Why Is Credit Card Acceptance So Much More Expensive Than Debit Card Acceptance?

I can’t tell you how many times business owners (or ‘merchants’) ask this question, and they only ask because no one wants to explain it to them.

To answer this question, let’s start with the question:

What does debit card and credit card acceptance (payment processing) do for a business?

Let’s say Joe just happens to stumble into your store for whatever reason (he was killing time in the area, doing an errand, meeting a friend for lunch, just passing thru, etc.).  He finds something he really likes.  He comes up to the counter and has no cash.

1) If you only accept cash, then you lost Joe and his immediate business.

You don’t make a sale if Joe doesn’t have enough money on him, even though he wants your great product.

2) He might want to use debit because he doesn’t want to walk to the end of the plaza and pay a fee to use an ATM that isn’t affiliated with his bank. You pay a fee, but make a sale.  You make a sale even though Joe doesn’t have money on him.

3) He might want to use a credit card because he won’t have money in his bank account until Friday, and really wants your product, and wants it now.  You pay a fee, but make a sale.

You make a sale even though Joe doesn’t have any money- period.  In any of the above scenarios, if you don’t offer flexibility in payment options, then you probably won’t see Joe again, because in this day and age, he and everyone else can buy whatever you sell almost anywhere from many different merchants and in many different ways.  There is very little loyalty because of the over abundance of choice.

What is ‘IT’ exactly?

A debit transaction is a TRANSFER OF FUNDS from the customer’s bank account to your business account within 24hrs.  Like a money transfer.

A credit card transaction is a FORM OF A SHORT TERM LOAN from your credit card processor (or provider)’s account into your business account within 1-2 bus days.  Your provider then gets their money from your customer’s credit card company within 30-90days.  Your customer is getting a FORM OF A LOAN from their card company in order to buy great product from you.  The business owner is getting extended credit deposited into their account for products/ services that were purchased with a credit card.

The credit card processors on the business owner side ARE NOT the same companies on the customer’s side.  This is not ALLOWED by the government in Canada.

I still don’t understand WHY credit card acceptance is so much more expensive?

For debit card acceptance, the risk involved in transferring money that exists from one account to another is minimal.  For credit card acceptance, the risk involved in lending a business money within 2 business days and then getting that back from a third party 30+ days later is higher for many reasons.

Just consider 5 reasons here:

First, lending thousands to tens of thousands to each merchant account customer every few days is a huge responsibility.

Second, fraud or defaults within the credit card processors’ customer base of business owners cost time and money.

Third, fraud within the customer base of the individual business owners cost time and money.

Fourth, at the end of the day, the credit card processors need to make a profit AFTER deducting all their expenses and taxes, just like you do.

Fifth, a merchant’s past business experience in the industry that they are applying for current processing, credit score, credit history, etc.

What are the typical rates (or fees, or charges)?  The typical DEBIT charge is 10-12cents per transaction.  (SideNote: I’ve seen people pay as high as 25-55cents, but it is rare, and that merchant probably got their program before there was any competition.)  Companies that offer less than 10cents/ transaction have a more complicated fee structure.  Usually with a percentage attached, i.e. 7cents+ 0.0025% of the transaction amount.

Or a minimum charge on top for total monthly transactions lower than, i.e. 200trans/mth. It may be a good deal depending on the type of business you have.)

The typical CREDIT charge is anywhere from 1.85%-3% of the transaction amount, PLUS a transaction fee of 10cents (similar to debit for processing the information through the phone lines).  (SideNote: I have seen business owners pay as high as 5% for e-commerce and 3.75% for face to face retail.  I have seen merchants pay annual fees of $200-$300 for a rate of 1.59-1.75%, which may be a good deal depending on the type of business you have.)

Credit card rates depend on avg. sale amt, monthly volume, annual volume and business model.  From the examples above it is understandable that fraud hurts everyone in the long run.  Crime not only doesn’t pay for hard working business owners, but it costs.  Higher average sales, low consistent/inconsistent volume, and riskier business models, these are all criteria considered by credit card processors.

The Good News

The good news is that 15-20yrs. ago small businesses could not thrive like they can today with all the technology and information available to make business owners’ lives more efficient, easier and better.

The convenience and choice available to all consumers today is unheard of from any time that has past.

And because debit and credit card usage by consumers keeps climbing each year, it is essential for Canadian businesses to accept debit and credit cards along with cash.  Gain more customers and make more sales!

Click for a FREE Quote Today