Are Debit Cards Actually Cheaper for Merchants to Process Than Credit Cards

Consider the question most consumers encounterseveral times a day upon swiping their plastic payment card to make a purchase: "Credit ordebit?" As a savvy business owner, which answer would you prefer to hear? Does their answerimpact your bottom line? Which method costs you more? If a customer uses their debit cardand then selects "credit," what does this mean for you? How do processing fees changethe way you do business? In order to see the whole picture and develop an informed opinion,we'll examine the decision making process from three different perspectives: your customers',your own, and a bank's.

For the consumer, it's mostly a matter of personal preferencewhen choosing to process their card as debit or credit.

Some things they may take intoconsideration are fees that may be encountered on their end, such as backend banking paperworkfees.

Certain banking institutions charge their customers a fixed fee (generally $0.


60)for each transaction they run as debit due to the extra work incurred on behalf of thatbank.

These fees will appear on the customer's bank statement, much like an ATM conveniencefee or surcharge would.

Aside from focusing on bank fees when choosing debit over credit,many of your customers will like the idea of accountability attached to paying withtheir debit cards.

They don't receive a monthly bill, there's no penalty interest rate ontheir checking account and they may find it's easier to "live within their means" due tothe fact that they're not borrowing against themselves only to pay off debt later.

Forthose people, as a merchant, you should always offer the option of PIN-based debit card acceptanceso as not to miss out on potential sales.

As a business currently accepting credit anddebit card payments, you must already have a merchant account with your payment processor.

Each processor will have different criterion of how debit card payments are handled.

Forsome, you will find that there is no direct percentage rate schedule attached to debitprocessing and only a fixed transaction fee (generally $0.


50) per transaction.

However,even though your processor may not charge you a percentage per debit transaction, youshould be aware of the various debit card networks (STAR, NYCE, Pulse, etc.

) that verywell may.

In order to decipher if this is happening, you'll be able to tell what thatfee is, if indeed there was one, when you receive your first processing statement.

Thisfee is referred to as a "network access fee" which is paid to the network of banks affiliatedwith your customer's debit card issuing bank (Fifth Third, Bank of America, TCF, etc.


Generally speaking, PIN-based debit card transactions will end up being cheaper for your businessin the long run.

When a PIN-based debit card transaction takes place, instead of travelingthrough the payment networks required to process a transaction as credit, the transaction,along with the customer-entered PIN number, travels directly to the customer's bank account.

That account is checked for availability of funds and, if there's enough to cover therequested payment, the account is immediately debited and the funds are scheduled for depositinto your business's bank account within 24-48 hours.

Speaking of interchange, this bringsus to what choice BANKS would prefer your customer to make.

For the purpose of thisarticle, let's assume that banks are referring to your customer's debit card issuing bank,where their checking account is held.

Until very recently, banks saw huge profits fromdebit card-based transactions; an average of $0.

44 per swipe (the swipe fee) when acustomer chose to process their debit card via PIN pad.

A nationwide average showed thatdebit card swipe fees account for an amazing 1/5 of a checking account's revenue for banks,providing banks with a gross annual profit of approximately $12 billion a year.

However,a new amendment aimed at lowering these fees and making them more "reasonable" and "proportionateto the costs of actually processing a transaction" has been introduced in Congress by RepresentativeDurbin (D) from Illinois (the Dodd-Frank Wall Street Reform and Consumer Protection Act).

This new law is sponsored by big box retailers; those businesses that stand to gain the mostprofit based on their high-volume transaction processing.

If unchecked, this amendment wouldforce banks swipe fees to be set at a maximum of $0.

12 per transaction.

The idea is thatif debit transaction fees are regulated, it will allow businesses to lower their pricesso as not to pass such a high interchange cost onto their customers.

The proposal wouldalso empower the merchant to choose whichever debit card network is cheapest for them toprocess their transactions.

The act is scheduled to take effect July 2011, although many effectedparties are lobbying for a one to two year extension to research and report on the effectsof such a regulation.

In reaction to this proposed amendment, banksare preparing to make up for lost income elsewhere.

Free checking could become a thing of thepast, and many banks have already put the nix on their debit card rewards programs.

Increases could also be seen in increasing ATM convenience fees, lower interest ratesfor savings accounts and annual fees for debit cards.

Once again, the answer to the initialquestion of, "are debit cards cheaper to process than credit cards?" remains somewhat open-ended.

If the proposed regulation goes into effect, the answer will most of the time be "yes.

"However, as it stands now, the answer hinges upon how your processing is set up with yourmerchant account provider and what types of debit cards you encounter.

Generally, PIN-baseddebit transactions will tend to cost merchants less than transactions run as credit.

© 2011Lorraine Wolfe.

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