Debit purchases are on pace to eclipse cash purchases by 2012. Good news, right? Not if you’re a business owner … or a consumer.
Debit cards are distributed by banks. While credit card companies like Visa and Mastercard traditionally dictate the fees merchants pay for accepting PIN debit purchases, Visa has now given banks the power to set those fees for signature debit purchases (an incentive for distributing Visa debit cards to more customers).
The average fee is $.75 for every $100 in debit card purchases a store or merchant accepts. While that may not seem like a lot at first glance,
consider the following:
- Debit card transactions now account for more than 60% of all plastic purchases
- Visa, which accounts for more than half the market, facilitated roughly 40 billion debit transactions last year
- The fees credit card companies collected for processing debit payments last year (usually five or six cents per transaction) amounted to $45 billion in revenue (a figure which has more than doubled over the past seven years), and
- The rest of the profits were passed along to banks, who are the real winners in the debit game, chalking up multi-billion-dollar profits in return for distributing debit cards to their customers.
Debit fees are especially difficult for small business owners because their overall profits are smaller — a reality which has forced a lot of small owners to enforce minimum purchase levels on all debit purchases. That, in turn, causes a lot of consumers to only do business with larger chains that don’t need to enforce such restrictions.
Still, most independent business owners claim they can’t refuse debit transactions altogether because they account for such a huge chunk of all purchases.
Meanwhile, major retail chains like Best Buy and Wal-mart, are now forced to pay hundreds of thousands of dollars in debit fees each year, which means
less money set aside for hiring new employees and/or offering raises to existing employees.
But it also means consumers are forced to pay slightly higher prices on just about everything — a burden which will only increase over time. If PIN and signature debit transactions continue to grow at the pace they are now, businesses will have no choice but to raise prices to offset the additional costs.
What’s worse? Those costs could end up capsizing a lot of small business owners who simply can’t compete with the slim profit margins major retail chains are willing to accept.
So what’s the solution? Is this just a byproduct of progress, or more greed on the part of financial institutions? Let us know in the comments section below.
Source: “How Visa, Using Card Fees, Dominates a Market,” by Andrew Martin, New York Times, 1/5/10
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Tags: credit, debit, economy, fees, Finance, interest, money, visa
February 18th, 2010 at 5:29 pm
More greed on the part of financial institutions!! This is just another of the many ways these financial institutions are putting it to the public. The small businesses are really being hurt, but as stated, we all will be hurt in the long run. Of course, if you are one of the big guys your happy for the fees. It’s not enough for the government to steadly increase fees and taxes on businesses and those of us who actually still have a job and pay our bills, but the large financial institutions we all work with have really put it to all of us as well with the increasing fees and interest rates not to mention the available credit lines they have decided we don’t need.
Wouldn’t it be nice to see everyone move our financial activity to our locally owned and operated banks and bring out the checkbook instead of the plastic!! How long would it take for the “Big Guys” to start feeling the pain??? Personally, I would love to find out..
February 18th, 2010 at 6:31 pm
Unfortunately, the way things are going, the only way to break the vicious cycle is going to take something along the lines of a small revolution. I really don’t like writing checks, but I think I will have to get used to writing them again.
I really do feel bad for the small business owners, especially since they provide the bulk of the jobs in America.
Also, becaue of the short-sightedness of CEOs of corporations and their shareholders, corporations have to do what they can in order to satisfy the “what have you done for me, lately” mentality we all have as shareholders. One of the biggest expenses for corporations is labor and they have every incentive to not hire Americans.
What a mess!
February 19th, 2010 at 1:58 am
And don’t forget the ongoing reaming-in-progress that the recently “bailed-out” mega banks have been doing while the Feds look the other way… You know… stuff like raising credit card interest rates “because they can get away with it” especially on higher balance customers (who they know are stuck with the “company store.”)
We won’t even get into the high-flying financiers presumedly bailing out so-called “failed banks” … then getting secure, guaranteed terms to supposedly “help” people keep their homes… all the while heading toward the planned and executed dessembly-line of “not renegotiating” mortagages with the homeowners… letting them default… then selling to a new buyer at the new “mark-to-market” price… and coming out 10-30% ahead with the Feds “subsidizing” help… and dare I say, guidance…
Yeah… Let’s turn perfectly-paying , perfect-record customers into problems where no problems (or small problems) existed before.
I, personally, am losing patience fast with these dispicable tactics… mainly… because they are operating in a Federally protected world that the rest of us small-business types are excluded from in this administration’s economic “solutions.”
I agree with a previous commentor. It is time to push back and regroup under the cash umbrella. It may take some time (years) to get there, but I believe we are all discovering who the friends and foes really are during this time of blood-money profits. Don’t get me wrong… I am a free-market capitalist, but when you have the administration bending the rules so far out of wack that it sends negative ripples throughout the playing field, while at the same time enriching the few “cronies,” it is time for a revolution of sorts. I only hope that it won’t be started by a total economic collapse.
So… how’s that working for us Skippy? Here in California, we already know about collapse… but apparently the major party in command here hasn’t capitulated to the facts yet… and maybe never will. Our state continues further down the economic toilet this year… taking virtually every municipality with it. My county has layed off 5% percent of the workforce… but still hasn’t come to grips with the fact yet… that those of us in the real world (outside of government) have layed off A MINMIUM of 15% of our workers and climbing to the tune of 5-7% a year cumulative until this thing turns around.
Not a comforting thought for a mass-retiring baby-boomer generation who actually thought they were going to get a chance to retire… in their lifetime.
Collateral damage? Lot’s of it. My neighborhood was 100% owner-occupied 5 years ago. Today it is at about 50%. That’s one of the marvelous outcomes of this administration’s “protectionist” tactics.
Oh yeahhh… I really feel protected in my new neighborhood… of absentee landlords.
Yippee-ki-yay!!!
February 19th, 2010 at 5:28 am
Most stores have the option of running your debit card as a credit card transaction which does not require a pin number. This is the option that I use
Richard S.
February 19th, 2010 at 9:38 am
If you look at it realistically, what is a business to do? The banks have got everyone over a barrel. There are fees associated with credit/debit cards, but guess what, there are bank fees associated with checks, ach transfers and drum roll……………. cash.
Banks charge business accounts a per check fee and a per deposit fee when they process checks. There are fees for processing ach direct payment transactions even though the business does all the work and the bank spends pennies per transaction to process the electronic payments. Most banks also charge cash deposit fees when the monthly deposited amount exceeds a certain limit. My church gets nailed every time we deposit more than $5,000 cash in a month. There is no way to avoid bank fees, it is just a matter of picking your poison on what type of transactions you will accept.
And then Washington cannot figure out why people are so angry with bailing out the greedy corrupt banking industry.
February 19th, 2010 at 9:42 am
Most stores now are running a check thru like it was a debit card. You won’t remove this type of problem until stores start take checks like checks were meant to be. You’ll find if you go to Walmart and write a check they will run it and hand you back a voided check with a slip for you to sign.
February 19th, 2010 at 10:03 am
I think the real problem is that we are a consumer nation of sheep. We let the credit/debit card companies do whatever they want to the flock and as long as the sheep get to continue purchasing,the reprocussions from the way these companies glean their cut from our purchases doesn’t seem to matter. Interest rates are exhorbant, late fees and penalties are raised by the financial institutions without impunity and we continue to bend over for them in return for the privilage of using their credit instruments. It will not stop until we finally wake up and start letting the credit organizations know that we are the customers and they do not govern us but SERVICE us. We do that by getting out the scissors and start using cash. It wouldnt take long for a unified effort to produce results. Unfortunately, the sheep we have become do not have the cahones to ever put that kind of effort together. BAAAAAA
February 19th, 2010 at 10:08 am
The reality is, cards are convenient for the consumer and “we” don’t like to write checks or carry excessive cash. Checks are a costly mode of payment for merchants too, mainly because they are not a guaranteed form of payment (they can bounce). But the real benefit to the merchants is that people spend more when using plastic due to the convenience and especially in the credit world where the “buy now, pay later mentality” kicks in. Credit and debit cards are certinly a lucrative profit margin for banks but it is a bit more of a “win-win” scenario that people realize.
February 19th, 2010 at 10:23 am
Every company has the ability to negotiate your CC and Debit rates. I am lucky in that I have a set % with my local bank who handles these transactions. I would NEVER consider using any other company but the bank I do my banking with. Also, writing checks isn’t the answer. Anyone been to Walmart recently? If you write a check, they run it as an electronic transaction! The rate I have seen for that ability, for a small business, is 1.7% plus a per transaction charge plus a monthly fee plus a limit per month with additional rate if that limit is passed. The lesson is NEGOTIATE EVERYTHING. It sucks, but that is the way of fighting in the financial shark infested market.
February 19th, 2010 at 10:36 am
There is another side to this story. In the past, consumers paid for most goods and services with checks. Merchants paid their bank a per item fee to deposit those checks, and also took significant risk that the check was actually good. (remember the days of going to the local store and seeing all the ‘bad’ checks posted by the cash register?) The merchant was ‘out’ those funds, unless they were able to collect from the consumer — which was incredibly time consuming and expensive.
Debit cards provide immense value to every merchant – large or small. They get immediate guaranteed credit! No longer taking the risk having a check returned as NSF and then trying to collect from the consumer. (the bank takes that role, and also the risk – if there aren’t enough funds in the checking account to settle a debit transaction). Debit cards provide a real value to the consumer. Unlike checks, they are accepted almost anywhere in the world. The convenience of being able to pay for goods/services or get cash, anytime, anywhere. Consumers have incredible protection with a debit card. If lost or stolen or fraudulent transactions – the most a consumer is liable for is $50. (and most times not even that). The financial institution bears all the risk – on these cards. The system isn’t perfect, but continues to evolve. Frankly, the merchants are not victims here — large or small, they all benefit from the electronic payment systems and I’d bet would never be willing to return to the paper check world.
February 19th, 2010 at 10:43 am
A small business in my city surprised me when I paid cash for small purchase. He gave me 10% off
for paying cash! It covered the sales tax plus. Don’t know how he does it, but I noticed others in
the store pulling out the green.
February 19th, 2010 at 10:44 am
What a poorly written uninformative piece. It is a disservice when a writer does not understand what he is writing about and people accept it as fact. I am not a banker but have been on the side of the retail fence that paid millions of dollars in interchange fees of credit and debit cards. This article is obviously confusing many of you. What it says is Visa unlocked is the ability of a bank to set a different price for signature based debit, not pin based debit. A signature based debit has substantially more risk of a chargeback to the retailer than a pin based debit. Theft of a card comes to mind. The thief can sign the name on the card, but likely does not know the pin. As a retailer, pin based debit transactions save them significant fees that allow them to keep their prices lower. As the writer mentioned BestBuy, do you understand why the pin pad prompts you for a pin? It is because the pad recognizes the card as a debit card and authorizing the transaction costs significantly less than without a pin. BestBuy would gladly pay a pin baded debit fee as opposed to taking a check, if anyone still writes them, or a credit card transaction fee. If you as a small retailer are processing debit cards as a credit transaction, then you are paying a lot more for the transaction than you should since Visa interchange, association, and acquiring bank fees can eclipse 2% of the transaction. Ask your merchant bank to provide you a pin pad so you can take pin based transactions. If you want to complain about card fees, complain about the high interchange fees on credit cards. Oh but you don’t pay those, the retailer does and some of those fees go to your rewards programs you are addicted to.
February 19th, 2010 at 11:39 am
I must admit value of Rick’s statement is off the chart. Thanks Rick for showing us that you are the only responder with the intelligence to understand the subject matter. Im sure the writer of the article as well as the rest of us are grateful for your pointing out how confused we all are.
February 19th, 2010 at 12:03 pm
Rick’s comments are right on. I have been in banking for 25 years and only a very small percentage of banks were bailded out. Over 7000 banks in the US did not receive any bailout money but we are paying for through an increase in the FDIC Insurance premiums. Our bank had an increase of over 400% in premiums cost in one year and none of that can be passed on to the customers. We are as upset about what has happened as most of Americans but the media groups ALL banks together and the vast majority of us did not create this problem. What most people don’t know is that our Congress, 10 – 15 years ago created this problem by forcing a change in the lending practices on Mortgage loans through a regulation call Community Reinvestment Act which has been around since the 80′s. But I digress.
As for the fees, Rick is right when he says the author does not know what they are talking about and everyone else just accepts those comments. VISA and MC dictate the fees every merchant (business) pays on the various card transactions. Any fee a bank makes amounts to only penny’s per transaction for debit cards and it is not based on the dollar value of the transaction. The most secure debit card transaction is a PIN and it is the least expensive to the Merchant. Even a Signature Debit transaction is much less than a Credit Card transaction. The highest transction cost is when you use a debit or credit card to make purchase over the Internet like so many of us do. These are very risky for obvious reasons. So many people love to blame banks for fees but they will spend $3 – $5 for a cup of coffee or pay nothing when they get cash back at almost every retailer when they use a PIN debit card transaction. You do not think the Retailer is incurring cost not only for the transaction but the cash they keep.
February 19th, 2010 at 12:05 pm
I have heard that this is a potential problem with using a debit card and the associated PIN. I saw a piece
recently about card readers that can be installed in places where people normally use their debit cards.
These are bogus readers and allow a thief to steal one’s PIN and empty out one’s account. Neither Visa nor
the bank is liable for reimbursing a peron’s stolen funds. The article advises using the debit card as a credit
card, thereby providing insurance against a total loss of funds. I believe the limit is $50. The bad side effects
of this is the higher fees charged to merchants because the transaction is treated as a credit purchase rather
than a debit one.
Maybe Rick can shed light on the solution to this problem or at least an approach that does the least harm.
February 19th, 2010 at 12:43 pm
If any of you are paying a fee to your bank for depositing cash and/or checks (specifically R Blum), then it’s time for you to look for a new bank. Our bank pays us interest on our deposits! Banking is a competitive industry. Shop around and you’re sure to find a better deal than you have now.
And as for debit cards, I really don’t understand all this hullabaloo, either. I’d much rather accept a debit card than a credit card. The fees are always lower on the former, and at least with our business, if the customer does not use his debit card, he’s likely to use his credit card and cost me more.
February 19th, 2010 at 1:16 pm
As a small business person I prefer to use debit cards. I know I’m getting money, I don’t have to chase down bad check, have people or pay outsiders to spend time chasing a bad check. My employees handle less cash, less chance for theft and they can settle their drawers in a fraction of the time. I have less cash and checks to deposit and or get stolen after the fact. It costs me more than 75 cents per hundred in staff time to count $100 in cash in various amounts.
I know a small retailer who charges a dollar in my area if the card transaction is less than a certain amount. To me this is just plain stupid – I go elsewhere and honestly really smells like someone who wants cash transactions and doesnt want to pay sales tax.
I think card transactions actually levels the playing field for me. As a small guy, I’m and easier target for a bad check, have less of an ability to cover it and it is costly and difficult for me to recover. How many c-stores, liquor stores, etc have you been in where you have seen the bad check hall of shame on the register or the walls?
My bookeeper actually had to call the bank because she could not believe that we hadn’t had a bad check in 9 months.
Someone is making my life easier and less costly – count me in! God bless them if they can make money at it! Why does progress have to be either bad or free?
February 19th, 2010 at 2:11 pm
As a small business owner, there is a lot of valid points,
Richard Steward is correct, we run debit cards as credit cards only, that way we do not have to pay the issuring bank debit fees. This has saved us at least 30% on our merchant fees. Every transaction has an approval, but even if we know the customer, we ALWAYS ASK FOR ID. This is a check and balance security feature. 99% of our customers do not mind, it is to protect them.
Laura C. is correct, if you have too high of fees, NEGOTIATE, especially with your bank. Banking is a relationship-BUSINESS relationship, not personal, I have switched banks three times because one bank BBTwas charging too many fees. Everything is negotiable, it is about business.
Steve is correct in which banks charge pennies to a transaction, ok add up the costs on a $50.00 credit card transaction, 1.25-1.5% for the visa-mastercard, another .25 or more for the credit card company, another 0.10 cents for the issuing bank debit card. What do you get multiplied by several hundred transactions per month, money flying away from the business. Negotiate, check customer id, it is for everyones protection, micromanage (stewardship)your money, especially if you are a business owner.
February 19th, 2010 at 2:54 pm
Debt, Credit, Fees, all can be modified by one of you, and you all sound mighty smart, creating a consumer credit card, in which, all users are owners. Remember the idea of the co-op, thats whats needed and we all, after the expense of operating the institution, and i’m sure the operating percentages are easy to assess, have profits re-distributed back to the members.
Lets start our own credit card company, easier than you think… anyone interested, and anyone with the know how, email me at glengerson@msn.com and lets see what we can do…
Note, I work at one of the top re-habs in the country, Milestones, and a large part of the problem with abuse, drug, alcohol, prescription etc, is further aggravated by excessive debt
February 19th, 2010 at 3:18 pm
Regarding what Alex asks, I would not expect to see a bogus reader in a reputable retail chain such as one of the big box retailers or grocery chains. I have heard of devices being attached to ATM machines, but that would look suspicious to me as a user. Each legitimate pin device has a triple-des encryption algorithm and the device is integrated with the POS register. The integration is key and the device should trigger the close of the tender at the register. When the transaction data such as the card number, transaction amount, date, trac I and trac II data from the card, leaves the reader, it is already encapsulated in an encrypted data packet. The encapsulated packet moves through the POS system and in a closed network to the card processor. The processor has the key to unencrypt the transaction and then pass the authorization record to the card issuing bank for approval. You should feel comfortable in most retailers and supermarkets of size and scale. Since the TJX security breach several years ago, retailers and transaction processors are governed by a set of security standards developed by the card payment industry and with the threat they will put you out of the credit card business unless you comply. I led a group in my former life that made us compliant. The standards are high. Now, on the other hand, if you go into a merchant where the device is separate and distinct from what is going on in the register, there could be a concern. I think those situations are the exception for the mass of card users though.
February 19th, 2010 at 3:35 pm
Please claify – If the fee for use of debit card is “only” 75 cents, and the fee for a credit card, as published, is 25 cents PLUS 1 % (both vary with card type), then the cost for a $100 transaction is more like $1.25, often more. PayPal, which is used extensively on the web, charges about 2.5% overall. That means a $100 purchase will cost about $2.50 to $3. Is this excessive? Possibly. But PayPal does all the financial work and “worries” about bad/lost/stolen cards. For our business, that is acceptable.
And, some banks and many Credit Unions have minimal charges for checks, deposits, debit cards. But for large scale users (high-dollar accounts), a big bank is about the only option.
To name names, we use Bank of America. It’s big, reasonably solid. Our relationship with them has been excellent.
Advice: if you have you own account with a credit card processor, try to get it directly with your (big) bank as opposed to through one of the many companies who “drop in” and deal with you personally. You’ll have to purchase one of their terminals (or rent) and pay their fees in addition to all the other transaction fees. So talk first with your bank about accepting cards and how they would like you to do it. With BofA (and other big banks), if you have a question about your terminal, you will be talking to a division of that same bank, not a third-party processor.
Meanwhile, all we can do is search for the least costly way to process cards.
February 22nd, 2010 at 6:45 pm
This is exactly why we should not reelect most of our congressional representatives and senators. As they are not looking out for the people that elected them to office…just big institutions whose lobbyist have them in their pockets.
February 23rd, 2010 at 12:11 pm
Unfortunately, Ralph G., the recent Supreme Court ruling that gives corporations (and unions) the right to spend as much money as they want to against any “good” candidates, is going to make it much more difficult
to get true “servants of the people” elected. It’s a sad state of affairs that as soon our representatives get
elected they start working on funding their next election campaign. Corporations with deep pockets make it
much easier to fund a campaign.
I have seen a definition of Fascism that says that fascism occurs when corporations take over the government.
I hope that we are not so far down that path that it is too late to stop it. That situation will probably require
a revolution to undo.