Debit Or Credit? Which Is Best? It Depends!

I'm sure you've experienced it before yourself. You get into the checkout lane and work your way up to the cashier. Your order gets tallied up and they give you the total. Next, you reach in your wallet or purse for that little piece of plastic to make your purchase. The cashier asks "debit or credit"? How do you typically respond? Which way is best? It depends!

Let's first of all take a look at this from the perspective of the cardholder. Simply, if you are presenting your debit card for payment, funds are typically drawn from your checking account. In other words, it's similar to writing a check except it's electronic. And to you, it doesn't matter which way the merchant runs it because there are no costs to you one way or another. You know there are funds available in your account which is why you presented the card in the first place. If you're looking for cash back, you will have to select debit and input your pin number.

Now, as mentioned earlier, there are typically no costs to you the cardholder whether you run it as debit or credit. However, some banks used to tell their debit cardholder to just tell the merchant to "run it as credit". And, further, if you insisted on running it as debit, with the input of your pin number, they (the issuing bank) would charge you a fee. Why do you suppose they would do that? For banks, it's all about fees, fees, fees.

You see, if the merchant has you input your pin number, your transaction runs directly through one of the Debit Networks (STAR, NYCE, Maestro, Interlink etc.) and the issuing bank makes ZERO, ZILCH, NADA. This is precisely why some banks charged you a fee if you used your pin. They were trying desperately to sway you to say "credit" so they would make more. They aren't supposed to be doing that any longer though. They got their hands slapped by Visa/MC a couple years ago for "charging" you to access your funds. If however, you don't use the pin number, and the merchant runs it like a credit card, the issuing bank makes the Interchange Fee (Visa Debit Interchange 1.03% + $.15, MC Debit Interchange 1.05% + $.15).

Okay, so we've looked at it from the viewpoint of the cardholder. Now, let's consider what the motivations are for the merchant. There are a couple considerations for the merchant regarding which way would be best for them to process your card. If the merchant employs a pinpad, they have the option of running it either way. Typically, the decision should be made relative to the size of the transaction.

Let's take a look at a specific example. I recently had a conversation with a merchant of mine that is priced on a 3 Tier structure with a Qualified Rate (swiped) of 1.58% + $.25. Assume for a moment that I went into his store and made a purchase of $50. I whip out my Visa debit card (issued by the bank where I have my checking account) and proceed to pay. My debit card goes through the STAR network so let's look at the cost difference to the merchant.

On that $50 transaction, if the merchant simply swipes it without my pin, they are charged $1.04 ($50 x 1.58% + $.25 = $1.04). If the pin number is entered my transaction will route through the STAR network. Currently, their fees are 0.75% + $.1925 (with a cap of $.6925). And, in this case, the processor is getting $.20. So, my $50 transaction would cost the merchant $.7675 or $.77. If you were the merchant, which way would you want to run the sale? The absolute most a pinned based debit transaction could cost this merchant, with their current provider would be $.8925 regardless of the size of the transaction. See how important it is to understand your fee structure and options available to you?

I ran across a study a couple years ago that illustrated what percentage of transactions were typically debits. It was separated by industry type (i.e. retail or restaurant) and average ticket size. Essentially, the smaller the transaction, the higher the likelihood of it being a debit card being used. In retail, for example, if the sale was under $10, nationally, the average was 78.72% were debit cards. Between $10-25, the average was 75.55% and between $25 and $50, it dropped down to 51%. For restaurants, the same average ticket ranges showed even higher percentages.

Let's try and get a handle on understanding why this is true. Look in your wallet and see what kinds of cards you have. You probably have a debit card and a few credit cards. Do any of those credit cards offer some type of reward like frequent flyer miles, cash back or bonus points? If your purchase is for a smaller amount, you would likely just pull out your debit card. If, your purchase were larger, you'd want to rack up those rewards and use your credit card instead.

As a retailer type merchant, you can see from this discussion, that you really need to understand the different rate structures. Otherwise, you could needlessly be putting excess revenues into your processors pocket. The average size of your typical transaction would dictate whether or not you should have a pinpad for cost savings. For restaurateurs, you must also consider how your customers pay. If they pay at the table, you will need a wireless terminal with built in pinpad. For those restaurants that have the checks paid for at a cashier on the way out, pinpad access is more convenient.

The bottom line in all this discussion is to stress the importance of getting a more thorough understanding of how this industry works. Take it upon yourself to get educated and save yourself thousands of dollars over the life of your business. Thanks for taking the time to listen to my thoughts.