To Debit or to Credit, That is the Question

Before you checkout at any local grocery store you'll be asked whether you want to pay via debit or credit, nobody uses those green bills anymore.Your choice of payment is one that benefits you as the customer, maybe you'll earn points or maybe it doesn't matter to you.Well, my weekend trip to the grocery store got me wondering how debit and credit payments affect the merchant, and if the merchant benefits more from one than the other.

Processing Fees

Visa and MasterCard:

When a Visa or MasterCard transaction occurs there are four parties involved...

1. The cardholder (the customer or purchaser)
2. The issuer (the financial institution that issued the credit card to the cardholder)
3. The merchant (the person or business selling a product or service)
4. The acquirer (the merchant's financial institution)

American Express and Discover:

When an American Express or Discover transaction occurs there are three parties involved...

1. The cardholder
2. The merchant
3. The credit card company (American Express and Discover act as both the issuer and the acquirer)

When you or any business decides to accept credit and debit cards as forms of payment you must first negotiate what is called a "merchant discount fee" with your financial institution, the acquirer. The merchant discount fee is deducted from each transaction when a customer uses a credit or debit card to pay.In the case of American Express and Discover, you negotiate this fee directly with them since they act as the financial institution and credit card company.A large part of the merchant discount fee is the "interchange transaction fee" which is paid to the credit or debit card issuer (the customer's financial institution) by the acquirer.The fee rates vary depending on certain factors which we will explain below.

Credit Card Interchange Fee Rates

The four main factors for determining a merchant's interchange fee rates are listed below.These factors only apply to Visa and MasterCard because American Express and Discover do not disclose how their rates are determined.

1. Card Type (Premium cards or those offering rewards normally have higher rates than standard credit cards)
2. Industry or Category (Industries that do not process many credit cards have lower rates than those who process many credit cards)
3. Size (More transactions mean lower rates)
4. Processing Type (Transactions via the internet have higher rates than those where the credit card is present due to an increased chance of fraud)

Debit Card Transactions

Just like credit card transactions, a merchant must also negotiate a discount fee for processing debit cards.However, the interchange rates are often lower for debit cards than credit cards since the funds are immediately removed from the cardholder's account.Since the issuer is receiving a smaller amount for debit card transactions than credit cards, they sometimes charge the cardholder a fee every time the debit card is used.Or, the issuer may require the cardholder to make a minimum number of debit purchases each month otherwise a fee will be imposed.The issuer prefers their cardholders to pay via credit card in order to receive a higher fee from the acquirer, which ultimately comes out of the merchants pocket.

Final note, Debit or Credit?

In 2014, customers prefer the convenience of paying with debit and credit cards, that's a fact.Staying in business and increasing sales means following the trends.It's important you research all the options to find the lowest rates but what is more beneficial for you the merchant, accepting debit or credit?Debit cards, this is because the rates are lower since the money is withdrawn directly from the cardholder's account.