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