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Why Credit And Debit Card Transactions Have Different Rates

The federal government recently passed laws that put a cap on the amount that can be charged for debit card transactions. The impetus behind this is nothing new; there has always been a thought that debit card transaction fees should be lower than credit card transactions. However, the implementation of laws to enforce a lower fee for debit cards was a long time in coming.

For many years, retailers looked to the banks to lower the fees on debit card transactions mainly due to the fact that customers have a tendency to use them for smaller purchases. For example, the previous cost for a debit card transaction averaged $.44 cents. If a customer came in and purchased a cup of coffee or a candy bar that costs $1, almost half of the transaction is eaten up by the fee. The remaining amount is barely enough to cover the cost of the item purchased. Thus the cap in fees for debit cards is a victory for the business owner.

Credit card transactions are untouched, meaning that the merchant still sees a larger bite out of a transaction. However, consumers are more likely to spend more money on a regular credit card, so the hit to the merchant’s bottom line is not as hard.

One of the sections of a merchant account agreement states that the business who accepts credit and debit cards must accept it for all transactions, regardless of dollar amount. Merchants who display a sign that they will not accept any credit card charges under $5 are in violation of their agreement and are at risk of losing their account if they persist. Merchants ate the fees in order to avoid the loss of a credit card processing account. However, the rise in the use of debit cards for small transactions hurt the merchant in the long run.

The policy only applies to banks that have over $10 billion in assets. These banks are restricted to charging 21 cents per debit card transaction plus a fee of 0.05 percent of each purchase to cover fraud losses. A debit card issuer that utilizes tough fraud prevention policies can add a 1-cent-fee per transaction. Debit card issuing banks that are under the asset level and credit unions are exempt from the cap.

Merchants are now able to feel more comfortable with accepting debit card transactions since they take that much less of a bite out of their profits. Now, a $1 transaction on a debit card covers the replacement cost of an item and a little more. Lastly, the merchant has to do nothing to get this rate apart from swiping the card for a purchase.


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