You probably know the difference between a credit card and a debit card. But you may not realize that accepting each type of card has different financial implications for your business.
A debit card transfers funds directly from your customer’s bank account to pay for their purchase. This means you’ll know immediately if the customer has sufficient funds to cover the cost of the purchase. That means it’s a lower-risk transaction and, as such, your bank or merchant services provider will charge a lower discount rate — that’s the fee your business is charged per transaction.
There are two ways to accept debit cards. The signature debit transaction requires the customer to sign a receipt and the transaction is processed just as it would be for a credit card. The PIN debit transaction lets the customer enter a four-digit PIN number on a PIN pad, with no signature required.
In general, credit card transactions have higher merchant fees than debit transactions because there is more risk involved. The higher fee is meant to compensate the card issuer against customer fraud and for the cost of processing transactions multiple times.
So you may think it makes financial sense for your business to encourage your customers to use their debit cards to make purchases. Not necessarily. Government regulations say you may set a minimum purchase limit for credit card transactions, but not for debit card transactions. And if your business has a low average transaction amount, you may find that debit card fees add up to more than your credit card fees.
It’s a complicated issue, but you’ll probably want to accept credit and both types of debit cards and let your customers make the choice of payment method. You’ll build good will and your customers will appreciate the convenience.
You’ll also want to stay aware of any changes to government regulations in this area. That’s why it’s important to choose the right payment processor, who will offer you choices, support and all the information you need to help you save money and grow your business.