Payments and Credit Cards

Payments 101

Payments 101

 

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.

retailcouncil

About the author

Retail Council of Canada (RCC) has been the Voice of Retail in Canada since 1963. We speak for an industry that touches the daily lives of Canadians in every corner of the country — by providing jobs, career opportunities, and by investing in the communities we serve.

Be heard. Save money. Stay informed.

Become a member