 5: Reserves and Working Capital​

Reserve TypeCalculationYour Amount
Rolling reserveVolume × reserve %$______ locked
Fixed reserveFlat amount$______ locked
Working capital costLocked funds × interest rate / 12$______ /month

Example:

  • $500K/month × 10% rolling reserve = $50K locked
  • Interest cost: $50K × 8% annual / 12 = $333/month

Step 6: Settlement Delay Impact​

FactorCalculation
Average funds in flightDaily volume × settlement days
Working capital needAbove × opportunity cost rate

Example:

  • Daily volume: $16,667 ($500K / 30 days)
  • Settlement: 2 days
  • Funds in flight: $33,334 average
  • Opportunity cost: 8% annual
  • Cost: $222/month (interest on delayed funds)

Your Total Cost Calculation​

Cost ComponentAmount% of Volume
Processing fees$_________%
Chargeback costs$_________%
Fraud/dispute tools$_________%
Labor$_________%
Working capital cost$_________%
TOTAL MONTHLY COST$__________%
Reserve locked up$______N/A

Worked Examples by Business Type​

Example 1: $100K/Month E-Commerce (Startup)​

Assumptions:

  • Volume: $100K/month
  • AOV: $60
  • CB ratio: 0.6%
  • Processor: Stripe (2.9% + $0.30)
  • No fraud tools (under $100K)
Cost ComponentCalculationAmount
Processing fees$100K × 3.2%$3,200
Chargebacks17 × $80$1,360
ToolsStripe Radar only$0
Labor10 hrs × $50$500
Working capital$3.3K locked × 8% / 12$22
TOTAL$5,082
Effective rate5.08%

Budget: $5,100/month + $10K reserve locked

Example 2: $500K/Month E-Commerce (Growing)​

Assumptions:

  • Volume: $500K/month
  • AOV: $75
  • CB ratio: 0.5%
  • Processor: Stripe (2.9% + $0.30)
  • Dispute alerts enabled
Cost ComponentCalculationAmount
Processing fees$500K × 3.2%$16,000
Chargebacks33 × $85$2,805
ToolsRadar + Verifi$400
Labor25 hrs × $50$1,250
Reserve$50K × 8% / 12$333
Working capital$33K × 8% / 12$222
TOTAL$21,010
Effective rate4.20%

Budget: $21K/month + $50K reserve locked

Example 3: $1M/Month E-Commerce (Scaled)​

Assumptions:

  • Volume: $1M/month
  • AOV: $100
  • CB ratio: 0.4%
  • Processor: Stripe negotiated (2.7% + $0.30)
  • Full tool stack
Cost ComponentCalculationAmount
Processing fees$1M × 3.0%$30,000
Chargebacks40 × $90$3,600
ToolsFraud + alerts + analytics$3,000
LaborFull-time ops person$6,000
Reserve$100K × 8% / 12$667
Working capital$67K × 8% / 12$445
TOTAL$43,712
Effective rate4.37%

Budget: $44K/month + $100K reserve locked + $72K/year salary

Example 4: $250K/Month Card-Present Retail​

Assumptions:

  • Volume: $250K/month
  • AOV: $45
  • CB ratio: 0.3% (lower for CP)
  • Processor: Square (2.6% + $0.10)
  • Minimal tools
Cost ComponentCalculationAmount
Processing fees$250K × 2.7%$6,750
Chargebacks18 × $70$1,260
ToolsSquare built-ins$0
Labor8 hrs × $50$400
Reserve$25K × 8% / 12$167
TOTAL$8,577
Effective rate3.43%

Budget: $8,600/month + $25K reserve locked

Hidden Costs Breakdown​

The $15 Chargeback Fee Is a Lie​

What processors tell you: $15 chargeback fee What it actually costs:

Cost ComponentTypical Amount
Chargeback fee$15-25
Lost product$30-80 (if physical goods)
Shipping cost$5-15 (if applicable)
Labor to respond$10-30 (30-60 min)
Ratio impact$5-20 (risk of monitoring program)
Total per chargeback$65-170

For digital goods: $15 fee + $10 labor = $25 minimum For physical goods: $15 fee + $50 product + $10 shipping + $15 labor = $90 typical

Reserve Working Capital Cost​

$50K locked in rolling reserve at 8% cost of capital:

  • Annual cost: $50K × 8% = $4,000
  • Monthly cost: $333

At 10% rolling reserve:

  • $100K/month volume = $10K locked
  • $500K/month volume = $50K locked
  • $1M/month volume = $100K locked

This is real money tied up that can't be used for inventory, payroll, or growth.

Budget Planning Template​

Monthly Operating Budget​

For a $500K/month business, budget:

CategoryAmountNotes
Processing fees$16,0003.2% effective
Chargeback costs$2,000-3,000Depends on CB ratio
Tools$400-1,000Dispute alerts minimum
Labor$1,000-2,500Part-time or contract
Working capital$300-600Reserve + settlement
TOTAL$19,700-$23,1003.9-4.6% of volume

One-Time Setup Costs​

ItemCostWhen
Processor integration$2,000-10,000Initial setup
Terminal hardware$0-2,000If card-present
Fraud tool setup$500-2,000One-time
Legal review$1,000-5,000Contracts, terms

Reserve/Locked Capital​

TypeAmountDuration
Initial reserve$5K-50KFirst 90 days
Rolling reserve10-30% of volumeOngoing
Chargeback reserveVariableIf high ratio

Total locked: $______ (plan for this in working capital)

Cost by Business Model​

Subscription SaaS​

Monthly VolumeTotal CostEffective RateReserve
$50K$2,500-3,0005.0-6.0%$5K
$250K$11,000-14,0004.4-5.6%$25K
$1M$42,000-50,0004.2-5.0%$100K

Higher costs because:

  • Card-on-file rates higher (3.5% on some processors)
  • More dunning labor
  • Subscription dispute risk

Physical Goods E-Commerce​

Monthly VolumeTotal CostEffective RateReserve
$100K$4,500-5,5004.5-5.5%$10K
$500K$20,000-24,0004.0-4.8%$50K
$2M$82,000-96,0004.1-4.8%$200K

Higher costs because:

  • Physical chargebacks lose product + shipping
  • Returns management
  • More fraud risk (shipping fraud)

Digital Goods / Downloads​

Monthly VolumeTotal CostEffective RateReserve
$100K$4,000-4,5004.0-4.5%$10K
$500K$19,000-22,0003.8-4.4%$50K
$1M$38,000-45,0003.8-4.5%$100K

Lower costs because:

  • No product lost on chargebacks
  • Lower shipping/logistics
  • But fraud risk is higher (need tools)

Card-Present Retail​

Monthly VolumeTotal CostEffective RateReserve
$100K$3,200-3,8003.2-3.8%$10K
$500K$15,000-17,0003.0-3.4%$25K
$1M$30,000-35,0003.0-3.5%$50K

Lower costs because:

  • Lower processing fees (2.6% CP)
  • Much lower chargeback ratio (0.1-0.3%)
  • Less fraud
  • Minimal tools needed

Test to Run: Calculate Your True Cost​

Week 1: Gather data

  1. Pull 3 months of processor statements
  2. Count chargebacks, calculate average cost (fee + product + shipping)
  3. List all tools you pay for (fraud, disputes, analytics)
  4. Estimate hours spent on payment ops

Week 2: Calculate 4. Processing fees: $_______ 5. Chargeback costs: $_______ 6. Tools: $_______ 7. Labor: $_______ (hours × rate) 8. Working capital: $_______ 9. Total: $_______

Week 3: Compare 10. Effective rate: Total / Volume = ____% 11. Compare to 3% baseline 12. Difference = hidden costs

Success criteria: You now know your true all-in cost and can budget accurately.

Scale Callouts​

Under $100K/month:

  • Budget 4.5-5.5% all-in
  • Processing = 70% of costs
  • Chargebacks = 20-25%
  • Tools = minimal
  • Reserve = $5-15K locked

$100K-$500K/month:

  • Budget 4.0-5.0% all-in
  • Processing = 65-70% of costs
  • Chargebacks = 15-20%
  • Tools = 10-15%
  • Reserve = $25-75K locked

$500K-$1M/month:

  • Budget 3.8-4.5% all-in
  • Processing = 70-75% of costs
  • Chargebacks = 10-15%
  • Tools = 8-12%
  • Labor = dedicated person
  • Reserve = $75-150K locked

Over $1M/month:

  • Budget 3.5-4.5% all-in
  • Processing = 70-80% of costs
  • Chargebacks = 8-12%
  • Tools = 5-10%
  • Labor = full-time team
  • Reserve = $150K+ locked

Where This Breaks​

  1. High chargeback businesses: If CB ratio >1%, double the chargeback cost estimates. You'll spend as much on chargebacks as processing fees.

  2. High-risk industries: Reserves can be 30-50% of volume, not 10%. Working capital needs explode.

  3. Low-margin businesses: If margins are under 15%, a 4.5% all-in payment cost is half your profit. Business may not be viable.

  4. Seasonal businesses: Reserves are calculated on peak volume. You might have $200K locked up 9 months of the year when you're only doing $50K/month.

  5. Multi-processor strategies: Running two processors doubles some costs (reconciliation, tool integrations, labor).

Next Steps​

Planning a new business?

  1. Use this worksheet to calculate total payment costs
  2. Add to your business model viability analysis
  3. Ensure unit economics work AFTER payment costs

Existing business, surprised by costs?

  1. Calculate your true all-in cost
  2. Identify biggest cost component
  3. Optimize:

Trying to reduce costs?

  1. Switch processors only if saving 0.5%+ at scale
  2. Reduce chargebacks - bigger ROI than fee negotiation
  3. Optimize auth rates - declining orders is hidden cost

See Also​