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Processing Costs: Differences in Debit and Credit Cards
The most obvious 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.
But for a merchant, the difference in impact on the bottom line is even more profound
From a consumer standpoint, the credit card has the benefit of providing funds beyond what may currently be available, with the downside of incurring ongoing interest charges; 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 charged for a debit card charge.
Types of Debit Transactions
Not all debit transactions are created equal. Swiping, tapping, or entering a PIN impacts a merchant’s debit processing cost:
- Signature Debit is often more expensive because it follows the card network rails, which come with higher interchange fees.
- PIN debit is generally cheaper, especially for larger transactions (thanks to the Durbin cap.)
- PINless debit, when a PIN is not used at the point of sale, is often the lowest cost, as it can avoid the card network rails altogether, using domestic networks like Star or Pulse.
Signature debit is most commonly the default debit transaction type, and is a more expensive route. These debit transactions are routed over the Visa or Mastercard networks, with fees hovering around $0.80 + 15-25 cents per transaction. Signature debit is most common in card-not-present transactions.
PIN debit is a lower-cost, higher security option. Entering a PIN leads to routing the transaction through regional debit networks instead of the signature rails. This route is generally for card-present transactions and is cheaper for merchants. This includes where the card is dipped, tapped, or within a mobile wallet but at a physical terminal.
As the name suggests, PIN entry is not utilized for PINless debit transactions. PINless debit is a debit card transaction where a PIN entry is not used at the point of sale. It includes card-present transactions but is most commonly associated with card-not-present transactions in e-commerce. PINless debit can use the signature debit rails, along with regional networks or PINless-enabled debit networks.
Why are debit cards cheaper to process?
Debit cards are cheaper to process than credit cards because, unlike credit cards, debit cards do not create short-term unsecured debt. The accessible funds are consumer-held funds, which are confirmed to be available during the authorization process. As a result, they create substantially less risk for the financial institution facilitating the transaction. For this reason, processing fees for debit cards have attracted the interest of regulators worldwide, and have been regularly targeted for reduction to reflect the lower risk. This is the essence of why debit cards are cheaper to process.
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; debit card transactions must be disputed within 60 days. This means that not only is the initial processing fee likely to be lower, but the risk of subsequent refunds and/or chargebacks is reduced.
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 be far higher than that. 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: the issuing institution 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 a limited risk of non-payment for everyone 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.
Still, they limited the premium that was supposed to be paid for a risk that was effectively non-existent.
How many transactions are processed through debit cards
According to industry outlet Payments Journal, consumers in 2023 conducted more than 30 point-of-sale debit card transactions per month. The average debit purchase increased to nearly $50, resulting in a four percent year-over-year growth in debit transactions from 2022 to 2023.
PYMNTS estimates 38% of consumers use debit cards in physical stores, and 33% choose debit for online payments. These numbers reflect a trend toward debit cards.
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 at least a third of their transactions will be completed with a debit card—and likely more. And merchants who don’t plan for a multi-processor system to access the lower processing costs for debit cards are leaving real money on the table.
Imagine two merchants. One uses a full-service payment services provider (PSP), which charges 2.9% plus 30 cents per transaction, regardless of card type; the second uses payment automation and decision making 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 charges 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.
In other words, Shopify estimates the average margin for one of its retailers is 10%: Merchant 1 takes 3.2% of that, while Merchant 2 takes only 0.76%.
Accessing 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, limiting the merchant’s ability to optimize their payment costs.
