Debit Card Processing Fees: What Merchants Should Know
Aaron Stahl / Merchant Processing / May 10, 2023
In today’s increasingly digital world, it’s no surprise that even “cash” has gone electronic. Modern technology, and a little push from a worldwide pandemic, has compelled our society to be even more cash free. Debit cards are basically the electronic form of cash. And while many people and businesses prefer using credit cards, just as many claim debit cards as their preferred payment method.
As a wise business owner, you know accepting all types of payments is important. And you probably also know that processing those payments will cost you money. Debit cards are no exception, and businesses pay a ton of debit card fees daily. So let’s take a closer look at debit card processing fees, how they compare to credit cards, and what you can do to lower those costs as much as possible.
While credit and debit cards may look the same and cost merchants to process them, their similarities end there. A credit card allows the cardholder to borrow funds from their bank or financial institution up to a certain limit. When using a credit card, the cardholder is essentially borrowing the money, which must be repaid at a later time, usually with interest.
Meanwhile, a debit card is linked to the cardholder’s bank account and allows them to make purchases with the funds currently available in their account. For debit card purchases, the funds are immediately deducted from the cardholder’s account.
The most significant similarity between credit and debit cards is that vendors are charged a fee to accept these types of payments. However, since debit card transactions are considered less risky and go through fewer steps for approval, they can come with lower fees than their credit counterparts. Still, they have a major effect on a business’s bottom line, so let’s take a closer look at debit card processing fees.
Debit card fees are the fees charged by payment processors to merchants for processing debit card transactions. When a customer pays with a debit card, the transaction goes through several steps before the seller receives the funds. Each step along the way is handled by a different financial entity — the card network, the merchant’s bank, and the customer’s bank. Each of these institutions charge a fee for their role in processing the transaction, and these fees are ultimately passed on to the merchant.
Debit card merchant fees can add up quickly, especially for small businesses with tight profit margins. However, by understanding the various costs associated with debit card processing, merchants can make informed decisions about which payment processors to use and how to negotiate debit card fees. This can ultimately help to reduce costs and increase profits for the business.
As mentioned above, each entity involved in processing debit card payments charges some sort of fee for the service. Generally speaking, merchants can expect to see three different types of charges on debit card transactions.
Interchange fees are paid by the merchant to the bank that issued the debit card. However, the card networks set these fees, and they vary depending on the transaction amount, the merchant category code, and the type of transaction. Interchange fees are typically charged as a percentage of the transaction amount.
Regulated banks have a maximum rate put in place by the Durbin Amendment, which limits charges for banks with more than $10 Billion in assets. These banks typically charge the maximum allowed, which is 0.05% plus 21 cents, and an additional cent for fraud adjustment. Meanwhile, unregulated transactions can average up to 65 cents per transaction, depending on the various factors listed above.
Assessment fees for debit cards are fees that are charged by the card networks such as Visa or Mastercard to the merchant’s bank for the privilege of using their payment network to process debit card transactions. These fees are typically a flat fee per transaction. The card networks typically charge about 0.13 percent for assessment fees.
Lastly, a merchant’s payment processor will also include markup fees. Processor fees for debit cards can vary depending on the payment processor, the type of transaction being processed, and the volume of transactions being processed by the merchant. These fees can be charged as a flat fee per transaction, as a percentage of the transaction amount, or a combination of both.
The markup fees can vary dramatically with all the different types of pricing, but they typically range from 0.75 to 0.9 percent of each transaction, plus $0.13 to $0.22.
While assessment and processor fees are more often than not charged at a flat rate, the interchange fees typically vary based on the transaction type. For debit cards, that means signature versus PIN transactions, as well as card-present or card-not-present.
When we think of using our debit cards, we usually imagine entering our PIN to complete the purchase. PINs are essentially passwords that authenticate the charge, which is routed through a PIN debit network. These transactions are subject to debit network fees rather than interchange fees, which are typically at a lower rate. However, they also incur a flat charge, including a transaction fee and a switch fee, which can often add up to even more than their credit card counterparts. While seemingly more secure, PIN transactions are not ideal for businesses with low average sale totals.
When a card user pays for a purchase using a debit card by signing the receipt similarly to a credit card rather than using their PIN, it is a signature debit transaction. This exchange is then routed through the credit card network rather than the PIN debit network, incurring interchange fees. The percentage rate for these types of purchases is lower, but the per-transaction fees are higher. That makes signature debit transactions more economical for merchants on small purchases.
Both PIN and signature debit transactions are applicable for card-present purchases. These are for sales done in person, typically at a physical retail store or restaurant. During a card-present transaction, the customer typically swipes, inserts, or taps their card into a card reader, and the merchant verifies the transaction by obtaining an authorization code from the card network. This reduces the risk of fraudulent transactions and chargebacks. For card-present purchases, they will run as signature debit or PIN transactions, as explained above.
Most B2B and online companies will deal entirely with card-not-present debit transactions. This method also reflects keyed-in debit purchases. In card-not-present transactions, the customer provides their card information, including the card number, expiration date, and credit card security code, either through a website or over the phone. The merchant then verifies the transaction by obtaining an authorization code from the card network. These types of sales will always be processed through the credit card network and therefore incur their interchange fees, similar to signature debit purchases.
The first thought of any business owner analyzing all of these different debit card fees is, “How can I save money?” It can be overwhelming with so many additional costs for many separate entities and moving parts. However, there are a few things that businesses can do to lower merchant debit card fees.
Make sure to choose a payment processor that offers pricing that will be beneficial to you. While it can be difficult to compare expected costs due to all the moving parts, some pricing structures work better than others. For example, tiered pricing will send all of your debit charges through as credit, costing you more in fees. In addition, flat rate pricing can be detrimental for businesses with a high quantity of low-price tickets. Some payment processors may be willing to lower their debit card fee in exchange for a higher transaction volume, so it’s worth negotiating with them to see if there’s any room for flexibility.
Not all terminals have a PIN pad for debit card users, meaning those transactions will automatically process as a signature debit. If that’s the case for you, it’s time to update to a newer terminal that has a PIN pad. Some of these newer models even allow you to choose the processing network, allowing you to choose the lowest rates.
By offering a discount for customers who pay with cash, a business can encourage more customers to pay with cash, which can help reduce debit card processing fees. Another option would be to transfer debit card costs to your customer through a convenience fee. However, there is strict regulation on convenience fees that vary by state. Therefore, it’s important to check the legality of convenience fees and consider the effect on your customers.
While these ideas may save business owners a little bit of money, the number one way to lower costs is by conducting a merchant processing audit. Third-party companies like P3 Cost Analysts can help a business identify areas where they may be paying more than they need to in merchant debit card fees and make changes to reduce those costs.
P3 Cost Analysts has a team of experts to help businesses lower merchant processing costs. The most significant savings come from interchange optimization. P3 specializes in identifying opportunities for merchants to qualify for reduced or incentivized interchange programs based on their SIC code. By implementing solutions that help companies qualify for the lowest possible interchange rates and having insights into the minimum margin tolerance of merchant processing providers, we help businesses get the best possible rates for their debit card processing fees.
In addition to interchange optimization, we can help merchants by negotiating better rates with payment processors. Plus, ongoing auditing will help eliminate fake fees, minimize chargeback costs, and implement alternative payment methods that may be more cost-efficient.
Debit card processing fees are inevitable. Each institution involved in processing debit card transactions, including the card network, the card issuer, and the payment processor, charges a fee for their role, which is ultimately passed on to the merchant — that’s you.
By understanding the fees associated with debit card processing, you can make informed decisions on which payment processors to use and how to negotiate debit card fees, ultimately reducing costs and increasing profits for your business. However, the number one way to lower your debit card processing fees is by working with a third-party company like P3 Cost Analysts to audit your payment processor and keep them in line moving forward.
Learn more about reducing merchant processing costs by scheduling a free consultation with one of our experts today!
