Payments 101

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Have you ever wondered what happens when a customer makes a purchase using various forms of payment? What’s the difference between using cash, debit and credit?

Credit Card

Merchants pay a merchant discount rate on each credit card transaction. This rate is a combined rate that is distributed a number of ways: the majority(80%+) goes to the cardholder's bank as an interchange fee. The remainder is split between the networks(VISA or MasterCard), and the processor (e.g. Chase or Moneris).

The Network – VISA or MasterCard dictate the price. They set the rules for how much Interchange is charged.

The graphic above illustrates a $500 transaction*:

  • Approximately $2 of the Merchant Discount Rate goes to the Network and Processor
  • Approximately $8 goes to the Financial Institution
  • What about Rewards – who pays for those?
  • Of the $8 that goes to the Financial Institution:
    • Approximately $6 remains with the Bank
    • Approximately $2 is used to fund the Rewards Programs
  • The merchant discount rate is a percentage of the purchase price – the more expensive the item, the higher the fee.

Different kinds of credit cards are charged different rates. For example a basic, no rewards card may have a Merchant Discount Rate of as low as 1.6%. A premium card, offering expensive rewards, may cost as much as 3%.


Cash

When a customer pays cash for an item, the cost is virtually $0 to the merchant.


Debit

Debit transactions are charged a single transaction rate – regardless of the value of the purchase. It generally costs merchants under 10 cents to process each debit transaction. This amount does not change, whether the purchase is for $5 or $5,000.


The Cost to the Retailer?

For a $500 transaction – the cost to the retailer can then range from:

  • Cash:  $0
  • Debit:  $0.10
  • Credit: $10

The more people who use credit cards – the more expensive the cost to retailers and the higher prices become for everyone.


*assumes a MDR of 2% with an interchange fee of 1.6%