How to Decide Between Debit and Credit for Your Store

With all the different companies out there trying to convince you to switch to their credit card processor, the numbers can get confusing. But not accepting credit cards can be the kiss of death for your business. How do you choose? Credit or debit? Do you offer both, or just one? Do you set a limit?

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• A merchant account
• A credit card machine
• A business
• A product to sell
• Customers
• A calculator (if you want)

1. Without getting into technical detail, there is a massive network of systems behind that tiny machine on the sales counter. While your customer is pressing buttons and sliding plastic, the micro chips are identifying which card, who issued it, how old it is, the list of gathered detail goes on and on and on.
   
   As the store owner, you look at each sale differently than your customer. While they see it as giving the store owner money, you see the amount of money you're going to lose to the service provider for every penny ran on that pretty plastic card. Most customers don't stop to realize that you have to PAY for the ability to take their money.

2. With this in mind, each transaction costs a different amount. A pin-based, or debit transaction, has different percentages and transaction fees than a signature, or credit transaction. Why? Because Visa and MasterCard said so. Sorry.

3. The pricing per transaction comes into play when you consider the amount you're paying. Debit transactions have a lower percentage rate, but a higher transaction fee. Vise versa, a credit transaction has a higher percentage rate, but a lower transaction fee.

4. Here comes the fun part: assume a debit transaction has a 1.05% and a $0.55 transaction fee, and a credit transaction has a 1.85% and a $0.15 transaction fee. These are pretty standard for the retail industry in terms of pricing. Using that calculator if you've got one, try to figure out what the resultant fees would be for a $30.00 sale, and a $70.00 sale.

5. I'm not that sadistic, so here ya go:
   
   On a debit card, a $30.00 sale would cost $0.87 for the fees. A $70.00 sale would cost $1.29
   
   On a credit card, a $30.00 sale would cost $0.71 for the fees. A $70.00 sale would cost $1.45

6. What does all the math mean? Basically, it means that it's cheaper to take a credit sale on an amount lower than approximately $50.00 than it would be take a debit sale, because of the fees. On a smaller sale, the lower TRANSACTION fee on a credit card sale factors hugely. On a larger sale, the lower PERCENTAGE fee on a debit card sale factors hugely.

7. Hopefully this has helped you to understand how the fees work. If you've got the option, have your customers purchase via credit for smaller items, and via debit for larger items. It'll save you money in the long run, which can help to increase your profit margins, which can in turn help you lower your prices. It's a continuing cycle.

Tips & Warnings

• Always check with your credit card processor that your rates have stayed static. Visa and MasterCard generally speaking come out with increases in their rate twice a year, and in most cases the processor will pass these increases onto the merchants.
• Research your rates thoroughly. Figure out if you're only paying three major fees (qual, mid, and non qualified) or if you're paying several (on a bucket plan). This will factor hugely in your decision on which sale type to use.
• You can ask your processor for your average ticket amount if you don't know it, and they can use their records of your sales to give you a pretty accurate number. This will help in determining your fees.