Small Business’ Guide to Debit Card Fees

July 15, 2020

Paying with plastic instead of cash is convenient for the customers in stores. On the Internet, there’s no other option. For the merchants, however, that often means calculating credit and debit card fees and expenses. Here’s a short guide on those expenses.

Debit vs Credit Cards

Let’s begin by explaining the difference between the two types of cards. They both have their respective numbers, dates of expiration, and PIN codes. Both are popular eCommerce payment options. That’s for similarities. When the customer swipes or keys in his credit card information, he takes a loan from the issuing bank. With debits, he’s spending money from his own bank account. And transactions with them are charged differently.

Debit Cards Can Be Signature- or PIN-Based

There are two types of debit card transactions with different costs involved. In the case of signature transactions, buyers make payment with debits but don’t key in their PIN (Personal Identification Number.) Instead, they sign the receipt, and by doing so, complete the purchase. Signature payments are often called “offline” transactions.

On the other hand, PIN payments are those when a customer enters his unique number into a terminal. There is no need for a customer’s signature.

Fees for the two are not the same since pricing models are different. There is no general rule to which model is the best credit card processing for small business, but with a bit of data, every merchant can figure out which rates suit him and his business the most.

Processing of Debit Card Fees

The difference in pricing is because payments pass through different channels. If customers use signature debits, those payments will arrive at the customer’s bank through the issuer’s network. In that case, the interchange fee of Visa or MasterCard will be applied. PIN debits are routed through a PIN network. That network will charge its own rates.

Interchange Rates

If you aren’t new to plastic payments, then you have at least some idea of how credit card processing works. Processing company, and probably all other intermediaries, will charge you a specific fee for this or that processing service. Rates and pricing models differ between them, but some kind of interchange fee has to be a part of merchant service rates. That fee is charged every time cards are used to pay for something, and it is a cost that the bank in which you, the merchant, have an account (the so-called acquiring bank) pays to the card-issuing bank. You may think of it as a way the banks compensate themselves for taking the risk of processing transactions, especially if it’s a card not present transaction (or CNP.) Interchange rates are decided and set by financial entities involved in cashless transactions. The current average interchange rate for payment with a credit card is 1.8%, while the amount for the debits is 0.3%.

Processing Markups

Unlike interchange rates, markups are set by the merchant processing company and present its profit. The amount of money they’ll charge you will vary from one processor to the next. Sometimes, one or the other markup fee and its amount will even be negotiable. But you should be wary because markups can add up very quickly and bring profitability of your business model into question. That’s why you should always compare the offers before you opt for the processor.

Costs and Rates

Now we’ll deal in a bit more detail with costs associated with each debit card transaction. Since one of the main goals of a business is to make money, a proper understanding of what the banks and processors charge will undoubtedly impact your bottom line.

PIN Transaction Costs

As we said before, when you accept a PIN transaction, you pay to the PIN debit network that connects companies with banks.

The fee you’ll pay to the network consists of four parts. There is a flat per-transaction fee, a percentage, and switch and annual fees. The amounts will vary depending on the business and other variable factors. Some networks even cap the amount the merchant can be charged.

There are also markups paid to the processor, which is usually a flat amount. However, the law allows the processors to raise markups for higher-volume transactions.

Signature Transaction Costs

Signature transactions are subjected to the interchange rates of card issuers. How much money the merchant will pay depends on the payment amount, the bank’s size, and whether it was a CP or CNP transaction. Both Visa and MasterCard charge interchange rate of percentage depending on the payment size plus a flat amount. The processor’s markups are a significant factor, too.

Durbin Amendment and Debit Card Fees

In the aftermath of the financial crisis of 2008, Congress imposed a cap on fees for transactions with debits. The Durbin Amendment capped the fee at 0.05%+0.21 USD per debit’s use. The downside is that the cap concerns only banks whose assets top 10 billion dollars. It may be worth checking up on their offer.

Signature Processing is Cheaper Than PIN

It has to be clarified that, as far as average credit card processing fees go, signature processing costs merchants less than the use of PIN code. Of course, merchants operating online don’t have the luxury of choice. The best they can do is to find the best credit card processing services for their business when they’re applying for a merchant account.

Since there’s no free lunch, the credit card transaction fees are here to stay. But that doesn’t mean you shouldn’t make the most for your company with them in the picture.

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