The Complete Guide To Debit Card Transaction Fees For Merchants
Need to understand how debit card transaction fees work? Keep on reading to find out everything you need to know about debit cards, debit fees and regulations.
Debit cards and credit cards tend to get lumped together in the minds of many merchants, but they’re definitely not the same thing. While a purchase made with a credit card requires the issuing bank to temporarily cover the cost of the transaction, debit cards pull the money directly out of the customer’s bank account. Using a debit card drastically lowers the risk of the transaction and the amount you’ll have to pay in processing fees.
Merchants need to understand how debit card processing fees work, not only because they’re different from credit card fees, but also because you can save a lot of money on your processing costs with a proper debit card acceptance strategy. In this article, we’ll discuss how much debit card processing fees cost, how they’re regulated, and how you can avoid paying too much to accept debit cards.
Table of Contents
- How Much Are Debit Card Processing Fees?
- Are Debit Card Transaction Fees Regulated?
- Understanding Signature Debit VS Pin Debit
- Breaking Down Debit Card Transaction Fees For Merchants
- How Do I Make Sure I’m Not Overpaying For Merchant Debit Card Fees?
- Are Debit Card Merchant Fees Worth The Cost?
- Common Questions About Debit Card Fees
How Much Are Debit Card Processing Fees?
Debit card processing fees can vary widely, depending on factors such as the type of debit card used, whether a PIN was entered, whether the transaction was card-present or card-not-present, etc. According to the Federal Reserve, for 2020 the average debit card fee was $0.23, or 0.65% of the transaction value.
With interchange fees costing merchants an average of about 1.40% of the transaction value, it’s clear that debit card transactions will cost you significantly less in most circumstances. However, you’ll have to carefully consider your payment acceptance strategy in order to take advantage of these savings. Below, we’ll explain how to do that.
Are Debit Card Transaction Fees Regulated?
Debit card fees are regulated by the Durbin Amendment, which is part of the 2010 Dodd-Frank legislation.
Under this law, regulated banks (i.e., those with more than $10 billion in assets) are limited to charging no more than 0.05% +$0.21 ($0.22 if fraud is suspected) per debit card transaction. This limitation applies equally to both card-present and online transactions. While smaller financial institutions are exempt from these limitations, market pressure generally keeps them from charging significantly higher debit card transaction fees.
Debit Interchange Rates VS Markup
By now, you understand that your debit card transactions will get routed through either a PIN debit network or a credit card network, either one of which will charge you a set of fees for the use of the card. However, these fees don’t represent your entire cost. Your merchant services provider takes a cut, too. In most cases, it’s a relatively small portion of your overall cost.
How your processor determines its markup will depend on the pricing model you’re using.
As for the “interchange” part of the fee, the most important factors in determining your debit card fees are:
- Card Networks: Over a dozen debit card networks operate in the United States, and they each have a different fee schedule. STAR, Interlink, and Maestro are three of the more familiar networks, but there are others as well. In Canada, Interac is the most well-known debit card network.
- Issuing Bank Size: With the passage of the Durbin Amendment, banks and other financial organizations above a certain size are subject to rigid caps on the fees they can assess for debit transactions.
- Signature VS PIN Debit Transactions: Debit card transactions can be authenticated using either the customer’s Personal Identification Number (PIN) or signature. PIN authentication is inherently more secure and reliable, so these transactions will be subject to much lower processing fees than if the customer merely signs their receipt.
- Card-Present VS Card-Not-Present Transactions: Any transaction where both the customer and the debit card are present at the point of sale is going to be fundamentally more secure than online or keyed-in payments taken over the telephone. Consequently, processing rates for these transactions will be lower than they are for remote payments.
Understanding Signature Debit VS Pin Debit
When a customer uses a debit card to make a purchase, the transaction can be processed as either a PIN debit or a signature debit, depending on which method is used to verify a customer’s identity. Here’s what you need to know about each method:
- PIN Debit Transactions: These transactions are authenticated by the customer physically entering their PIN into the terminal. (Note that PIN debit is not available for eCommerce transactions.) Payment data is routed through one of the various PIN debit networks (e.g., Interlink, Maestro, etc.). You will be charged the applicable debit network fees for these types of transactions, not the interchange fees that credit card associations such as Mastercard and Visa charge. Debit network fees typically feature lower percentage fees than their interchange counterparts, but higher fixed per-transaction fees. Because of this, they generally are less expensive to process for large ticket sizes. If you process a lot of very small-ticket transactions, however, they can actually be more expensive than credit cards.
- Signature Debit Transactions: These transactions bypass the PIN debit networks and are instead routed through the applicable credit card networks for Visa, Mastercard, Discover, or American Express. This is commonly referred to as “running a debit card as credit.” The standard credit card interchange fees will apply, in addition to any markup charged by your processor. Interchange fees usually impose a higher percentage fee, but the per-transaction fees are lower. Unlike PIN debit transactions, signature debit transactions will be less expensive to process for smaller ticket sizes.
- Card-Not-Present Debit Transactions: What about online or manually keyed-in debit card transactions where the customer can’t enter their PIN or provide a signature? These transactions can only be authenticated using the card’s Credit Card Security Code (also known as a CVV, CVV2, etc.), so they’ll be processed through the credit card networks just like signature debit transactions.
PIN debit network fees and interchange fees are both highly variable. The number of factors that affect them makes it nearly impossible to say with any certainty how much your average ticket size needs to be to make one method less expensive than the other.
However, PIN debit transactions are inherently safer than signature debits. Fraudsters attempting to use a stolen debit card are very unlikely to have access to the cardholder’s PIN, but they can forge a signature fairly easily. Some personal finance advisors now recommend that consumers avoid signing the back of their debit and credit cards entirely, as this makes it that much easier for someone to copy your signature. The increased use of touchscreen devices to capture signatures adds to the problem.
You’ve probably already noticed that it’s very difficult to replicate your own “normal” signature using one of these devices. With the increasing security risks surrounding the use of customers’ signatures to authenticate transactions, both Mastercard and Visa have recently dropped the signature requirement for most transactions.
Breaking Down Debit Card Transaction Fees For Merchants
The exact debit card processing fees merchants end up paying depend on a whole host of factors. These are the types of fees charged by the payment networks that process PIN-authenticated debit transactions:
- A Percentage Rate: This is simply a percentage of the transaction.
- A Transaction Fee: A fixed transaction fee, also called an authorization fee. Most debit card processing rates will include both a percentage rate and a transaction fee.
- A Flat Switch Fee: This is a flat fee charged for routing payment information through the network. Switch fees are the same for both regulated and exempt transactions, and range from around $0.03 to $0.10 per transaction.
- An Annual Fee: Not all networks charge this type of fee. When charged, it will be a flat fee that is the same for both regulated and exempt transactions. It only applies if you accept transactions through that network.
- Non-Interchange Fees: These additional fees typically apply to cross-border card usage and non-US-issued cards used on the network.
How Do I Make Sure I’m Not Overpaying For Merchant Debit Card Fees?
With all the moving parts involved in debit card transactions, it can be difficult to form a strategy for minimizing debit card processing fees. That said, there are some things you can do to keep your fees lower, including the following:
- Include A PIN Pad With Your Countertop Terminal: Most modern credit card terminals now include a built-in, customer-facing PIN pad for debit card transactions. However, some older countertop models require a separate device that has to be connected to the primary terminal. Without a PIN pad, all of your debit card transactions will be run as credit, resulting in much higher processing rates.
- Choose A PIN Debit Network With Favorable Rates For Your Type Of Business: Most new EMV terminals are automatically configured to allow you to select the network you want to use. Since rates can vary between networks and types of transactions, you’ll want to choose a network that processes your types of transactions at a lower rate. Remember also to minimize switch fees and annual fees when possible. Keep in mind that these fees can change at pretty much any time, so you’ll probably have to keep an eye on them.
- Choose A Payment Processor That Offers Interchange-Plus Or Membership Pricing: With interchange-plus pricing, you’ll pay a fixed markup in addition to interchange fees or PIN debit fees on each transaction. This allows you to enjoy the savings offered by lower PIN debit processing rates. Likewise, membership pricing takes this pricing transparency one step further, eliminating the percentage-based markup altogether in exchange for a fixed monthly subscription fee.
- Consider Adding A Convenience Fee To Debit Card Purchases: It’s generally allowable to offset some of the high authorization fees on small-ticket debit card sales by adding a fixed convenience fee to each transaction. For example, this practice is quite common at gas stations. However, you’ll want to weigh the pros and cons (lower processing costs vs potentially fewer sales) carefully before implementing this type of fee.
- Choose A Provider That Offers You A Tiered Pricing Plan: With tiered pricing (an epic fail of a pricing model), the multitude of processing rates are consolidated into three tiers: qualified, mid-qualified, and non-qualified. These tiers ignore the differences between PIN debit and credit card interchange fees, meaning that all of your debit card transactions will cost as much as credit cards, even if you use a PIN pad. (Note that some providers offer separate tiers for PIN debit transactions, often using the lower rates in a misleading way to suggest that all of your transactions will be that inexpensive.)
- Choose A Provider With Flat-Rate Pricing If You Have A High Volume Of Debit Card Sales: Much like tiered pricing, flat-rate pricing offers you a single rate for all transactions (although these plans usually distinguish between card-present and card-not-present transactions). Again, you’ll pay the same rate for debit and credit cards, even though the PIN debit transactions cost much less to process. Popular payment service providers (PSPs) like Square and PayPal offer flat-rate pricing but don’t charge monthly or annual fees. This can be a fair tradeoff if you’re just getting started or have a low monthly processing volume. However, at higher volumes (generally above about $5,000/month), you’ll want to switch to an interchange-plus or membership pricing plan to save money on your PIN debit transactions.
- Set A Minimum Purchase Amount For Debit Cards: With the high per-transaction authorization fees for some debit card transactions, it may be tempting to require or set a minimum purchase amount for card transactions if a customer pays with a debit card. Unfortunately, it’s both illegal under federal law and prohibited by the major card associations. You can, however, set a minimum purchase amount (up to $10.00) that only applies to credit cards.
Are Debit Card Merchant Fees Worth The Cost?
For the majority of merchants (particularly retailers), the cost of debit card acceptance will be well worth it. Due to a combination of regulation and fraud protection, debit card transactions are usually much cheaper for merchants to process than credit cards.
If you’ve gone to the trouble to set up a merchant account so you can accept credit card transactions, you’ll definitely want to offer PIN debit card payments, too. With the majority of Americans now using debit cards issued by major banks such as Bank of America, Chase Bank, Wells Fargo, etc. — all of which are regulated under the Durbin Amendment — the caps on debit card processing fees will save you a significant amount of money on your overall processing costs in comparison to credit cards. However, you’ll need a PIN pad and an interchange-plus pricing plan to take full advantage of those lower rates.
Need an up-to-date terminal to process your debit card transactions? Check out our list of the best credit card machines and terminals.