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Debit or Credit?

Who Pays Interchange Fees?


Florist in her shop checking orders on her laptop
Richard Drury/The Image Bank/Getty Images

When you purchase with plastic you’re often asked if you’d like to make it a debit or credit transaction. What’s the difference? The choice you make determines how your purchase is processed, who pays the bill for that processing, how long it takes, and what your rights are. This page covers how interchange fees work and just how important your choice is.

Is it Debit or Credit?

When you use a debit card, you can sometimes choose how the purchase is processed. It can either be an online transaction or an offline transaction. If you punch in your personal identification number (PIN), it’s an online transaction – it gets completed electronically and it’s done pretty quickly. If you don’t use your PIN and you sign a charge slip instead, it’s an offline transaction. Offline transactions are processed much like plain-vanilla credit card purchases.

Even if you use a debit card, offline transactions are very much like credit card transactions. Your debit card might have a Visa logo on it, for example, so it runs through the Visa network. It’s not a credit transaction, but it uses the same infrastructure.

In summary, when you’re using a debit card:

  • Choosing “Credit” makes it an offline transaction
  • Choosing “Debit” makes it an online transaction

Who Cares?

So far, you may be unimpressed. Who cares how each transaction is processed? You might not, but banks and retailers do. When you do an offline transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee.

What about online transactions? Retailers can get those done for a lot less. They might only pay 10 cents or so per transaction.

As you might imagine, 2% of every purchase adds up to a lot of money. The banks and credit card companies would love for you to choose credit because they get 2% of every dollar you spend. Retailers, on the other hand, beg to differ. They’d prefer that you choose debit so that they don’t have to pay a hefty interchange fee (but in some states they can add credit card surcharges that pass that fee back to you).

In order to maximize revenue, banks give you an incentive to choose credit (or a penalty for choosing debit, depending on how you look at it). They may charge you a fee for online transactions – usually in the ballpark of one to two dollars. Once you discover these fees, you’re more likely to choose credit next time. In addition, they may offer rewards (such as airline miles or entry into a sweepstakes) each time you choose credit.

Of course, somebody has to pay the 2% interchange fee. Some retailers don’t pass it on to you. However, it has to come from somewhere – they have to build it into the price of the products and services you buy.

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