More About Debit Card Fees
(and the difference between PIN and signature debit)

There is a very interesting and somewhat litigious history surrounding the proliferation of debit cards that has recently culminated with government intervention.  Recently signed by President Obama, The Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as the “Financial Overhaul” act) includes an amendment by Sen. Richard Durbin (D., Ill) which allows the government to regulate debit cards fees that most card-issuing charge merchants.  In particular, the bill empowers the Federal Reserve to set rates for debit card fees some Associations set for the processing of signature based debit card transactions.

An important fact is that debit card usage represents a significant percentage of overall card transaction volume.  In the one year period ending Sept. 30, 2006, Visa reported that debit cards represented approximately 43 percent of the U.S. dollar volume crossing their card networks.[1]   In its SEC registration statement, Visa revealed that in the 12 months ending in June of 2006 approximately 36.4 percent of worldwide dollar volume crossing its card networks was in the form of debit transactions.[2]   The Nilson Report stated that in 2009, 63.3% of all card transactions (card present and CNP) were transacted with debit cards and this is expected to increase to 69% by 2015.[3]

In the spring of 2003, Visa and MasterCard agreed to settle their respective class action antitrust lawsuits with Walmart and other retailers.[4]   The settlement of what is commonly referred to as the “Honor-All-Cards” case inevitably resulted in the creation of dozens of new, ostensibly lower debit card interchange rates.  The case surrounded the fact that merchants were required to accept “all” MasterCard and Visa cards, which included the increasingly popular debit cards.  In order to understand the litigation, it is important to understand that debit cards can be used in two ways. This is one of the reasons why you are frequently asked, “credit or debit” in the checkout line of your local supermarket:

1.PIN-based – The consumer swipes her card and then chooses “debit.” She next enters her PIN at the point-of-sale and the transaction is routed through a proprietary “ATM” network (e.g., NYCE), which authorizes the transaction and immediately deducts the cash from her checking account.  The merchant generally receives the money within days.  Sometimes this is referred to as an “online” transaction and virtually never applies to CNP purchases.

2.Signature-based – The consumer swipes her card and then chooses “credit.”  An authorization transaction is routed through the Visa or MasterCard network, which causes the sale amount to be restricted in her checking account.  She next proceeds to sign a receipt, and the money is deducted from her checking account generally within one day of the merchant processing the sale transaction through the Visa or MasterCard network.  The merchant usually submits the sale transaction with the rest of its card transactions at the end of the day, and receives its money within days of this settlement.  Sometimes this is referred to as an “offline” transaction because it bypasses the proprietary ATM networks.  Depending on the merchant, debit card volume can exceed 50 percent of the total CNP volume.

The important point is that when consumers use their debit cards, their cash is withdrawn in a virtually instantaneous manner and paid to the merchant.  Prior to the Wal-Mart litigation, merchants were required to pay the same amount of Interchange for both card types, credit and debit.  When a signature debit was used, the card issuing bank was in effect receiving an “Interchange Reimbursement” fee from the merchant without needing to provide the consumer with a grace period – the funds were in effect deducted from the consumer immediately.  This constituted a major windfall for the card-issuing banks, which explains in part why debit cards were marketed so heavily.  What’s more, for many merchants (e.g., supermarkets) online debit transaction costs were significantly lower than signature debit transactions.  The Honor-All-Cards rule in the Associations’ Acceptance Agreement would not allow merchants to exclude debit cards; nor would merchants wish to do this for fear of reducing payment options and losing sales.

The final settlement included lots of compromises.  Merchants processing CNP transactions were affected in the following ways:

1.New, “lower” interchange rates were introduced.  Because CNP transactions carry a risk premium, however, these new rates were still significantly higher than most card present retail debit rates.  Because these new rates generally include a higher per-sale transaction fee, they may actually be more expensive for merchants with low product price points (See example 1 in Section 2).

2.Merchants now have the right to discriminate.  They may choose to accept credit cards, debit cards or both.  Because it is difficult for CNP merchants to distinguish between card types, the Associations agreed to provide tables allowing merchants to look up the card type based on the account number.  These are commonly call “BIN” or “Routing” tables.[5]   In practice, few merchants exercise the right to discriminate as this tends to depress sales due to fewer payment options, and may subject the merchant to some onerous provisions of Regulation E.[6] This decision notwithstanding, we will see in Section 3 that there are some interesting Interchange applications for BIN tables when considering the MasterCard Interchange program mix.

It is important to note that the effects of this settlement will be effectively nullified should the New Fed rules be enacted in July 2011.

Merchants should, however, always be aware of their effective debit card usage rate.  Debit card Interchange fluctuations, Federal regulations and other factors may have a significant impact on a merchant’s costs and operations.  While it has been reported that debit card usage can exceed 40 percent, this does not mean every merchant will see high debit card rates.  The best way to determine your debit card acceptance rate is to utilize a payment processor that provides debit card reporting.  Processors that offer true pass-through billing arrangements will provide this information automatically in their Interchange reports.  Because the debit card usage is reported in an aggregate manner after the transactions were completed, merchants do not need to be concerned with Regulation E.  Even many processors offering bundled billing arrangements will offer Interchange reporting, although often only by special request.

[1] Press Release: Visa Reports 11.1 Percent Third-Quarter Growth in U.S. Sales Volume on Visa-Branded Cards, Nov. 21, 2006,
[2] Securities and Exchange Commission, Form S1 Registration Statement, Visa Inc., Filed 11/09/07, p. 13.
[3] The Nilson Report, December 2007, Issue 961, Pages 7
[4]  Wal-Mart Stores, Inc. v. VISA U.S.A., Inc., 396 F.3d 96 (2d Cir. 2005). & United States v. VISA U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003) -- In re Visa Check/MasterMoney Antitrust Litigation.
[5] BIN” is a common abbreviation for Bank Identification Number, which is typically the first 4 or 6 digits of a credit card account number.
[6]E.g., preauthorized monthly DDA debits like subscriptions: