Debit card merchant fees are important for merchants to understand, as you’ll likely have customers pay for goods and services with debit cards in addition to traditional credit cards, e-wallets and other alternative methods.
In contrast to credit card processing fees which are mainly affected by whether the cards are present or not at the time of the transaction, debit card processing fees are affected by the kind of authentication used (PIN vs. signature), whether the card is present, the merchant’s industry type and the ticket size.
The most important things to know if you plan to accept debit cards are:
- Debit card processing fees are substantially lower than credit card processing fees because they carry less risk.
- PIN debit transactions go through debit networks whereas signature debit transactions go through credit card networks.
- PIN debit transactions have lower percentage fees and higher fixed fees than signature debit transactions.
- The interchange fees charged vary according to the merchant’s industry type.
- Card-not-present transaction fees are higher than card-present transaction fees.
- Merchants should research the applicable network rates and negotiate the most favourable processing fees with their payment processor.
PIN Debit Transactions vs. Signature Debit Transactions
While credit cards are always processed through the credit card networks (Visa, MasterCard, Discover, American Express), debit cards can be processed either as debit or credit when used for card-present transactions.
If processed as debit, the customer will be asked to enter their personal identification number (PIN). If processed as credit, the customer will be asked to provide either a digital signature or sign the sales receipt with a pen.
It’s important to realise that merchants are charged different debit card fees for PIN debit transactions compared to signature debit transactions, and if you’re leaving the choice up to the customer, you may be paying higher transaction fees than you need to.
PIN Debit Transactions
PIN debit transactions are processed through the PIN debit networks rather than credit card networks like Visa and MasterCard. Most of the PIN debit networks are run by major card brands and include Visa’s Interlink, MasterCard’s Maestro, and Discover’s Pulse, plus others. Because these transactions go through the debit networks, a PIN transaction is referred to as an ‘online debit transaction’.
After a customer swipes or dips their card, they select ‘debit’ and are prompted to enter their personal identification number. If the PIN is correct, the transaction request passes through the payment gateway to the acquiring bank, from where it is sent to the debit network and issuing bank and—if there are enough funds in the customer’s bank account—the transaction is approved.
On the merchant’s statement, the charges for PIN debit transactions include:
- A debit network fee (made up of a rate, a fixed transaction fee and a switch fee)
- The payment processor’s markup (usually a percentage of the amount plus a fixed per-transaction fee)
- Some debit card networks charge annual fees in addition to transaction fees.
Signature Debit Transactions
In contrast to PIN transactions, signature debit transactions are processed as credit card transactions. Because a signature debit transaction doesn’t go through the PIN debit networks, it is referred to as an ‘offline debit transaction’.
To complete a signature debit transaction, the customer swipes or dips their card and selects ‘credit’. Then, they will be asked to provide their signature by either signing on a screen or signing the sales receipt with a pen.
If the signature on the card and the receipt (or screen) match, the transaction request is sent through the payment gateway and acquiring bank to the credit card network and the customer’s issuing bank. If the card has enough funds and is not blocked or reported as lost or stolen, the transaction is approved.
Once the transaction appears on the merchant statement, the report should show:
- A card network assessment fee
- An interchange fee
- The payment processor’s markup
It’s important to note that while signature debit transactions are processed through the credit card networks, the customer pays with the funds in their bank account rather than borrowed funds. As a result, the risk to the issuing bank and the merchant is lower even when debit cards are processed as credit.
PIN Debit Network Fees
Debit card transaction fees include four components at the time of the transaction in addition to an annual fee for some networks. Each debit network sets its own fee structure.
- Rate. This is a percentage of the total transaction amount.
- Transaction fee. This is a fixed per-transaction fee.
- Switch fee. This is an additional fixed per-transaction fee that is charged on PIN debit transactions and is set by each debit network.
- Annual fee. Some debit networks charge an annual fee for using their services.
- Payment processing fee. Payment processors add a markup to card transaction fees to cover their costs. This typically includes a fixed per-transaction fee as well as a percentage fee.
Signature Debit Fees
Signature debit card transactions come with a total of three different fees:
- Assessment fee. This is the credit card network fee. The fee charged is affected by the merchant’s industry and the transaction amount. Generally, small-ticket transaction fees have a higher percentage fee and a lower per-transaction fee.
- Interchange fees. These are fees charged by the issuing bank. The rates are affected by several factors, including the nature of the goods or services being purchased, whether it’s a weekday or the weekend, the merchant’s chargeback rate and whether the customer is using a local or foreign card.
- Payment processing fee. This is the markup added by the payment processor to cover their services. As with PIN transactions, the markup is usually a percentage plus a flat transaction fee.
Card-Not-Present Debit Card Processing Fees
For e-commerce merchants, standard debit card merchant fees don’t generally apply because customers neither sign nor enter a PIN for purchases they make online. Instead, they enter the card number, expiry date, the name on the card and the card verification value on the back of the card (if requested).
As card-not-present transactions are completed without entering a PIN, purchases made online, by telephone, by mail or by entering the card number manually are processed through the credit card networks (Visa, MasterCard etc.) along with the applicable rates.
Due to the higher risk of fraud with card-not-present transactions, the average interchange fee is higher than card-present debit card processing fees. However, it’s still generally lower than the fees charged on credit card transactions because no borrowed funds are involved.
Benefits of Choosing to Accept Debit Cards
The complex nature of debit card fees might seem off-putting for merchants who are thinking about accepting card payments for the first time. However, the benefits usually outweigh the risks. In the United Kingdom, debit cards account for around 70% of card payments—ahead of credit cards and e-wallets.
Since your transaction costs will generally be around 1-3% of the transaction amount (and often less), the growth in income should be more than enough to offset your debit card processing fees. Moreover, if you already accept credit cards, offering the option to use a debit card could actually help you to save money.
How to Save Money on Debit Card Merchant Fees
As mentioned previously, many merchants pay more than they need to in debit card processing fees. Fortunately, knowledge is power and with a little research, you could keep more Euros in your pocket at the end of the day.
Compare Debit Network Charges for Your Industry
Each debit network sets its own fee structure and the fee structure of one network will inevitably be more favourable for certain business types and average ticket sizes than the others.
If you regularly process small ticket sizes (below €14), it would be advantageous to use the debit network that has the lowest flat transaction fee for your industry, even if the percentage-based rate is higher. Conversely, if you mostly sell high-ticket items (over €14), look for the network that offers the lowest rate as a percentage of the transaction amount for your industry, even if the flat fee is higher.
Work Out the Most Favourable Payment Method
After you’ve compared the network fees and found those that are the most favourable for your industry and ticket size, you will need to compare the relative cost of PIN debit network fees and credit card network fees (for signature debit transactions). In most cases, PIN debit network fees are often cheaper for high-ticket transactions, whereas signature debit transaction fees are cheaper for smaller, more frequent purchases.
Configure Your Point of Sale System to Optimise Transactions
Once you’ve worked out which network and transaction type offers the best rates for your specific business, set your POS system to offer that transaction type first (signature or PIN). If a customer can’t remember their PIN and wants to use their signature instead (or vice versa), they can always change the selection manually. However, most customers will go with the option presented to them and you can benefit from lower fees.
Negotiate with Your Payment Processor for Favourable Rates
Card network and interchange fees are set by providers and are not negotiable. However, all merchants can save money by negotiating favourable markup fees with their credit card processor. Payment processors are able to design custom payment structures based on interchange-plus pricing that takes into account the merchant’s industry, monthly processing volume, average ticket size and chargeback rates. Unless your business is extremely small, you should generally be able to save money by using a dedicated merchant account rather than an aggregate merchant account.
Debit Card Merchant Fees Can’t Be Avoided, but They Can Be Reduced
Debit card processing fees are an inevitable part of doing business in-store and online. While you can’t avoid these fees completely, you can make sure you’re not paying more than you need to by comparing network fees and choosing the network and payment type that reduces these fees to a minimum.
Aside from optimising your payment options, choosing a payment processor that offers interchange-plus and can tailor its markup to your business structure is ultimately the best way to save.