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Debit Cards, Credit Cards, and Bill Payments

Posted by Alison Arthur on 09 Apr 2018


Credit cards and debit cards may look the same, but there are important differences between the two. These differences not only affect the bill payment experience you deliver to customers, but they can also impact your business’s bottom line. Let’s examine the major differences between these two payment methods and how they can impact your billing and payments program.

Credit cards

It might seem obvious, but credit cards are just that – they extend a line of credit to cardholders, so cardholders can purchase goods and services and pay for them over time. Credit cards are typically issued by banks, credit unions, retailers (think department stores and gas stations), and directly by credit card companies such as American Express. The cardholder agrees to the associated fees and interest rates associated with the card and pays a minimum amount (or more) on a recurring basis, usually monthly. Many credit card products also offer rewards programs, which allow account holders to rack up points and rewards including free merchandise, cash back, and travel perks.

Credit card issuers are distinct from credit card networks, which include Mastercard, Visa, American Express, and Discover. These four companies operate payment networks that connect the banks that issue credit to consumers (issuing banks) and the banks that collect money on behalf of merchants (acquiring banks). The card networks “run the rails” between these entities, making sure that customers have enough credit before a purchase is approved, and wiring money between the various entities. Businesses will typically display logos for the card network brands they accept – either at physical storefronts or on their online checkout pages – to communicate the types of payment brands that customers can use at their establishments.

Debit cards

The primary difference between debit cards and credit cards is that debit cards withdraw funds directly from the cardholder’s bank account. Because funds are extracted directly, debit card cardholders do not have the opportunity to pay for goods and services over time. While debit card transactions are generally limited by the amount of available funds in the underlying account, the time lag associated with the transfer of funds can open customers up to the possibility of overdrawing their accounts.

Debit cards are generally accepted wherever credit cards are, and in-person payments can be completed with either a signed receipt (signature debit) or by entering a personal identification number (PIN debit). In addition, debit cards typically give cardholders access to their bank accounts at ATM machines and certain debit card products may allow them to receive cash back at specific retailers.

Costs of acceptance

For businesses that accept payments via credit cards and debit cards, the single biggest difference between the two is the cost of acceptance. Credit cards have fees associated with them that the underlying merchant must pay per transaction.

There are three major fee categories for credit card transactions:

  • Interchange – interchange is paid to the credit card issuer and is typically calculated based on a percentage of the total sales price plus a flat fee; interchange is not one set rate and can vary based on factors including card type, merchant category code (MCC), and processing type (chip/swiped, keyed, online, etc.)
  • Assessments – these fees are paid to the card brands (Mastercard, Visa, Discover, American Express) to maintain the payment operating network, fund marketing programs, etc.
  • Processor fees – these are the fees that merchants pay to their payment processor to provide authorization and settlement services on their behalf; these fees are determined directly between the merchant and their payment processor

This is not an exhaustive list, and there are other fees that can apply depending on the merchant and the nature of their transactions. However, a merchant will typically pay an average of 2.0-2.5% of the total sales price in credit card fees per transaction.

The fee structure for debit cards is different. When the Durbin Amendment was implemented in 2011, debit card interchange for large issuers was capped at $0.21 plus 0.05% of the transaction (and an additional 1 cent to account for fraud protection costs). This is a simpler fee structure and can be significantly less expensive for merchants depending on the nature and size of their transactions.

Credit cards, debit cards, and bill payments

Customers may have specific reasons for choosing a credit card or a debit card for their bill payments. For some, it might be more convenient to pay monthly expenses like utilities, mortgage payments, and auto insurance via a debit card. This can help customers better manage their budgets and keep a close eye on their personal finances. For these customers, automatic payments can be a valuable billing option so they have peace of mind that they’ll never miss a payment.

While debit cards might make sense for some transactions, credit cards can come in handy for bigger ticket items that need to be paid over time. For example, if a customer has a large medical bill from a healthcare provider that they can’t pay in full, they can charge it to their credit card and pay it off over time. This is an example where flexible billing options like recurring payments and payment plans can help your customers pay their bills without having to take on the interest rates and fees associated with revolving credit card debt.

The Bottom Line: Both credit cards and debit cards are convenient ways for your customers to pay their bills. It’s important to understand the differences between the two, including the fee structures for each. Consider how billing options like automatic payments, payment plans, and recurring payments can work together with debit cards and credit cards to provide the best experience for your customers.

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Alison Arthur Product and Content Marketing Manager Alison creates timely product marketing and thought leadership content that keeps Alacriti's community informed on the latest developments in billing and payments technology. With a background in payments and financial services, Alison specializes in composing content related to technology, security, compliance, and overall industry trends.

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