If you’re considering accepting debit cards in your business, you may be worried about the fees eating into your profits. Let me put your mind at ease by explaining exactly what you can expect to pay when you offer this popular payment method.
I’m here to share everything I’ve learned from my own experience. This guide will help you decide whether offering debit card payments is the best decision for your business.
Once you have a good understanding of the different fees involved, you can make sure you’re not overpaying when you accept debit cards. It will also help you better predict your cash flow.
What Are Debit Cards? How Are They Different from Credit Cards?
While debit and credit cards may look exactly the same, they are actually very different in terms of the way they operate behind the scenes.
With a credit card purchase, the card issuer pays the seller on behalf of the customer and collects the funds from the customer later on. With a debit card purchase, on the other hand, the funds are immediately deducted from the customer’s account.
Unlike with a credit card transaction, In order for a debit card transaction to go through successfully, the customer must have the appropriate amount of money in their account.
For the consumer, the difference is essentially between paying now and paying later. For you, the merchant, the difference is in the fees that are charged. Because debit cards by definition are a lower risk (because the customer has the cash available in their account), the fees are typically lower than with credit card payments.
The Different Types of Debit Card Transactions
It’s important to understand the difference between the types of debit card transactions, because they can incur vastly different fees.
The two main types of debit card transactions are signature debit and PIN debit.
In this type of transaction, customers are required to provide a signature as proof of identification. This type of payment is actually processed in the same way as a credit card payment, and it goes through a credit card network like Visa or Mastercard rather than a debit network.
Although the transaction is processed via a credit network, the funds are still immediately deducted from the cardholder’s account. The fees you are charged as the merchant come from the credit card network.
Signature debit transactions are what most ecommerce merchants use. These online debit card transactions are also processed via credit card networks and are treated the same way, even when the customer is obviously not there in person to enter a PIN or sign a receipt
With PIN debit transactions, the customer enters their PIN (personal identification number) after they have swiped their card. This serves as a way to identify the cardholder, so a signature is not required.
In this type of transaction, the payment is processed through a debit network such as Interlink or Maestro and it will be this debit network that will charge you fees. It’s important to note that PIN debit is not available to ecommerce merchants, as the customer is required to enter their PIN into a physical terminal.
While PIN debit transactions are significantly less risky, meaning lower fees, the fee rates for both types or transactions can vary depending on a number of factors. You’ll learn about them in the next section.
How Much Are Debit Card Processing Fees?
Unfortunately, there’s no simple answer. According to the Federal Reserve, the average fee per debit card transaction comes out to $.44. That said, the fees you will pay will vary based on your payment service provider, the rates it offers, the volume of transactions you process, and more.
Just because someone you know is paying a particular rate, that doesn’t mean you’ll get that same rate. Depending on your circumstances, you could get a better deal or end up paying more.
So, who is charging these fees? There are three players involved in debit card transactions:
- The bank
- The credit card company
- The debit card processor or payment processor
Each one has its own way of charging that can include both flat fees and/or percentages of purchase price.
The banks charge an interchange fee, the credit card companies charge assessments, and debit card payment processors charge markup fees. Let’s take a closer look at each.
These fees are charged by the bank that issued the debit card. They’re meant to cover the costs of processing and handling transactions as well as fraud prevention. The amount that the bank will charge depends on a number of factors, including:
- Your industry and the type of business you operate - businesses are assigned a merchant code based on industry and other factors.
- The type of debit card - different cards may have different fees, depending on their features, for example.
- The transaction type - as described above, PIN transactions and signature transactions have different fee structures.
- The size of the bank - larger banks have to conform to certain regulations regarding the amount they can charge in fees. Smaller banks are not subject to the same limits and may charge higher rates.
Interchange fees usually include a flat amount per transaction plus a percentage of the total transaction amount. These rates can change at any time, so it’s important to always stay on top of any rate changes so that you can forecast and budget accordingly.
Just for sake of comparison, here’s an example of Visa’s interchange rates for both debit and credit cards:
What Is the Durbin Amendment and How Does It Affect Your Debit Card Fees?
The Durbin Amendment went into effect on October 1, 2011, putting a maximum cap on the debit interchange fee that regulated banks (those with $10B or more in assets) are allowed to charge. The maximum allowed rate is .05% + $.21 per debit card transaction. While this law only applies to regulated banks, smaller banks tend to keep their prices more or less in line to remain competitive.
Now, before you wonder why this is even relevant if we’re talking about debit cards and not credit cards, remember that signature debit transactions as well as ecommerce transactions are processed via credit card networks. This means that even if it’s a debit card payment, you still have to pay a fee to cover the credit card company’s operating costs.
Assessment fees are generally a percentage of the transaction amount. For example, Visa’s debit card assessment fee is .11% and Mastercard’s is .125%.
Markup fees will be charged by your payment processor, the company that works behind the scenes to process the transactions and make sure you get your money. These fees can vary and may be open to negotiation. Make sure you do your research and look into different options to find the processor that works best for your needs.
Markup fees are also usually a flat rate per transaction plus a percentage of the transaction amount, although there are a number of different pricing schemes including different pricing levels depending on the volume of transaction processed per month. You can generally expect to pay around 2.9% + $.30.
What Can You Do to Lower Your Debit Card Fees?
There’s no avoiding paying some sort of fee for accepting debit card payments, but there are steps you can take to try to minimize the cost:
- If you have a brick-and-mortar store in addition to your ecommerce site, make sure you have a PIN pad to allow PIN debit transactions. As explained above, these lower-risk transactions tend to cost less, so the more you can facilitate them, the better.
- Always keep an eye on changing rates and look out for better deals. Depending on your payment service provider, you may be able to negotiate better terms or even switch to a better one.
- You can charge your customers a small fee for using a debit card and you can use this to offset your costs. Your customers may not love this, so it should be more of a last resort.
- Avoid tiered-pricing models, as those are likely to end up costing you the same rates for debit cards as the higher credit card rates.
How Can You Accept Debit Cards?
Your customers will be able to use their favorite debit cards on your checkout page, and you’ll be able to rest assured that you’re offering them all the options they want. We handle all the technical details of the payment processing.
The Bottom Line: Should Your Business Accept Debit Cards?
Unless you’re running a cash-only business, the more payment options you can offer your customers, the better. No one wants to browse a site and find the perfect product only to discover that their preferred payment method isn’t accepted. That’s a surefire way to lose customers!
Of course, you should be smart about it. Research the options, calculate the fees you’ll be paying, and forecast your income. Even if debit card fees might cost you a bit of your profit, think about the long term. Happy customers can go a long way.