Why Are Debit Card Rates Cheaper Than Credit Card Rates?

To process credit and debit cards, a merchant must establish a merchant account with a financial institution or third-party processor. In order to understand why are debit card rates cheaper than credit card rates, you should know that there are processing fees associated with each transaction and these fees are subtracted along the way as a sale settles. The bulk of these fees, the interchange fee, is set by the card issuing banks and the credit card association and have long been a bone of contention for the merchants.

Legislation Law For Debit Card Rates

In October of 2011, a law was passed lowering debit card fees. Dick Durbin, the Republican Senator from Illinois, felt interchange rates were unreasonably high and authored a piece of legislation proposing a reduction of these to more reasonable amount. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Durbin Amendment has significantly reduced the interchange fee to process debit cards; before this legislation, debit card fees ranged anywhere from 1% to 5% of the total amount of the sale, the Durbin Amendment limits the interchange fee to a maximum of $0.21 plus .05% of the total of the sale. This amendment also allows merchants to process their debit card transactions over their choice of PIN debit networks, promoting competition between the PIN networks that has also resulted in a cost savings for merchants.

How Are Credit Cards Regulated?

Understanding why are debit card rates cheaper than credit card rates, will lead to the fact that no such legislation has been proposed to reduce credit card interchange rates. So credit card companies have put on a big push to encourage their cardholders to process their debit card like a credit card transaction. And why…because they make more money that way. When your customer presents you with a debit card and you ask, “Will that be debit or credit?” you are asking them how they want the debit transaction processed. Their answer impacts your bottom line, because debit cards can be processed in several ways. And each type of transactions comes with a different set of costs.

To understand what this means, you need to know how a debit transaction works.

  1. Offline or Signature Debit Transaction:
  2. An offline debit transaction is when the cardholder swipes a debit card, chooses credit as the processing method, and signs a sales receipt. The only advantage to the cardholder is a slight delay in the withdrawal of funds from their account. That may be a benefit for the cardholder, but not for the merchant. An offline debit transaction is processed through the card brand’s network and the merchant will be charged interchange and assessment fees. Good for the banks, but not the merchants.

  3. Online Debit Transaction:
  4. When considering why are debit card rates cheaper than credit card rates, you should know that online debit transactions require a PIN to authorize the transaction. This PIN, which is the legal equivalent of a signature, and the rest of the transaction information are sent directly to the cardholder’s bank for authorization. If there is enough money in the account, the amount of the sale is immediately debited and scheduled for deposit into your merchant account. The transaction is an immediate debit and direct deposit that bypasses the card brand networks and reduces processing fees. Good for the merchant but not for the banks.

Most buyers don’t really understand that there’s no real benefit when they select “credit” at the time of check out, and sign a sales receipt. Not to the buyer, anyway. The money is still drafted directly from their account. No credit is being extended.

But as the merchant, you should know why are debit card rates cheaper than credit card rates and why you have to pay more for signature debit transactions, than you do for PIN debit transactions. So while credit card companies are urging their cardholders to use their debit card as a credit card, now you know why you should be encouraging your shoppers to say, “Debit, please.”