Below we take a closer look at both debit card and credit card processing fees and how each are calculated:
Debit Cards
Who Charges Debit Card Processing Fees?
Debit card transactions follow a different fee structure depending on whether the transaction is PIN, or signature based.
- PIN-based. When cardholders enter their PINs at the time of the transaction, it is a PIN-based transaction that is processed through an online payment network, much like an ATM transaction. A PIN-based transaction withdraws the funds from the cardholder's account at the time of the transaction. A PIN-based transaction does not incur credit card network fees, however it does incur an interchange fee.
- Signature-based. When a cardholder opts to run their debit card as “credit”, or makes a purchase with their debit card online, the transaction is considered signature-based and is processed through the credit card network. Historically, the cardholder was required to physically sign for these purchases after swiping their card in-store, but with the advent of EMV chip cards, many merchants no longer require an actual signature. Regardless of whether the cardholder provides a signature, any debit card transaction that does not require a PIN is considered signature-based, and credit card processing fees apply.
How are Debit Card Transaction Fees Calculated?
In 2018, the average fee to process a single debit card transaction was $0.23, but debit card transaction fees can range widely. On top of transaction fees, some networks charge additional fees including annual processing fees, non-interchange fees, and fees for settlement and refund processing.
Debit card processing fees will vary based on many factors, including whether the transaction is PIN or signature-based. Other factors include:
- Merchant category. Merchant codes are assigned based on the industry and business type. Online merchants selling children's toys will have a different code from those selling in-person merchandise. Retailers have varying merchant codes depending on their products. The category code comes with higher fees if a business is considered high-risk.
- Card Entry Type. Fees are assessed based on how the transaction is acquired. Is it an online transaction with a manually entered card number, is the card swiped, or is a chip-reader used?
- Regulated. Card-issuing institutions with more than $10 billion in assets are regulated in their fee charges. Unregulated companies do not have a cap set for processing fees. This means that a smaller, local bank sets fees themselves, while national banks are regulated.
What you’ll pay per debit card transaction is also often influenced by your transaction volume. The more transactions a merchant processes, the lower their interchange fees typically are. Merchants may also pay a per-terminal fee if they are leasing their payment processing devices rather than purchasing them.
Credit Cards
Who Charges Credit Card Processing Fees?
The best way to break down credit card processing fees is to look at the companies involved in the authorization and settlement of transactions. These include:
1. Credit Card Companies. U.S. credit cards come from four primary sources: VISA, MasterCard, American Express, and Discover. Each company operates its own network and charges transaction fees for every transaction that comes through their system.
2. Payment Processors. Payment processing companies are those who offer point-of-sale devices that businesses can accept card transactions through. When a transaction goes through the device, it is sent to the appropriate network for authorization, and an approval or decline is then returned to the merchant. Payment processors can be financial institutions or third-party companies.
How Are Credit Card Transaction Fees Calculated?
Fees owed to both the credit card companies and payment processors will include a percentage of each transaction, referred to as “per-transaction fees”. Keep in mind that these fees apply to signature-based debit card transactions as well, since they are processed through the credit card networks. Average credit card processing fees by network are:
- MasterCard. 1.29% to 2.64% of transaction amount
- Visa. 1.29% to 2.54% of transaction amount
- Discover. 1.48% to 2.53% of transaction amount
- American Express. 1.58% to 3.45% of transaction amount
Per-transaction fees charged by payment processors typically range from $0.05 to $0.30 per transaction. Most credit card transaction fees are communicated as a percentage of the transaction, plus a flat fee. This is referred to as interchange-plus pricing. It includes the network fee and the payment processor fee. For example, a fee of “2.6% plus $0.10”, equates to 2.6% of the transaction amount (which is paid to the card networks), plus an additional $0.10 per transaction (which is paid to the card processor).
Reducing Card Processing Fees
Unfortunately, card processing fees can add up quickly and eat into any merchant's profit margin. But they are unavoidable if you want to accept card payments. Here are a few tips to help minimize your card processing fees as much as possible:
- Require debit cardholders to enter a PIN. Having customers enter their PIN when using a debit card can reduce the number of signature-based debit transactions you’re charged for, which are more expensive since they are processed through the credit card networks.
- Find a network and processor with favorable rates and fees. There are an abundance of companies that offer card processing terminals, so compare your options and choose the provider that offers the best rates. Make sure you understand all associated fees and don’t be afraid to ask questions to be sure there will be no surprises when you start using the machines.
If you’re interested in learning more about payment processing solutions for your business, don’t hesitate to contact our Business Banking team today.