Understanding Debit Card Transaction Costs

As a collection agency you know the advantages of offering a number of payment methods for the consumers to use to pay their debt. Of these, you probably offer both credit card and debit card payments. You are most likely familiar with credit card payments, but sometimes less is known about debit card transactions. When you set up the ability to take debit cards, you will find that there is a lot more complexity to it than previously thought. Here is information about debit cards that can help you be familiar with the process.

Debit card transactions are very popular. A Federal Reserve study from the Diary of Consumer Payment Choice (DCPC) found that cash makes up the largest share of consumer transaction activity at 40 percent, followed by debit card transactions at 25 percent and then credit card transactions at 17 percent.

The same research also points out that debit cards are the preferred method of payment. This is important because collection agencies should understand that credit and debit cards are not interchangeable. Credit and debit transactions assess different fees and while you may have a good rate on credit transactions, you could be over-paying for debit transactions.

Debit Card Processing Costs

Debit transactions withdraw money directly from a checking or savings account. But unlike an Automated Clearing House (ACH) transaction such as direct deposit, the money does not transfer directly from one account to another. Instead, the transfer process is handled by the issuing card network which is the bank or credit union. This makes the transaction subject to fees.

Debit card fees can vary according to two factors:

  1. The card network and size of the issuing bank: The size of the fee is impacted by the size of the card-issuing entity. This is called an “interchange fee”.
  2. Whether it is a signature or PIN debit transaction: The average payment size can make one option more affordable than the other.

Note: The Durbin Amendment, a federal act passed in 2011, places a cap on the interchange fee banks with more than $10 billion in assets can charge for debit transactions.

The Interchange-Plus Model

Debit card payment processing can be complex because transactions can fall into more than 100 different categories that are each assessed different rates. To simplify this, many merchant account providers started lumping transactions into different tiers to make billing easier. Interchange-plus emerged as an alternative to categorized rates. With interchange-plus, to process a transaction you pay only the interchange fee plus the merchant account provider’s markup (it may be a flat fee or a percentage). As a result, the fee structure is much more transparent.

Signature vs. PIN Debit Transactions

Another thing that impacts costs is the type of transaction. Debit transactions can be processed in one of two ways: as a PIN debit or a signature debit.

A PIN debit transaction is known as an “online debit transaction” because it uses the network to determine whether the account has the necessary funds available. A signature debit transaction requires the cardholder to sign a receipt instead of inputting a PIN. Signature debit transactions are called “offline debit transactions” because it does not use the debit network; it does not verify that sufficient funds are in the account at the time of the transaction.

This is an important distinction to understand. With a signature debit transaction, there is not verification that sufficient funds are available in the account. With a PIN debit transaction there is verification. PIN debit transactions pretty much ensure the payment will be made. Signature debit transactions are like a check; it is a promise to pay, but the funds may not be available at the time of the transaction.

In summary, debit card transactions bring a host of unique complexities that you must be aware of when taking them for debt payment. The type of payment you take could impact the fees you are charged and the likelihood of the payment being processed. To learn more about it, contact BillingTree or call us at 877-424-5587.