Credit Vs. Debit Card And The Processing Fees BF Blog

Credit Vs. Debit Card And The Processing Fees

Congratulations on achieving entrepreneurship. Whether you are starting your new business or in the process of setting one up you need to understand processing fees.  The fees are part of the process of doing business and these costs need to be factored in. However, if you only plan to run a cash business, this will not be an issue for you. On the other hand, most businesses, especially online businesses, will require credit cards and debit card transactions. Your financial institution of choice, credit card network, and payment processor will determine the processing fees for credit and debit cards. Please note there is a difference between credit and debit card fees. Let’s take a closer look into the difference between a credit Vs. debit card and the processing fees for each.

What are the Processing Fees

When a consumer makes a purchase from you in the form of credit card transactions or debit card transactions there will be a processing fee. Credit Card processing fees will cost a business between 2.87% to 4.35% of the total for each transaction. Most importantly, this fee is paid from the merchant account to the issuing bank. Let’s review the types of fees associated with credit card payments and debit card purchases.

Interchange Fees

The interchange fee is a fee paid to the card issuer when the transaction is swiped with the card. This fee will depend on the type of card swiped, the amount of the transaction, and the type of industry of the business. For instance, if the purchase is from an online business the interchange fee could be higher since the risk for fraud is higher. However, fraud is the greatest risk factor in this entire equation. More about this later.

The interchange fees are set by the payment networks, i.e., Mastercard and Visa. The fees change twice a year, in April and October only. In short, the purpose of the interchange fees is to cover the risk of approving sales, fraud, and handling costs for the card issuer.

Assessment Fees and Dues

The dues and assessment fees are collected for the card networks. These fees are for the use of their brand name, i.e., Visa or MasterCard. These fees are also reviewed bi-annually.

The main difference between Interchange Fees and Payment Processor Fees is that they are based on total monthly sales, not a single transaction.

American Express is the only credit card issuer that is both the card network and the card issuer.  Therefore, all interchange, assessment fees, and dues will go directly to American Express. Also, these merchant fees are the highest. Visa, Mastercard, and Discover all have lower interchange rates. American Express is also one of the few cards that has an annual fee for consumers to use the credit card. Hence, Amex was not widely accepted by many merchants, especially small businesses.

Payment Processor Fees

Finally, there is the fee paid directly to the payment processor to facilitate the transaction. This is an additional fee that must be paid on top of the Interchange Fee and the Assessment Fees. As you can see everyone has a hand in these fees.  Every middleman must be paid. These fees are collectively referred to as swipe fees. However, do these fees differ depending on the type of card you use?

Debit Card vs. Credit Card Merchant Fees

I always wondered why I was encouraged to use my debit card vs. my credit card as a consumer. Is there a difference in how fees are calculated? I found out that credit card transactions range from 2% to 4% per transaction. The Federal Reserve caps the debit card fees at 21 cents per transaction plus 0.05% of the transaction amount. However, debit cards from small banks are exempt. These costs are subject to change based on the Payment Networks’ bi-annual review process.

Please note that Debit Card fees are regulated by the Durbin Amendment which is part of the 2010 Dodd-Frank legislation. This is a federal law. This amendment directs the Federal Reserve Board to regulate debit card interchange fees to ensure they are reasonable and proportional to the cost incurred by the issuer of the transaction.

For small businesses, it is in their best interest to encourage their customers to use their debit cards in order to keep costs down. This can be a difficult task as most consumers prefer to use their credit card vs. their debit card to reduce the risk of having their bank accounts drained by hackers.

Reducing Credit Card Transaction Fees

For a small business, every dollar earned counts. Therefore, paying unnecessary fees should be avoided at all costs. The type of card used in a transaction can make a huge difference to your bottom line. If you can avoid credit transactions to obtain lower rates I would. Maybe, you can incorporate this into a marketing or sales promotion. I believe the customer will need to be heavily incentivized to use their debit cards.  In conclusion, the risk is lower for financial institutions, and it is a bigger risk for consumers.

The main difference is debit card funds come directly from the consumer’s bank account. On the other hand, credit card purchases draw immediately from the credit card companies. Therefore, the consumer’s funds are not at risk from fraud.

Pin Debit vs. Signature Debit

There are two types of debit card transactions. One where the consumer provides a Personal Identification Number (PIN).  This is called a PIN debit transaction. After swiping their debit card, the Point of Sale or POS system will prompt them to enter the 4-digit code to complete the transaction.

The signature debit transactions are the second type of debit card transaction. To complete the transaction the salesperson will request you to sign the merchant account receipt. Today, this is rarely used as a signature is more easily forged than trying to obtain a PIN.

Debit Card Transactions

The types of transactions can determine a debit’s card transaction fees for the merchant. Hence, when there is a PIN-authenticated debit transaction the following types of fees can be initiated.

The fee cost can be based on a percentage of the transaction, a fixed transaction fee, a flat fee for routing payment information through the network, an annual fee, or a non-exchange fee that can apply to cross-border card usage and non-US-issued cards. Therefore, spend time finding your sweet spot for these costs so that they do not hurt your bottom line.

Merchant Services Provider

There are two types of Merchant Services providers that process payments. The standard ones may or may not have monthly fees.  However, the online payment processors do not.  Here is a listing of the top Credit Card processors from Forbes.

The second type is Online merchant service providers, such as PayPal and Square.  They both do not have monthly fees.  However, they will charge a swipe transaction fee and an online transaction fee.

Hence, when reviewing which type to go with, review the pricing structure carefully. Cheaper may not always be better. You may want to opt for a solution that meets the needs of your specific industry. Based on your merchant category code or MCC.

Merchant Category Code

Each business that wishes to accept payment via a credit or debit card must apply for a Merchant Category Code. Therefore, during this process, a Merchant Identification code (MID) will also be assigned. The MID identifies the individual merchant and the MCC identifies the industry type.

The MCC will have a bearing on how much a bank, credit union, or credit card company will charge in interchange fees. There are certain businesses that can be deemed higher risk. Therefore, high-risk merchant category codes are industries that generate higher-than-average cardholder disputes, have high levels of financial risk to the banks, and a brand that could create regulatory issues.  Examples of high-risk industries are adult entertainment, alcohol and tobacco products, dating and matchmaking services, gambling and online casinos, and Loan and financing services to name a few. Click here for an inexhaustive list of each high-risk and its correlating merchant category code.

As you can see there are a number of factors that go into determining the cost associated with doing business.

Surcharges To customers

To reduce costs some merchants will pass along credit card surcharges or a convenience fee for using a credit card for payment to their customers. Other businesses will add this cost to the cost of the product or service they are selling to their customer. However, I have not seen any additional fees on my purchases, so I am assuming these costs are part of the markup of the products.


There are several types of costs you should be aware of. Above all, you should also understand the difference between credit vs. debit card merchant fees to control the cost of doing business most effectively.

  1. Interchange Fees for each type of credit card.
  2. Assessment Fees for each type of credit card.
  3. The cost of accepting a credit card.
  4. The cost of accepting a debit card.
  5. Your Merchant Category Code and industry risk.

There are steps you can take to reduce costs. Every business owner should make every effort to reduce any additional fees.

  1. Accept cards in person.
  2. Minimize chargebacks.
  3. Require a minimum amount for credit card sales.
  4. Find the cheapest credit card processing company.
  5. Accept cash or debit cards as payments whenever possible.
  6. Choose your industry wisely.
  7. Accept credit cards with the cheapest per-transaction fees.
  8. Avoid credit card issuers with higher interchange fees.
  9. Including these credit card fees in the cost of products and services.

This content is for informational purposes only. Also, all rates and fees noted are subject to change.

Additional Reading:

Is Credit Card Fraud a Felony

What Do CID and CVV Mean on a Credit Card?

Easy Answer: What Credit Card Starts with 4147?

What Credit Card Starts With 4400

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