The True Cost of Debit Card Transactions
Mobile payments are on the rise, and the mobile wallet concept is gaining steam. But until such time as the mobile wallet actually replaces cash and cards, merchants and retailers still need to worry about being able to accept these forms of payment.
We’ve talked a lot about how you can accept credit cards for your business, but we haven’t talked very much about the other form of card: debit.
A Federal Reserve study from the Diary of Consumer Payment Choice found that cash makes up the largest share of consumer transaction activity (40 percent), followed by debit card transactions (25 percent), and then credit card transactions at 17 percent.
The popularity of different payment methods — cash, debit, credit, check — varies according to generation and income level, factors that any merchant needs to be aware of. For example, households making less than $25,000 a year, as well as Millennials, tend to favor cash over other forms of payment. Senior citizens tend to favor credit cards and checks, while hardly anyone under the age of 35 prefers checks.
The same research also points out that overall debit cards are the preferred method of payment, with cash being a popular backup option. People tend to use their debit cards the same way they do cash — to handle daily expenditures.
That’s important, because merchants need to understand that credit and debit cards are not interchangeable from their perspectives. Credit and debit transactions assess different fees, and while you may have a good rate on credit transactions, you could be over-paying for debit transactions.
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What Does It Cost to Process Debit Transactions, Anyway?
Debit transactions withdraw money directly from a checking account or other prepaid account. But unlike ACH transactions (think direct deposit, Dwolla or e-checks), the money doesn’t transfer from one account directly to another. Instead, it’s handled by the issuing card network, making it subject to fees.
Debit card merchant fees vary according to two major factors:
- The card network and size of the issuing bank: Organizations above a certain size are subject to caps on the fees they can assess for transactions (called the interchange fee; many merchant account providers offer what is called an interchange-plus pricing model).
- Whether it’s a signature or PIN debit transaction: The average ticket size makes one option more affordable than the other.
Understanding the Interchange-Plus Model
Card payment processing can be complex. Traditionally, transactions can fall into more than 100 different categories that each assessed different rates. To simplify this, many merchant account providers started lumping transactions into different “tiers” to make billing easier. Unfortunately, it isn’t a very transparent model. Merchants often wind up paying more than they should.
Processing debit cards in this model is even more troublesome because the debit processing fees are typically the same as credit cards, which is more than you, as a merchant, need to pay.
Interchange-plus emerged as an alternative to tiered pricing. To process a transaction, you pay only the interchange fee plus the merchant account provider’s markup (it may be a flat fee or a percentage). As a result, the fee structure is much more transparent.
The Durbin Amendment, a federal act passed in 2011, also places a cap on the interchange fee banks with more than $10 billion in assets can charge for debit transactions, which has been a boon for merchants as well.
All of the highly rated merchant account providers on Merchant Maverick use the interchange-plus model.
Signature vs. PIN Debit Transactions
Debit transactions can be processed in one of two ways: as a signature debit, or a PIN debit.
A signature debit transaction requires the cardholder to sign the receipt instead of inputting a PIN. Because it doesn’t use the debit network at all, it’s also called an offline debit transaction. It doesn’t verify that the funds are in the account at the time of the transaction.
A PIN debit transaction uses the network to check whether the account has the necessary funds accessible in real time, which is why it is also known as an online debit transaction.
The fees assessed differ according which method you use. Generally speaking, if you have low-value transactions, you pay less to use signature debits. If you deal frequently in high-value transactions, it is more cost effective for you to use PIN debits.
Check out this handy calculator, which can tell you which type of debit saves you the most money.
Debit Rates for Mobile Processing
Accepting card payments on a smartphone or tablet is crucial for many retailers and service providers. It gives you the flexibility to take your business on the go, whether you send service technicians to clients’ homes, operate a mobile food truck or delivery service, or set up stands to sell your goods.
Because most consumers 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 between 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 probably overpaying for your debit card transaction. Check out some of our favorite providers to save on your debit transactions.