According to CreditCards.com, more Americans than ever before are using credit cards as their sole payment method. But if you think the surging popularity of credit cards means that your business can afford to bypass offering customers other payment options, you should think again. There are some compelling reasons you should not overlook adding debit card processing to your business, too.
Credit cards and debit cards might look the same and both fulfill the function of enabling payment from cardholders to your business. But credit card and debit card transactions work differently, and the differences between the two models can have a big impact on both customer preferences and on your business.
When a cardholder uses a credit card, they are deferring payment to a later date; in the interim, the credit card company pays the merchant and waits to be repaid by the cardholder. This means the credit card company takes on costs associated with the delayed payment as well as some of the risk. Merchants are charged commensurate to this, with fees that are based on a percentage of the total purchase.
Debits cards are linked to a cardholder’s checking account, or they may be preloaded with funds. The fact that the funds are directly available from the card, instead of being credited and repaid later, changes the nature of the transaction itself. When a cardholder agrees to a credit card transaction, whether using their signature or a PIN, they are promising to repay the credit card company based on the terms of their cardholder agreement. But when a cardholder uses their debit card, they are authorizing the transfer of funds to the merchant – if the funds are not present in their account (or the bank account does not have overdraft protection) or the purchase exceeds the amount loaded onto the card at the time of transaction, the transaction will be declined.
One of the most obvious advantages of this is that debit card authorization provides verification on the spot that the funds exist in the cardholder’s account. When problems do occur, businesses may be better protected against chargebacks than they are with credit cards. The Fair Credit Billing Act, which outlines consumer rights around credit card charges, has different rules for debit and credit card purchases – while cardholders may still dispute unauthorized purchases or items that were damaged or lost during shipping if purchased with a credit card, fees for debit purchases can only be reversed with the merchant’s agreement.
While a preponderance of loyalty and cashback credit cards might make it seem as though everyone is using credit these days, the data shows that many Americans are still using alternative forms of payment. In fact, an annual report by the Federal Reserve on payment forms used by U.S. consumers and businesses shows that debit cards reign. In 2017, the most recent year cited in the Federal Reserve report, debit card transactions made up two thirds of all card payments in the U.S., with 82.6 billion payments. The report also noted a previously-unseen surge in debit card usage relative to credit card payments, with 10.4 percent growth year over year.
Many personal finance experts have urged consumers looking to better manage their spending to forego credit cards altogether – if your business does not accept debit cards, you risk losing out on customers who either choose not to use or do not have access to a credit card.
As mentioned, when a credit card transaction occurs, the credit card company takes on the most immediate risks and costs by fronting businesses the associated funds. As you might expect, this results in fees that outpace those associated with debit card transactions.
Under the Durbin Amendment, debit card fees charged by large card-issuing banks are capped at $0.21 plus 0.5% of the purchase. While credit card transactions are also linked to a percentage of the purchase total, that percentage is typically at a higher rate than the one charged for debit card transactions.
If you accept debit cards and haven’t seen savings from the rate cap, your Payment Processor may be to blame. While the actual fee of a debit transaction is based on a lower percentage of the price paid than credit card transactions, some payment processors only offer flat-rate pricing – meaning that all transactions, regardless of the amount or type of card used, are subject to the same fee. For the processor, this model must account for low- and high-value transactions within a single fee – in other words, the flat fee is based on a wide range of fees – meaning it likely exceeds actual debit pricing. Some processors also charge different amounts for swiped and keyed debit card transactions, another thing to look for if you are looking to minimize processing costs.
With lower fees, reduced risk and a better ability to serve a broad range of customers, there are clear advantages to accepting debit cards. Does your business accept debit? If not, let us know in the comments what's holding you back.