Debit Card Processing Fees Explained

The following text has been adapted from “Fee Sweep” and has also been published at PaymentPop. Download your copy of “Fee Sweep” here.

How Much Does It Cost to Accept Debit Cards?

Card Swipe
© Depositphotos – Olga Yastremska

Now that we’ve fully covered processing fees for credit cards, it’s time to talk about debit card processing fees. As you might have heard, debit card processing fees can be lower than credit card processing fees. This section will break down how to calculate and minimize debit fees.

Signature Debit vs. PIN Debit! Fight!!!

Debit cards are gaining a lot of momentum among consumers. In fact, according to a 2013 Federal Reserve report, debit cards accounted for 38% of all non-cash transactions in 2012 (compared to 21% for credit cards), and the number of debit card transactions increased more than that of any other non-cash payment type from 2009 to 2012. Today’s young people in particular aren’t interested in credit cards or cash; they prefer debit cards by a large margin.

What does this mean? It means that as a business owner, you will undoubtedly benefit in the coming years from understanding how debit card fees work. Sure, the fees taken out of debit transactions are much smaller than those taken out of credit card transactions, but they add up over time. Why pay more than you need to?

There Are Two Basic Debit Transaction Types

Well, technically, there are three: Signature Debit, PIN Debit, and card-not-present debit (e.g. keyed-in transactions such as e-commerce, phone order, etc.). But since you have no control over how the customer authorizes a card-not-present debit transaction, we will be focusing exclusively on Signature Debit and PIN Debit. First, let’s define these terms:

  • Signature Debit transactions occur when a customer swipes a debit card through a credit card terminal and then signs a printed receipt or a digital signature capture device to verify the transaction. These transactions are most often initiated when a customer swipes his or her debit card through a terminal and then chooses to process the card as “credit.”
  • PIN Debit transactions occur when a customer swipes a debit card through a credit card terminal and then enters a Personal Identification Number (PIN) on a keypad in order to verify the transaction. These transactions are commonly initiated when the customer chooses to run the swiped card as “debit.”

What's the Difference?

The key difference between a Signature Debit transaction and a PIN Debit transaction is the processing network that each one uses. Signature Debit transactions are routed through credit card networks like Visa or MasterCard, while PIN Debit payments are processed by ATM/banking networks like ACCEL, STAR, NYCE, or SHAZAM.

“Online” Payments vs. “Offline” Payments

PIN Debit payments are often referred to as “online” payments because the networks they use (banking networks) correspond to the type of account attached to the card (a banking account). Predictably, Signature Debit payments are commonly referred to as “offline” payments.

You Will Be Charged Interchange Fees for Signature and PIN Debit

As with credit transactions, the processing network—whether it’s a credit network or an ATM network—charges a basic amount per transaction known as “interchange” to process a payment. This baseline cost will vary depending on three factors: the size of the card-issuing bank (the bank that issued your customer’s card), your business type, and the method of capture (signature or PIN).

In addition to these basic fees, you will also pay your merchant account provider a Provider Markup just like you would with a credit card transaction. The Provider Markup you pay will vary if you are on a tiered pricing plan, but it will remain fixed and predictable if you are on an Interchange-plus pricing plan.

What Are the Debit Card Interchange Rates?

You can see them in the linked tables below:

Signature Debit Interchange Fees (documents via Visa and MasterCard)

PIN Debit Interchange Fees (document via Wells Fargo)

Simple, right?

No? Read on for an explanation.

Understanding Signature Debit Interchange Rates

Hack Into The Matrix

Okay, let’s go over the pricing tables in greater detail. The following screenshot was taken from the first link, which contains Visa’s table of Interchange fees for debit (“check card”) transactions. It shows the Interchange rate for a sample signature debit transaction:

Table header
Table body

What's a Fee Program?

The left column titled “Fee Program” refers to a merchant’s business type, which is designated by the merchant's credit card processor. There are many different fee programs for different merchant types; for example, there are programs for “CPS/Restaurant, Debit” and “CPS/Supermarket, Debit.” In this case, we're looking at the debit card fees for “CPS/Retail, Debit”, a classification reserved for a general retailer. This fee program will apply to a very large number of small businesses.

What Is an “Exempt” Debit Card?

The middle column shows Visa’s Interchange rate for an Exempt Visa debit card processed by a merchant designated as CPS/Retail, Debit. An “exempt” card is any card issued by a bank that holds less than $10 billion in assets—in other words, a regional bank or credit union. So, in this example, if your customer swipes a Visa debit card that was issued by a bank that holds less than $10 billion in assets, then the applicable Interchange rate for that swipe will be 0.80% of the transaction amount plus an additional $0.15.

What Is a “Regulated” Debit Card?

The right column lists Visa’s rate for Regulated Visa debit cards. A “regulated” card is any card issued by a bank with more than $10 billion in assets. This would include most large, recognizable banks like JPMorgan Chase, Wells Fargo, Bank of America, and so forth. These cards are not exempt, meaning that a “regulated” rate will apply to them. In accordance with federal law, this rate is capped at 0.05% plus $0.21 for all providers. This means that Visa, MasterCard, and the ATM/banking networks all must honor this regulated rate when accepting cards issued by non-exempt banks.

So, according to the sample rate above, a CPS/Retail-classified merchant who accepts a swiped Visa debit payment from a customer would pay either 0.80% plus $0.15 or 0.05% plus $0.21 in Interchange fees for that transaction, depending on the size of the customer’s card-issuing bank.

MasterCard's Debit Fees Are Similar To Visa's

The same factors (merchant type, size of the card-issuing bank, and method of capture) apply to MasterCard debit transactions, but MasterCard uses different terminology than Visa's:

Table header
Table body

In this case, a merchant operating under MasterCard’s “Merit III Tier 1” fee program will pay an Interchange fee of 0.70% plus $0.15 for an exempt debit transaction. In accordance with federal law, a non-exempt transaction (not shown in this table) would receive a rate of 0.05% plus $0.21. The “Prepaid Rate” column does not apply to normal debit cards.

Understanding PIN Debit Interchange Rates

PIN Debit Fees Resemble Signature Debit Fees

How does this compare to PIN debit? Let’s look at a sample from the PIN debit Interchange chart:

Table header
Table body

As you can see, PIN debit Interchange costs are calculated in a similar fashion to signature debit Interchange costs. The merchant’s assigned category—in this case, a small-ticket retailer that primarily processes transactions under $15—is on the far left. This merchant’s rate for an exempt debit transaction is 1.00% plus $0.04 per transaction, while the regulated rate of 0.05% plus $0.21 is identical to those charged by signature debit networks. It’s worth noting, however, that PIN debit transactions also come with “switch fees” that range from $0.03 to $0.08 depending on the PIN network and merchant category.

Okay, So How Do You Save Money on Debit Payments?

There Are Many Variables to Consider

As you may have already realized, the most cost-effective debit payment option for your business will vary based on a wide range of factors. There’s no best overall solution for all merchants. However, there are a few basic steps you can take to achieve the lowest swipe rates available to you:

1. Insist on Interchange-Plus Pricing

Many merchant account providers will claim that they can save you money with a flat low rate for all of your debit transactions. In some cases, they may be right. But if you want to get the cheapest merchant account prices on debit swipes, you need to have a flat markup over Interchange for each transaction rather than a blanket rate for all card swipes.

This is especially important when it comes to regulated debit transactions. For instance, if a provider quotes you a flat rate of 0.5% for all debit swipes, that might sound like a fair deal. After all, you’ll be saving on most of your exempt transactions, which can often exceed 1% in basic Interchange fees. However, the processor’s 0.5% rate would potentially be a huge markup over regulated debit cards, all of which process at 0.05% plus $0.21. Under this model, you’ll almost never benefit from accepting regulated debit cards, which are much more commonly used by consumers than exempt debit cards.

2. Know Your Merchant Category Code

Or, more simply, understand which row in the far-left column of each Interchange chart applies to your business. This is the only way to know which rates on the Interchange chart will apply to your debit transactions. Your provider should be able to give you this information.

3. Compare Interchange Rates For Your Category Code Across All Networks

This is where Interchange-plus pricing comes into play. If you have negotiated for a flat markup above Interchange on each debit transaction, then you will save money by processing debit transactions that qualify for the lowest possible Interchange rates.

For both PIN and signature debit, the Interchange rate for a regulated debit transaction is fixed at 0.05% plus $0.21. However, PIN debit transactions also add a switch fee to each transaction, meaning that PIN will always have a slightly higher base cost on regulated debit transactions. As a rule, then, you will save money on regulated debit transactions by processing them as signature debit rather than PIN debit.

Exempt cards, on the other hand, have varying Interchange rates. You will need to compare between the listed signature and PIN interchange rates to determine whether signature or PIN Debit offers the lowest Interchange rate for exempt cards for your business type.

4. Establish Rules For Accepting Debit Cards At Your Business

Once you have determined which network (signature or PIN) offers the lowest Interchange rates for your business type, the final step is to ensure that you and your employees understand how to process cards at the lowest rates. When swiping debit cards, it might be helpful to think of each debit transaction as either a “large bank” card or a “small bank” card. If a customer hands you a card that has clearly been issued by a large, regulated bank—again, any bank with over $10 billion in assets—then you should process it as a signature debit transaction. If a customer hands you a card from a small, exempt bank, then you should know beforehand which network will give your business type the lowest rate for an exempt card and process accordingly.

In many cases, it may be impractical to expect your employees to correctly distinguish between exempt cards and regulated cards. If this applies to you, then you should probably just make an educated guess about which card types are most frequently used by your customers and operate under that assumption. For instance, if most of your customers seem to use small, local bank cards (more common in rural communities), then you should encourage whichever debit method has the lowest exempt rates. If most of your customers bank with large national banks (more common in large cities), then processing as signature debit is likely going to be the most cost effective method.

A Little Time Can Save a Lot of Money

Debit rates are incredibly confusing, and the difference between PIN and signature debit often comes down to a few pennies per transaction. But by doing a little homework and following a few credit card processing best practices, you can ensure that those pennies remain in your checking account instead of your provider’s.

Signature Debit and Durbin

Why Are Debit Fees Regulated?

We can’t talk about signature debit without talking about Dick. As part of the Dodd-Frank Financial Overhaul Act, Congressman Dick Durbin managed to include an amendment that became known as the “Durbin Amendment.” This amendment placed a cap on the Interchange fee that banks are allowed to charge for debit transactions. The cap was originally intended to be 11 cents, but pressure from the banks drove the final cap up to the regulated 0.05% plus 21 cents that we have been covering in the previous paragraphs (infographic here). Sounds great for merchants, right? Well, there's a catch.

The Durbin Amendment only regulates the interchange cost of transactions. It does not regulate the Provider Markup that third party sales organizations (ISOs) can charge. Therefore, the fee cap actually helped ISOs increase their profit margins by lowering their base costs for debit transactions. As a result, you will only benefit from the regulated Durbin Amendment rate if you have Interchange-plus pricing. The vast majority of merchants with bucket pricing see absolutely no benefit.

Be sure to secure interchange-plus pricing from one of our best all-purpose merchant account providers if you want to avoid overpaying for debit fees.

The preceding text has been adapted from “Fee Sweep.” Download your copy of “Fee Sweep” here.

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1 User Reviews

  • Al Fabeech

    I am just researching every way in which “processors” are skimming fees, both merchant and consumer side of the transaction. I am trying to limit their skimming in every way I can. My hospital does not even allow me to pay by direct deposit. Only credit or debit. I can generate a check from my online checking billpay, which will create and pay the postage for it and mail it to their account center. This would also save merchant’s a fee on their end,also? I believe it reduces it to a tiny ACH transaction fee, if they are a member of NACHA? Am I correct? Anyone out there? Direct Deposit is the cheapest way to do this?

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