Processing Costs: Differences in Debit and Credit Cards

How Credit and Debit Cards Compare

The fundamental difference between a credit and debit card is whose money is being used in the transaction: with a credit card, the consumer is borrowing from the card issuer, while with a debit card they are using their own money, stored with the issuing bank. From a consumer perspective, the credit card has the benefit of providing funds beyond what may currently be available, with the downside of incurring ongoing interest charges and fees; by contrast, the debit card has the benefit of incurring no extra fees, but the downside of making available only whatever funds the consumer currently has in their possession.

From the merchant’s perspective, however, the difference could not be greater, because the fees charged to process credit and debit cards diverge wildly, particularly in countries such as the United States, where federal law limits the amount that can be charged for a debit card charge.

Why are Debit Cards Cheaper to Process?

Unlike credit cards, debit cards do not create short-term unsecured debt; rather, they provide access to consumer-held funds that are confirmed to be available as a part of the authorization process. As a result, they create substantially less risk for the financial institution facilitating the transaction.

There are also a number of differences in the rules applied to debit accounts versus credit accounts that benefit merchants. For instance, credit card transactions can typically be disputed by the consumer for a period up to 120 days, where debit card transactions must be disputed within 60 days. That said, somewhat counter-intuitively, merchants are permitted to charge a surcharge to customers using credit cards, but are not permitted to do so with debit cards (although for online merchants, this tends to be a moot point).

How are Lower Debit Card Processing Fees Enforced?

In the United States, the Durbin Amendment of 2011 set an absolute maximum fee on debit cards of 21 cents plus 5 basis points (0.05%) on each transaction. Credit card fees, by contrast, can reach far higher than that, and, indeed, in an industry dominated by full-service providers like Stripe and PayPal, it is not unusual to see fees in the range of 2.9% plus thirty cents for any and all card payments.

It makes logical sense for card networks to charge higher fees for credit cards: it is the issuing institution that pays the merchant, and in doing so it is taking on the risk of non-payment by the ultimate buyer. While one might argue that the cost of lending the money should be borne by the consumer getting the short-term loan, the industry has steadfastly maintained that those loans provide liquidity that benefits merchants, who therefore should share in the cost of continuing operations.

By contrast, debit card transactions create limited risk of non-payment for anyone in the payment chain: the issuing bank pays out only those funds that are available from the customer’s account. As a result, regulators stepped in to ensure that payment processors could charge a fee for operating the system, but limited the premium that was supposed to be paying for a risk that was effectively non-existent.

How Many Transactions are Processed Through Debit Cards?

According to industry outlet PYMNTS, 38% of consumers use debit cards in physical stores, and 33% use them for online payments. These numbers were accurate in late 2021, and reflected a trend toward debit cards, so it is entirely likely that debit and credit cards are currently used at approximately the same rate.

Today over 80% of Americans have a debit card, and it is highly likely that they will use them from time to time to do more than extract cash from an ATM (particularly as the rate of purchases completed in cash has plummeted to just 8%. So for almost any merchant, the likelihood is that some portion of their transactions north of one in three will be completed with a debit card.

How Much do Merchants Stand to Gain or Lose?

Imagine two merchants. One uses a full-service payment services provider (PSP), who charges 2.9% plus 30 cents per transaction, regardless of card type; the second uses payment automation and decisioning to send debit card transactions to a provider that charges an extra nickel on top of the maximum 21 cents plus 0.5%. For a $100 basket, the merchant would pay

• The full-service provider $3.20
• The debit card provider 76 cents

That represents more than a 300% premium for using the full-service PSP! For a sense of measure, the average Shopify store makes $2000 per month; if that were split up into 20 $100 orders, all paid by debit card, then our first merchant would pay $48.60 more than our second every month, or $583 per year. Put another way, Shopify estimates the average margin for one of its retailers is 10%: merchant one is giving up 3.2% of that, while merchant 2 is only giving up 0.76%.

How Merchants Can Access Lower Debit Processing Fees

The first step, clearly, is to build a payments system that spots debit transactions and routes them to payment providers that will charge appropriate fees, and not just the one-size-fits-all rates of a full-service PSP. 

In order to do so, merchants should consider using a third-party tokenization provider like Basis Theory, which will assume responsibility for collecting, protecting, and submitting consumer cardholder data on the merchant’s behalf, while keeping the merchant’s payments system out of PCI-DSS scope. This will allow the merchant to move on from full-service providers, who provide the data protection service, but will not permit the merchant to transact business through other PSPs, and therefore limit the merchant’s ability to optimize their payment costs.