Debit Card Processing Fees

Debit card processing fees are less expensive than credit card fees. But there's a lot more to learn about them than that. Read on.

Debit card processing fees are generally more affordable than credit card fees.

But their pricing can still be confusing. Also, costs can add up if you use an unsuitable fee structure for your business.

Here's a guide to help you understand the ins and outs of debit card processing fees.

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What Is Debit Card Processing?

Debit card processing enables you to take debit card payments from your customers. Customers typically use checking or savings accounts connected to a debit card to make payments.

It's less risky compared to processing credit cards since you're taking money directly from bank accounts (money that's already there, unlike with credit).

Debit card processing companies are also merchant account providers and payment service providers. So if you plan to take credit card payments, you don't need to look for a separate payment processor.

Types of Debit Card Processing

Personal identification number (PIN) and signature debit are the two types of debit card processing. They use different card networks and authorization methods.

And although PIN debit can be more secure, there are still benefits in processing signature debit transactions.

• PIN Debit Transactions
  PIN Debit is the most common type of debit card processing. They're known as online debit card transactions. And they need to be authorized using the customer's PIN.

  Payments are processed through debit card networks such as Accel, NYCE, and Star. This is unlike credit card processing which uses credit card networks such as Mastercard and Visa.

• Signature Debit Transactions
  These transactions require customers to sign receipts for their purchases. They're also called offline debit card transactions.

  Although they are debit payments, these debit card transactions are "run as credit." That's because they're processed through credit card networks.

  You can set thresholds (typically $25) for signatures. So if customers purchase products for less than the amount, they won't be required to sign the receipts.

Contactless debit transactions work like PIN transactions. Customers will "tap" their debit cards to make payments. But they no longer need to enter their PIN, leading to faster checkouts.

On the other hand, card-not-present transactions work like signature debit transactions. They're processed through credit card networks. And they're used for eCommerce, card-on-file, and keyed-in payments.

It's not just the transactions that come in 2 types. There are also two types of banks affecting debit card fees. Let's get onto that next.

Debit Card Processing Fees

Debit card processing fees can be tricky to understand. Fees differ if a bank is a regulated bank or an unregulated bank.

• Regulated Banks or Exempt Banks
  The Durbin Amendment regulates banks with assets of $10 billion or more. For these banks, the debit card interchange fees are capped at $0.21 + 0.05% times the transaction value. There may also be an additional $0.01 for fraud protection.^[2]

  Your processor can't charge you more than this for transaction fees. And this cap is applicable whether you use PIN or signature debit transactions.

• Unregulated Banks or Non-exempt Banks
  Unregulated banks, in turn, are those with less than $10 billion in assets. Although they're not regulated with said fees, some debit networks still cap the maximum fee.

  Large interest groups or industries can negotiate with debit networks for caps on these fees. You can check if your industry belongs to such an agreement.

What are debit card fees?
Just like with credit card processing, debit card fees include interchange and markup fees. The markup will depend on your payment processor, while the interchange fees depend on the bank's size and the transaction type.

• Based on the size of the bank
  While interchange fees for regulated banks are capped, fees for unregulated banks depend on several factors. They may consider the size and type of the transaction and merchant category code.

• Based on the type of transaction
  The fees for PIN debit transactions depend on which debit network is used to process payments.

  Signature debit transactions, on the other hand, use credit card network interchange fees. But they're typically more affordable than interchange fees for credit cards.

Keep in mind that there may be other fees involved. Your payment processor can have annual fees and other non-interchange fees.

Now that you know the fees, let's talk about what really happens behind the scenes.

How Does Debit Card Processing Work?

Because a signature debit transaction is run as credit, it follows the steps to process credit card payments. Except that the transaction is marked as a debit payment.

For PIN debit transactions processed through debit networks, here's what happens:

1. The customer dips/swipes the debit card on your terminal.
   
2. The payment processor sends the debit card information to the processing network. The network verifies the data and checks for fraud.
   
3. The info is forwarded to the customer's bank (issuing bank). And this issuing bank confirms if there are sufficient funds to make the payment.
   
4. This info is relayed to the processor. And if the payment is approved, payment will be withdrawn from the customer's bank account to your merchant account.
   
5. After 1-2 days, your provider will transfer the funds to your business bank account (minus the fees).

Although you can use one processor for both, there are differences between processing debit and credit card payments.

Debit Card vs. Credit Card Processing

Before we talk about how they're processed, here are the main differences between credit cards and debit cards.

How Credit Card Processing Works
There are 3 stages to credit card processing. And unlike debit card processing, the card brands are involved as well.

• Authorization Stage
  When a customer pays with a credit card, the card details are sent to the acquiring bank (bank associated with your merchant account). Then the acquiring bank forwards these details to the credit card networks (VISA, Mastercard, etc.).

  The card network will request the issuing bank for authorization. If approved, the purchase is a success.

• Settlement Stage
  Money isn't actually transferred to your account after a successful purchase. Your merchant account will only have collected these approved transactions throughout the day, after which you should send them in a batch.

  The acquiring bank will forward them to the respective card networks. Then the card networks will forward them to the issuing banks. The issuing banks will pay the acquiring banks minus the interchange fees.

  Typically, you can get the funds the next day.

• Funding Stage
  Now, the merchant bank account isn't accessible to you. To access your funds, you'll have to wait for them to reach your business bank account. And that happens in this stage.

  Your payment processor will be the one to deposit payments to your bank account minus the fees.

Debit Card vs. Credit Card Merchant Fees
Credit card processing fees tend to be costlier than debit card fees. Although you can negotiate these fees, it's best to consider the maximum budget.

Here's a side-by-side comparison:

Consult with payment processors to find out exactly how much you're expected to pay. Interchange-plus pricing is the most transparent pricing model. You'll see exactly how much the interchange rate, card brand, and processor markup fees are.

But you may be offered other pricing models, including subscription, flat rate, and tiered pricing.

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If the fees are too expensive, there are ways to lower them.

How to Lower Debit Card Fees

Debit card fees can still pile up. This is especially true if most of your customers use debit cards for payments.

Here are some things you can do to make it even less expensive:

• Use PIN debit if you sell pricier products.
  PIN debit transactions typically have higher per-transaction fees and lower percentage fees. This makes them more suitable for large-ticket items. If you're selling cheaper products, it'll be more expensive for you as a merchant.

• Use signature debit if you sell affordable products.
  On the other hand, signature debit transactions often have lower per-transaction fees with higher percentage fees. It's doable if you sell small-ticket items.

• Consult with your processor about debit routing.
  A customer's debit card can be processed in various debit networks. Consult your payment processor about how many debit networks they work with. Then ask about how their dynamic routing works.

  Ideally, each debit card payment will be processed with the least expensive debit network (in terms of interchange fees).

The Bottom Line

There are many factors affecting debit card processing fees.

How much you end up paying as a merchant depends on the following:

• Type of debit card processing
  
• Interchange fees from credit and debit networks
  
• Markup by your processor

Although these fees aren't super-expensive, there are still ways to optimize your payments. You wouldn't want to add thousands of dollars to your bill when you can avoid it.

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