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Could somebody explain why the merchants are charged different fees when the customers use credit and debit cards?

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4 Answers 4

up vote 10 down vote accepted

A debit card takes the funds right from your account. There's no 'credit' issued along the way.

The credit card facilitates a short term loan. If you are a pay-in-full customer, as I am, there's a cost to lend the money, but we're not paying it. It's part of the fee charged to the merchant. Thus the higher transaction cost.

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This additional fee also covers the benefits of cashback/miles/rewards, $0 annual fee cards, and fraud protection, etc. –  Noah Jul 28 at 17:49
    
how does that play into why merchants are charged different amount for processing the same card as a debit vs credit? –  warren Aug 1 at 22:08
    
@warren - because the credit card is an implicit short term loan, the debit card, just a transaction out of your own account. That help? –  JoeTaxpayer Aug 2 at 0:00
    
@JoeTaxpayer - sorta ... but it's the same card, same account: form the perspective of the user, it's identical –  warren Aug 2 at 2:49
    
A debit card user has to treat the card as if he is writing a check, he must have sufficient funds to cover the transaction. The credit card user only has to be aware of his credit limit. Different, in my opinion. –  JoeTaxpayer Aug 2 at 10:58

In Addition to @JoeTaxpayer's answer, in the UK credit cards offer additional protection than if you were to pay by debit card. This includes (but is not limited to) getting your money back if the company you've bought something from goes bust before your order is complete.

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It comes down to liability - if a fraudulent transaction takes place with a debit card, you are out $$ until it is resolved - while as with a credit card, the credit lender is out $$ - the credit lender does not like losing $$, and therefore would like to be paid extra $$ for assuming this risk, and they found the merchant as the one most willing to pay. Sometimes the merchant will pass on this cost to the consumer, but often times the credit card company has a contract with the merchant preventing such a fee, because then they would be at a price disadvantage when compared to debit.

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As others have stated, credit (signature required) is processed through their respective networks (Visa, MasterCard, Discover, or American Express). A "debit" card tied to your checking account, still go through the same credit network even though the funds are guaranteed from your checking rather than a free loan 30-60 days which has the potential to be unpaid.

This type of debit card purchase may be eligible for a lower processing rate for less risk.

Debit cards can also be processed through the debit network (PIN required, no signature). This is typically a straight fee such as $0.35.

Fees vary, but let me give you a simple comparison:

Say you are at the supermarket and buy $50 worth of groceries with a debit card with Visa logo. You are asked "credit" or "debit":

  • If you go credit signature, the supermarket pays 2% on $50 (their cost $1.00).
  • If you go debit PIN, the supermarket pays a straight fee of $0.35.
  • Supermarket saves $0.65 if you pay using debit PIN.

At my supermarket, this is why I am given the option to enter my PIN first. If I want to pay by credit, I have to tap Cancel to process via credit signature.

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