The Comprehensive Guide to Debit Card Processing Fees

Guide to Debit Card Processing Fees

When running a small business, the various fees surrounding your POS system and accepting card payments can be confusing. In fact, you may not know exactly how your issuing bank and payment processor are charging you.

And, with consumers continuously preferring to pay with debit over both credit and cash—according to data from the most recent TSYS U.S. Consumer Payment Study[1]—it’s best to know what debit card processing fees you’re incurring when accepting these transactions. 

This article, therefore, will break down the processing fees you face every time you swipe a customer’s debit card.

Let’s get started.

Types of Debit Card Transactions

Are merchants charged for debit card transactions? The short answer is—yes—and the amount will vary. That said, there are typically two types of debit card transactions you will be processing: PIN and signature. 

Let’s explore the differences in how these debit card transactions work.

PIN Debit

PIN debit applies when a customer completes the transaction by entering their personal identification number (PIN) after swiping or inserting their debit card. Generally, the merchant will not require a physical signature for PIN debit transactions.

PIN debit transactions are often called “online debit transactions” because the payment information is processed through the debit network, instead of a card processing company like MasterCard or Visa. Also, in this case, it’s the debit network that charges the fee (more on this below).

Signature Debit

As the name indicates, a signature debit transaction occurs when a customer must sign the sales receipt. This transaction applies when a debit card is swiped, and the merchant or customer chooses to process the card as “credit.” Instead of entering a PIN, the customer must sign digitally or with a pen.

In contrast to PIN debit transactions, this payment is routed to the bank via Visa or MasterCard’s network, instead of the debit network. Since the processing occurs outside the debit network, signature debit transactions are often referred to as “offline debit transactions.”

Here, it’s important to note that even though the transaction is processed as “credit,” the funds are not borrowed, as they typically would be with a credit card. The funds are still drawn from the customer’s checking account.

The Main Difference

Essentially, PIN and signature debit transactions are different in how the payment is processed. The banking network processes the payments for PIN debit transactions, and the credit card network processes the payments for signature debit transactions.

But this isn’t the only difference between the two. How the payment is processed will also play a significant role in determining which debit card processing fees you incur. 

Breaking Down Debit Card Processing Fees

Now that we have an overview of the main types of debit card transactions, let’s look at how you can be charged in terms of fees. When it comes down to it, debit card processing fees are extremely complicated because there are a number of factors that go into determining exactly how much you pay for any one transaction. 

Overall, however, you’ll pay debit card processing fees in the form of interchange fees. These fees generally apply whenever a customer uses a debit card to purchase from you. In other words, whenever a customer pays with a debit card, you pay a fee to process the payment.

Typically, interchange fees pay for the costs of handling, fraud prevention, and processing, and are one of the ways that banks make money through issuing payment cards.

As we mentioned above in regards to PIN vs. signature debit card transactions, debit card processing fees are affected by a variety of factors, including:

  • Merchant category: Your merchant code is based on your business and industry. The interchange fees for a gas station would be different from a restaurant.
  • Processing method: Whether the payment was processed as debit or credit.
  • Type of card: Different banks issue different cards with varying debit card processing fees.
  • Type of transaction: Whether the debit transaction was PIN or signature.
  • Size of bank: Whether the bank is regulated (holds more than $10 billion in assets) or unregulated (has less than $10 billion in assets).

Let’s take a closer look at some of these factors and how they impact the cost of debit card transactions:

PIN vs. Signature Debit Cards

First, as we explained above, when you accept payment as debit, and the customer enters their PIN, the debit network charges a debit network fee. Generally, these transactions have lower percentage fees and higher transaction fees.

When you accept payment as credit, on the other hand, the payment is processed through the credit card network and you’re charged a credit network fee (different fees apply for Visa, MasterCard, AMEX). In this case, you usually see higher percentage fees and lower transaction fees.

Regulated vs. Unregulated Debit Cards

In addition, you may face higher or lower fees depending on whether the card’s issuing bank is regulated or unregulated.

To explain, you have regulated debit when a consumer uses a debit card issued by a bank with more than $10 billion in assets. Transactions were capped at $0.21 plus 0.05% after the Durbin Amendment was passed in 2010. 

In contrast, unregulated debit refers to debit cards issued by banks with less than $10 billion in assets. Unlike regulated debit, there are variable interchange fees which depend on:

  • Merchant category code
  • Size of transaction
  • Card company

Some debit networks place a cap on the maximum fee paid by businesses, like regulated debit, but other networks have no such cap. This leaves negotiating power for corporations, small and large, to set favorable caps.

Here is an example of how Visa Regulated Debit Card interchange fees might vary according to different factors:

Visa Regulated Debit Card 

  • Interchange: 0.05% + $0.22
  • Interchange fee on $10 sale: $0.225

Visa Small Ticket Debit Card 

  • Interchange: 1.60% + $0.05
  • Interchange fee on $10 sale: $0.21

As you can see, Visa charges a different interchange fee according to the transaction size—smaller debit card processing fees would apply to sales under $10. This is beneficial for small businesses that sell smaller-ticket items.

Interchange Rates by Industry

If debit card processing fees weren’t already confusing enough, you’ll also see that interchange rates vary based on industry. The interchange rate for a restaurant, for example, differs from a hotel or a travel service. 

Here is an example of Visa’s interchange rates for their Exempt Visa Check Card and Regulated Visa Check Card for debit card-present transactions, as of July 17, 2020:[2]

Card Present Fee Program Exempt Visa Check Card Regulated Visa Check Card
Supermarket
$0.30
0.05% + $0.21
Retail
0.80% + $0.15
0.05% + $0.21
Automated Fuel Dispenser
0.80% + $0.15 ($0.95 Cap)
0.05% + $0.21
Service Station
0.80% + $0.15 ($0.95 Cap)
0.05% + $0.21
Small ticket
1.55% + $0.041
0.05% + $0.21
Restaurant
1.19% + $0.10
0.05% + $0.21
Hotel and Car Rental
1.19% + $0.10
0.05% + $0.21
Passenger Transport
1.19% + $0.10
0.05% + $0.21
Travel Service
1.19% + $0.10
0.05% + $0.21
Retail Key Entry
1.65% + $0.15
0.05% + $0.21

Interchange Rates Change Over Time

Moreover, interchange rates often change over time—sometimes even twice per year. For example, Visa and MasterCard update their interchange fees semiannually. The interchange rates in the table above may be different one year from today.

For instance, Let’s compare the MasterCard Core Value Card’s debit card processing fees during the 2018 to 2019 period and the 2019 to 2020 period.

As of April 2018, MasterCard charged a fee of 1.15% + $0.05 within the service industries. Fast forward to April 2019, and the fee lowered to 1.15% + $0.05 from 2019 to 2020.[3][4] As you can see, it’s prudent to regularly review interchange rates across different companies to observe any fluctuations in your debit card processing fees and bottom line.

Payment Processing Fees

And—if debit card processing fees weren’t complex enough already, you might also incur fees charged by your payment processor. Payment processing companies don’t take a cut of the interchange fees—those go to the issuing bank and the card network. Instead, they charge a separate fee to process payments.

The debit card processing fees you incur will vary depending on which payment processing company you choose. To see the differences, let’s compare various payment processors and their respective rates:

Payment Processing Company Fee Structure
Stripe
2.9% + $0.30 per online transaction
Authorize.net
2.9% + $0.30 per online transaction OR $10 per online transaction + $0.10 daily batch fee
PayPal
2.9% + $0.30 per online transaction
Square
Starting at 2.6% + $0.10 per in-person transaction
Clover
2.7% + $0.10 per in-person transaction

Frequently Asked Questions

How much does a debit card transaction cost?

The average interchange fee for processing a debit card was about $0.44 per transaction, according to 2019 data from the Federal Reserve System.[5]

The actual fees you pay, however, will vary depending on your merchant category, processing method, type of card, size of the issuing bank, and whether your customer is using a PIN-based or signature-based transaction.

Do debit cards charge merchant fees?

Yes. If you use a point of sale system to process debit card payments, the company will take a cut of the transaction. Let’s take a look at Square’s debit card processing fees, for example:

  • Processing a debit card (as credit): 2.6% + $0.10
  • Manually entering card details: $3.5% + $0.15
  • Online payments: 2.9% + $0.30

Be mindful of the total amount processed, including tax or tip. Square gives an example of a $100 order with a $20 fee. Square charges a processing fee of the $120 total. The 2.6% + $0.10 fee, therefore, would total $3.22.

Do retailers pay a fee for debit cards?

Yes, retailers are subject to debit card fees, like any merchant. The interchange fee you must pay for processing debit card transactions would vary by the card and bank. Also, the fee related to the payment processor varies based on the provider you use.

The Bottom Line

The various interchange and payment processing fees surrounding debit card processing can make it difficult to determine how much you’re actually earning from your sales. Still, accepting debit (and credit) cards has developed into more of a necessity in an age where mobile payment apps, digital wallets, and contactless payments are becoming the norm.

Hopefully, this guide offered some insight into the inner workings of debit card processing fees and the costs associated with card transactions. And, if you’re ever unsure of how you’re being charged or have specific questions about the fees you face, we’d recommend reaching out to your payment processor for more information.

Article Sources

  1. TSYS.com. “2018 TSYS U.S. Consumer Payment Study
  2. USA.Visa.com. “Visa USA Interchange Reimbursement Fees
  3. Mastercard.us. “Mastercard 2018–2019 U.S. Region Interchange Programs and Rates
  4. Mastercard.us. “Mastercard 2019–2020 U.S. Region Interchange Programs and Rates
  5. Federalreserve.gov. “Average Debit Card Interchange Fee by Payment Card Network

Dan Marticio

Dan Marticio is a freelance business writer specializing in personal finance and entrepreneurship. He has written about topics ranging from investing and net worth to startup guides and productivity hacks. He helps small businesses scale and profit through compelling content.

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