Friday, September 18, 2009

Debit Cards (Tradecraft)

Last year, when our point-of-sale machine was being replaced, I decided to add a minor feature, an ATM pin pad. A few of the kids had requested we accept straight debit cards (no Visa/MC logo), and I didn't think much of it. Boy did I miss the trend on this one. I went back to my processing statements and saw that a fairly small number of Visa/Mastercard transactions were on debit cards. I know this because we're charged half a dozen different rates, depending on the type of card being used.* The percentage of debit card use was fairly small, probably about 10-15%. But what the heck, why tell customers they can't spend money with me? In any case, I would eventually save money.

The hardware to accept debit cards was $200, so the question was how long would it take to pay off the hardware and start seeing some savings. Here's how it works: If you swipe a regular Visa or Mastercard, the merchant is charged a fee of around 25 cents, along with a 2-3% transaction fee, depending on the card type. Using a reward card to get 1% cash back? I'm personally paying for your reward miles because I'm now paying 3% on your transaction instead of 2%. Debit cards are different, as they charge a flat fee, around 65 cents per transaction. Check out the chart:

Purchase Credit Debit
$5 $ 0.35 $ 0.65
10 $ 0.45 $ 0.65
15 $ 0.55 $ 0.65
20 $ 0.65 $ 0.65
21 $ 0.67 $ 0.65
30 $ 0.85 $ 0.65
40 $ 1.05 $ 0.65
50 $ 1.25 $ 0.65
100 $ 2.25 $ 0.65

You can see with this chart that when a customer makes a $20 transaction, there are equal fees with debit and regular Visa/Mastercards. So I could take my old statement, calculate the amount spent using debit cards at the Visa/MC rate, and come out with a savings projections. It wasn't very exciting, showing I would save money after about six months. I went ahead and installed the pin pad anyway, worrying about yet another long term savings option with up front costs.

After we installed the pin pad, something interesting happened. When it became known we accepted debit cards, our debit card usage went way up. Even better, the store now had a financial incentive to accept more debit cards, because of the savings. I trained everyone, including myself, to ask if a customer wanted to use debit or credit at that magic threshold (I thought it was $16, but I see now it's $20). Debit card usage skyrocketed. What was once 10-15% of credit card usage jumped to over 40%. My return on investment for that pin pad went from six months to about six weeks.

It turns out this is a growing trend nationally, as people attempt to wean themselves off credit and live within their means. It's also very common nowadays for kids to have accounts linked with debit cards. So the bottom line: debit cards good. If you're a merchant, you should absolutely accept them. If you're a customer spending over $20, save your merchant some money and swipe your debit card. Each year the Visa/Mastercard monopoly charges us whatever they want and the only option is to pay their escalating fees or not accept credit cards.

* What would a post on credit card processing be without some fine print? In addition to transaction fees, we're charged a minimum monthly service fee, batch fees (oh, you want to submit those?), pass through fees (oh, you want us to allow Amex through?), a monthly translink service fee, another Visa fee for accepting Visa, a debit processing fee, and a PCI compliance fee for occasionally scanning my network for security. Our total fees are around $50 a month. Each processor charges different rates, so the only way to know if you're getting a good deal is to crunch numbers with your particular volume, average ticket amount, debit card use, etc. I'm using Atlantic Pacific as my processor and I've been very happy.