The True Cost of Debit Card Transactions

As a merchant, you naturally want to be able to accept as many payment methods as possible from your customers. eCommerce businesses are, of course, limited by the fact that they don’t have a physical store where their customers can pay in-person, so they have to rely on online payment methods such as debit cards, credit cards, and eCheck (ACH) payments. Retail merchants, on the other hand, have the flexibility to accept just about any payment method, including traditional means such as cash and paper checks.

By now, you’ve probably heard numerous reports in the media about how the use of cash is on the decline and will soon be entirely replaced by plastic and electronic payment methods. The assumption is that younger consumers carry little (if any) cash on them and prefer to use non-cash methods such as credit/debit cards and NFC-based payment methods, including Apple Pay and Android Pay.

As is so often the case with sweeping generalizations, this idea is only partly right – and mostly wrong. Patterns in payment method acceptance are far more complex than most people realize, although some definite trends occur over time. The Federal Reserve publishes a Diary of Consumer Payment Choice (DCPC) study every year or two that sheds light on the actual payment habits of the American consumer.

Data collected in October 2012 for an earlier study showed, among other things, that cash still accounted for a whopping 40% of payments and was the most popular payment method being used by consumers. Debit cards made up 25% of all transactions, while credit cards accounted for 17%. Only 7% of all transactions were paid for with paper checks, while electronic payment methods accounted for another 7% and other, uncategorized methods made up the final 4%.

If we fast-forward to October 2017, when data for the most recent DCPC study was collected, we see that there have indeed been some significant changes in the patterns of payment methods used by consumers. However, they’re not as extreme as you might expect. Cash use has declined significantly to 30% of all transactions but is still the single most common payment method in use today. Debit card use has risen to 27%, while credit card use has also increased to 21% of all transactions. Electronic payment methods have increased to 10% of all transactions, while paper checks and “other” methods have decreased to 6% each.

At this point, it’s important to emphasize that there is a wide variation in payment method usage based on transaction size and other factors such as the age and socioeconomic status of the consumer. As the most recent DCPC study points out, cash is generally preferred for small transactions, while most big-ticket purchases are paid for with credit or debit cards. Younger consumers are more inclined to use electronic payment methods, but still prefer debit and credit cards for routine, day-to-day purchases. Older consumers, as you might expect, are still using the same traditional methods such as cash and paper checks that they’ve been relying on for decades. One important point raised in the study that is often missed in discussions of payment methods is that people at the very bottom of the socioeconomic ladder still rely almost entirely on cash – mainly because they simply don’t have bank accounts or credit cards. If you’d like to take a really deep dive into the statistics of payment methods being used in the US today, check out the 2018 Findings from the Diary of Consumer Payment Choice.

The key takeaway here for merchants is that debit card payments are going to be your customers’ favorite non-cash method of payment. For ecommerce merchants, they’ll take up an even larger percentage of your transactions because cash and paper checks won’t be an option. Knowing this, it’s imperative that you understand how debit cards work and how debit transactions are processed. In this article, we’ll discuss how debit card payments are accepted and the various interchange rates and fees that apply when they’re processed. Most importantly, we’ll also discuss how your merchant account provider or payment service provider (PSP) charges you for debit card transactions, and why you might unknowingly be paying way too much for them.

PIN Debit VS Signature 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 the customer’s identity. As you might have guessed, signature debits are verified by having the customer sign their sales receipt using either a wet ink or digital signature, while PIN debits require that the customer enter their Personal Identification Number (PIN).

PIN debit transactions are routed through one of the various PIN debit networks (i.e., Interlink, Maestro, etc.) and are thus considered to be online transactions. For these types of transactions, you will be charged the applicable debit network fees, not the interchange fees charged by credit card associations such as Mastercard and Visa. 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 small-ticket transactions, you should probably avoid PIN debit, as they will be more expensive.

Signature debit transactions, on the other hand, bypass the PIN debit networks and are instead routed through the applicable credit card networks for Visa, Mastercard, Discover, or American Express. For this reason, they are called offline transactions. 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.

While we’d like to give you a general rule of thumb regarding the point at which one of these methods becomes more affordable than the other, there simply isn’t one. As we’ll see below, PIN debit network fees and interchange fees are both highly variable, and the number of factors that affect them make 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, if you’re concerned about security (and you obviously should be), 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 can forge a signature fairly easily. In fact, some personal finance advisors now recommend that consumers avoid signing the back of their debit and credit cards entirely, as this just 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.

Different Cards, Different Businesses, Different Debit Rates

By now, you’ve probably realized that processing rates for debit card transactions can get pretty complicated. Unfortunately, there are even more factors that can affect rates, making it nearly impossible for you to know in advance how much it will cost to process a given transaction. Signature debit transactions will go through a credit card association’s processing network, and Visa, Mastercard, Discover, and American Express all publish separate interchange fee schedules. These schedules can change as often as twice a year. Fortunately, competition among the various card associations means that the differences in processing costs won’t vary too much.

The type of card being used can also affect processing costs. Personal cards issued to individual consumers will have different rates than corporate cards issued to business entities. As we’ll see below, even the size of the issuing bank can affect the rate you have to pay.

Merchant Category Codes (MCCs) are other variables that affect processing rates. All major credit card associations publish their own list of applicable codes that identify your type of business. A gas station, for example, would have a different code than a restaurant, and would pay a different processing rate for the same transaction using the same debit card. Again, competition between the card associations keeps the differences in rates from one card brand to another to a minimum. For a more in-depth discussion about Merchant Category Codes, see our article, The Complete Guide to B2B Payment Processing.

How Much Does A Debit Card Cost To Process?

Unlike credit card transactions, debit transactions withdraw money directly from a checking account or another prepaid account. As long as there are sufficient funds in the customer’s linked account, the transaction will go through smoothly. However, only PIN debit transactions, which are routed through the PIN debit networks, actually check the balance in the linked account before authorizing the transaction. If you run the transaction as a signature debit, this check is not performed, and there’s a chance you won’t receive your funds because the customer’s account will be overdrawn. Unlike eCheck (ACH) transactions, the money doesn’t transfer from one account directly to another. Instead, it’s handled by the appropriate card network, making it subject to fees.

These fees, of course, only represent part of your overall cost for processing the transaction. Your processor will also take a markup for themselves. We’ll discuss below the various ways in which processors can pass their markup on to you. Some methods are more transparent than others, and in some cases, you could end up paying too much for debit transactions if you’re not careful.

The most important factors in determining your debit card fees are:

1. Card Networks: As we’ve mentioned above, there are over a dozen debit card networks operating in the United States, and they each have a different fee schedule. Interlink and Maestro are two of the more familiar networks, but there are others as well. In Canada, Interac is the most well-known debit card network.
2. Issuing Bank Size: With the passage of the Durbin Amendment (see below) in 2011, banks and other financial organizations above a certain size are subject to caps on the fees they can assess for debit transactions.
3. Signature VS PIN Debit Transactions: As we’ve mentioned above, these two methods of verifying a customer’s identity as the legitimate cardholder will result in significantly different fees being assessed for the same transaction. Average ticket size is the most influential factor in determining which option is more affordable than the other.

How The Durbin Amendment Affects Debit Card Fees

15 U.S. Code § 1693o–2, also known as the Durbin Amendment, was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in the aftermath of the Great Recession in 2008. The law took effect in October 2011 and imposed a cap on the fees that banks could charge for debit transactions. However, this restriction only applies to “regulated banks,” which the law defines as those financial institutions having $10 billion or more in total assets. If you compare debit fees for a given card association or PIN network, you’ll now see separate fees listed for regulated and unregulated banks. In other words, while your local credit union or hometown bank is still free to charge whatever they want in the way of debit fees, large, national banks such as Bank of America and Wells Fargo are significantly limited in how much they can charge for the same transaction.

How much is the cap? Currently, it’s 0.05% + $0.21 per transaction ($0.22 if the transaction meets certain fraud criteria). This is very good news for both merchants and consumers alike, as debit transactions previously averaged about $0.44 per transaction in fees prior to the law’s passage. Naturally, big banks affected by the Durbin Amendment caps haven’t been so happy, and they’ve lost billions of dollars in potential fees since the law’s passage. However, legal efforts to have the law declared unconstitutional have not been successful. The US Supreme Court refused to hear the case in 2014, essentially letting the law stand as it currently exists. However, while the Durbin Amendment is safe for now, there’s always the possibility of a legislative repeal or modification in the future.

PIN Debit Transaction Fees

As we’ve mentioned above, transactions that are verified with a customer’s PIN are routed through the appropriate PIN debit network, which will assess their own fees rather than the interchange fees charged by the credit card associations. You, as a merchant, will usually have no idea which PIN network your transaction is going through, but the differences in fees between the debit networks are generally pretty small. PIN debit fees tend to carry relatively low percentage fees, but their fixed per-transaction fee can be high. As a result, small-ticket transactions will be relatively more expensive to process. Large-ticket transactions, on the other hand, will be cheaper than if they had been processed as a signature debit.

Signature Debit Transaction Fees

If you have your customers sign their receipts instead of entering their PINs, you’re essentially processing the sale as a credit card transaction. It will be routed through the applicable credit card processing network, where interchange fees will be applied. However, the credit card associations have separate interchange fees that apply only to debit cards. These fees are almost always much less than what they’d be if the customer had used a credit card instead. The main reason for this is that the issuing bank isn’t taking the risk of extending credit to the customer and hoping they’ll get paid back sooner or later. Instead, they’re merely deducting the purchase amount straight out of the customer’s linked bank account. Compared to PIN debit fees, signature debit fees usually have higher percentage fees, but lower per-transaction fees. For this reason, small-ticket sales will be less expensive to process using a signature debit.

Understanding Merchant Account Markups

By now you understand that your debit card transactions will be 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 processor takes a cut, too, although in most cases, it’s a small portion of your overall cost. How your processor determines their cut, also called the markup, will depend on the pricing model you’re using. As we’ll see, separating your processor’s markup from your other fees can be either very easy or hopelessly difficult, depending on which type of processing rate plan your account has.

Interchange-plus and subscription-based (or membership) pricing plans are by far the most transparent pricing models available on the market today. With an interchange-plus pricing plan, you’ll pay the normal interchange (or PIN debit network) fees, plus a small percentage of your transaction and a small, fixed per-transaction fee. These two latter elements make up the processor’s markup, so it’s easy to see how much you’re paying to your processor. As an example, a typical interchange-plus rate quote would be interchange + 0.30% + $0.15 per transaction. As we’ve noted above, interchange fees for debit card transactions are typically much lower than they are for credit cards, and they’re also about the same as the PIN debit network fees. You’ll save a significant amount of money in processing costs over credit card transactions with this pricing model. At the same time, most merchant account providers who offer interchange-plus pricing also charge a number of separate monthly and annual fees to maintain your account. So, you’ll have monthly costs associated with your account whether you use it or not.

Subscription-based pricing is a modification of interchange-plus pricing. Most subscription-based plans don’t charge a percentage markup on each transaction. However, they instead charge a monthly subscription fee, which can often run $99 per month or more. Thus, a typical subscription-based pricing quote would be interchange + $0.15 per transaction. Your monthly subscription fee, which is usually based on your average monthly processing volume, covers the percentage markup and, in most cases, the monthly fees that other providers charge individually. Although the $99 monthly subscription fee sounds expensive, medium-sized and larger businesses with a high processing volume can save a substantial amount of money over traditional interchange-plus pricing with this model. For debit transactions, interchange or PIN network fees are passed on to you at cost, with no hidden markup.

Flat-rate processing is also available from some of the newer providers such as Square (see our review) who are aiming to provide credit and debit card processing services to smaller businesses without all the complicated pricing plans, hidden fees, and onerous contracts that often come with traditional merchant accounts. For example, Square charges a flat 2.75% for card-present transactions that are processed with their mobile card readers. This rate applies regardless of whether a credit card or a debit card is used. While it’s a decent rate for credit cards, you’re seriously overpaying for debit card transactions with this rate. At the same time, Square doesn’t charge any of the numerous monthly and annual account fees that traditional merchant account providers do, so it’s somewhat reasonable that you pay a little extra for processing to cover these expenses. However, this tradeoff is only fair if you’re running a very small business with a processing volume of about $1,000 per month or less. Above that amount, you’re usually better off with a full-service merchant account and an interchange-plus pricing plan.

Lastly, there’s the infamous tiered pricing plan. With this type of pricing, your processor combines the dozens of possible interchange and PIN debit network fees into three simple “tiers”: qualified, non-qualified, and (sometimes) mid-qualified. While your rates will be much easier to understand, they’ll also be significantly inflated over comparable interchange-plus rates for the same transaction. Your processor isn’t going to allow itself to lose money on any transaction, so tiered rates are designed to cover the most expensive interchange rate within a given tier, plus a small markup. Like flat-rate pricing, tiered pricing doesn’t discriminate between credit and debit transactions – despite the much lower fees for debit card use. In other words, you’ll pay credit card prices for debit card transactions, resulting in much higher costs for you. Tiered pricing also lends itself to misleading sales practices, as most processors typically advertise only their lowest available qualified rate – without telling you that your mid-qualified and non-qualified transactions will incur much higher processing rates. With tiered pricing, you’re getting the worst of both worlds: you’re seriously overpaying to process debit card transactions, and you’re also paying all those additional fees for your merchant account. Remarkably, the majority of businesses that are with a traditional merchant account provider are on a tiered pricing plan. If this includes you, it’s time to consider changing providers and stop overpaying.

Debit Rates For Mobile Processing

Being able to accept card payments on a smartphone or tablet has transformed the way many businesses get paid for their services. Unfortunately, that increased flexibility and mobility often comes with a cost, particularly when it comes to accepting debit card payments. As we’ve seen, popular mobile providers such as Square (see our review) and PayPal Here charge the same rates for debit card transactions as they do for credit cards. The pay-as-you-go nature of their pricing, however, is a reasonable tradeoff for not getting hit with a bewildering variety of additional account fees every month.

Square’s popularity has, naturally, led a lot of its competitors to offer similar mobile processing services. While some of these products offer the same, flat-rate pricing as Square, others integrate directly into your existing merchant account and use the same interchange-plus, subscription, or tiered pricing that applies to your other transactions. In selecting a mobile processing service, we highly recommend that you determine your actual costs ahead of time before signing up with a provider. Is the mobile service a stand-alone, mobile-only offering with flat-rate pricing? Or, is it an add-on service that gives you an additional means of accepting payments into your traditional merchant account? Are there any separate monthly fees to add mobile processing to your account? You’ll want to know the answers to these questions before you commit yourself to signing up for an account.

Final Thoughts

In today’s economy, debit cards are a popular and convenient way for customers to pay for day-to-day purchases. They’re also more popular than credit cards and account for a larger overall percentage of transactions. Debit card use is growing as traditional payment methods such as cash and paper checks slowly decline in use.

As we’ve noted above, debit card transactions should cost you a lot less to process than credit cards. However, processors don’t always pass those reduced costs onto you, so you’ll need to take a close look at your pricing model to ensure that you aren’t being overcharged. Unless you’re receiving an offsetting benefit (such as not being charged monthly or annual fees), you shouldn’t allow yourself to pay credit card rates for debit card transactions.

Debit cards provide some other benefits for your business as well. It’s more difficult to initiate a chargeback with a debit card that’s processed as a PIN debit, for example. This helps to reduce the chances of your business suffering from a fraudulent chargeback where a customer falsely denies having made a purchase. Signature debit, on the other hand, is more vulnerable to fraud, as signatures aren’t as reliable in confirming a cardholder’s identity as PINs.

Because most consumers usually favor debit over credit, you absolutely cannot overlook the importance of obtaining a fair rate for your debit transactions. There are workable solutions whether you rely on the traditional merchant account, mobile processing, or some combination of the two. You also need to understand which method of processing debit — signature or PIN — will save you the most money. If you’re processing with a service like Square Register, or if you have a tiered pricing model with qualified and unqualified rates, you are almost certainly overpaying for your debit card transactions. Check out our Merchant Account Comparison Chart to find a top-rated provider who’ll save you money on your debit transactions.

Merchant Account Comparison Table