The Business Side of Credit vs Debit

The Business Side of Credit vs DebitThe choice you make at the checkouts while paying for goods you bought is a personal matter. You can process the transaction as debit, requiring your PIN to complete the process or you can run it as credit and sign for the receipt. This seemingly straightforward action has created an all-out battle between banks & retailers far away on Capitol Hill.

Banks claiming the interchange fees are necessary to cover the cost of transaction processing. On the flipside, merchants are claiming that they are losing profits due to banks’ interchange fees. Let’s take a closer look at what goes behind the scenes and how it affects the prices of everyday commodities.

Interchange fees: The cost of doing business

The card-issuing bank or credit union works out a deal with major credit card companies in case of offline transactions (otherwise known as ‘Credit’ transactions) that use one of the major credit card networks. This deal is all about using their processing service which is around 2%-3% of the total purchase price. This fee is paid by the merchant and is subsequently split into three ways; majority portion goes to the card-issuing bank, the rest goes to Credit Card Company and to the merchant’s bank proportionately.

Providers of online or ‘Debit’ transactions like Star, Interlink, Pulse, or NYCE also do an agreement with banks for the use of their Electronic Funds Transfer(EFT) network but here the interchange fee is significantly lower—1% of the total purchase price.

Now, of the two choices merchants always prefer the debit option because in that case, they keep a higher percentage of the total transactions. On the bank’s end, they are investing a good amount of money to steer consumers into choosing the ‘Credit’ processing method because of the swipe fees.

What the law says about it

In July 2010, Congress addressed this concern and initiated the Durbin Amendment regarding swipe fee reform. The amendment gave the Fed the authority to limit debit card processing fees. The central bank suggested capping fees at $0.12/transaction which is a 73% reduction from the current average. It seems like the Durbin Amendment allows the price of financial goods to go up as banks try to reclaim the loss of interchange fees.

If the swipe fee reform comes into the act as proposed, consumers will have to pay higher fees for checking accounts. Debit rewards cards & free checking account will soon become a thing of the past.

But if banks are the losers in this war, the opposite parties—merchants & their customers may be the winners. Merchants may start offering discounts based on the credit card you use. Besides, you may enjoy a 3% discount on your purchase if you are paying with cash.

In the end, we are yet to know how swipe reform will affect the card transactions. But the good thing is the price hike of goods & services due to hidden fees has come into the light. It’s up to the lawmakers now to decide if banking continues to benefit or if merchants along with their consumers can regain their breath from hidden interchange fees.

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