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The True Cost of Debit Card Transactions

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debit card merchant feesMobile 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.

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:

  1. 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).
  2. 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.

Unfortunately, most mobile payment processors, such as Square (see our review) and PayPal Here (see our review), treat debit and credit transactions the same way and give you a flat rate for both.

Final Thoughts

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.

Frank Kehl

Frank Kehl

Frank Kehl has been writing about merchant services, payment gateways, and international money transfer services since 2015. He has a Bachelor of Science degree from Penn State and a Juris Doctorate from the Ventura College of Law. After a long and enjoyable career of traveling around the world as an Air Force navigator, he’s comfortably settled down in the wine country town of Paso Robles in California’s scenic Central Coast region. He enjoys reading, photography, hiking, and numerous other outdoor pursuits.
Frank Kehl
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Responses are not provided or commissioned by the vendor or bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the vendor or bank advertiser. It is not the vendor or bank advertiser's responsibility to ensure all posts and/or questions are answered.

    John crampton

    I receive a monthly bill from a merchant that is usually around $100.00. They recently began charging $3.00 for a credit card transaction. Isn’t that a step backwards in technology? One would think the manual labor to handle checks would be more costly?


      I use my Health Savings Account debit card to pay any medical fees. Are banks allowed to charge for debits from an HSA? I lost $75 recently on an expensive specialist dental procedure because I was not paying with “cash or check” so did not qualify for the “cash the same day” discount they offer patients. I was told that even though the debit is from an HSA , their dental office still pays the bank a fee. However, my regular dentist accepts my debit as cash and I receive the cash discount she offers.

      I am solving the problem by having my bank print me up some checks now. Guess the old-fashioned way still works.

        Jessica Dinsmore

        Hi Janice,

        Unfortunately this reaches outside of our expertise, and we are not qualified to answer this question.

          Anthony O.

          I’ve been in the credit card processing industry for over 8 years, and I hear this question a lot from my clients, usually after they’ve been approached by another company. A lot of sales reps out there will try to convince you that pin-debit is cheaper, but they’re really just trying to sell you another piece of equipment that you will end up costing you more money. Security is another selling point, since it is less likely that you will lose a chargeback dispute if your customer entered their pin number, but this mostly benefits the banks – not the merchant. The truth is that pin-debit is almost NEVER cheaper than signature debit.

          The credit card processing industry revolves around percentages, and it is very important for business owners to understand Basis Points. In a nutshell, 1 Basis Point = 0.0001%, so if you are doing the math on a calculator, you would enter .05% as 0.0005 (5 basis points) or .75% as .0075 (75 basis points).

          When a debit card is run as Credit (Signature debit), assuming the debit card was issued by a large bank (which a most are) such as Wells Fargo, BoA, Chase, Citi, Capital One, TD, etc., the interchange rate is .05% + $0.22 per transaction.

          When a debit card is run as Debit (Pin number required) it is processed through one of the pin-debit networks. There are 9 pin-debit networks (ACCEL, AFFN, INTERLINK, MAESTRO, JEANIE, NYCE, PULSE, SHAZAM, STAR) and thier network fees range from .75% – .90% + $0.155 – $0.2575 per transaction. Also, most pin-debit networks charge an annual fee of $8 – $12.

          So Let’s say you process a $20 transaction as Credit (Signature), your interchange fees would be $0.23 ($20 x .05% + $0.22) . If you were to run that same card as Debit (Pin), you would pay $0.31 – $0.44 ($20 x .75% – .90% + $0.155 – $0.2575), depending on which network that particular card uses.

          Keep in mind that these fees are “Industry standards” and not controlled by your processing company, so it doesn’t matter whether you’re dealing with a larger, well-known company, a smaller local company or a bank. Understand that most sales reps only get paid after they sign you up, so the best advice I can give is to do your homework and don’t just take the sales reps’ word for it. This is all public information and can be confirmed with a quick Google search. That way you’ll know if you’re dealing with an honest company or not.

          I hope this was helpful. Best of luck!

            Steve H

            Are their two fee structures to consider where debit cards are concerned? The fee for merchant services and the fee for the interchange? Up until this time I have only operated using cash and/or checks; I’m moving toward credit and debit card transactions using an integrated point of sale system. The salesperson mentioned only a 2% fee for credit cards and a 1% fee for debit cards. Thanks for an inkling 🙂 I’m better to get one (an inkling) before I get stung!

              Joe D

              Hi Melissa – Thanks for the informative article. How do the debit card fees work for ecommerce transactions? (Since there is neither a PIN nor a signature.)

                Melissa Johnson

                Hi, Joe!

                For eCommerce, those transactions are processed as Card Not Present, which have different rates associated with them. CNP costs a little bit more in general because of the higher over all risk (you just don’t know if the person with the card is the rightful owner sometimes). There’s a lot of security tools meant to help reduce the chance of fraud, though, including AVS.

                Hope that helps!


                  Thanks for the great piece! Could you explain how the Debit Gift Card (Vanilla Gift Card) works when it comes to pin transactions? How much would the fees be for a $490 pin based transaction?

                    Tom DeSimone

                    Hi Rajiv,

                    That would be classified as a prepaid debit. See Visa’s published interchange rates for the exact wholesale pricing. The rates you pay will vary based on the markup charged by your merchant services provider.

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