Debit cards are the most commonly used form of electronic payment in the US because funds are drawn from your bank account, not a credit line. The only way you do not possess a debit card is if you are underbanked, which is more common than you would think in America. With the high level of distribution and increasing dependence by consumers, debit cards are becoming the electronic payment method of choice. As a small retailer, it is important to understand how debit cards work, why they are priced the way they are and who is using debit cards. As a merchant, you are expected to accept the payment option of choice to enable your customer to buy the way they want to buy. Knowing the current and future trends of consumer payments will help you adapt to the changing needs of your customers. The adoption, functionality, and relevance of debit cards are growing due to high levels of consumer debt and a change in culture since the great recession.
The traditional payment infrastructure is proving to be unreliable, insecure, and expensive in the digital age. With the growth of digital payments both in store and online, it is no wonder that fraudsters and hackers are coming up with new ways to defraud small businesses. With increased adoption, small businesses are finding new and effective ways to lower costs and increase customer loyalty.
DEBIT CARDS AND WHY THEY MATTER FOR YOUR RETAIL BUSINESS
A survey of over 1000 American consumer in 2017 showed that debit card was the preferred method of payment of 44% of respondents. Over the past decade, consumers have been moving away from credit cards in order to lower their dependence on debt. Consumers moved towards spending only the money they have instead of living off of a credit line. Consumers between the ages of 25 and 40 are active debit card users which accounts for 65% of all payments in the US.
There are many benefits to accepting debit cards in your small retail store. Consumers are staying away from credit because of the consequences of not paying your entire balance at the end of every month. There are also more security issues with using credit cards because of the lack of a pin and low probability of requesting picture ID from the consumers.
HOW DO DEBIT CARDS WORK FOR RETAILERS
Debit card processing is almost identical to credit card processing. You can read about how credit cards work here. The key difference between the two is that credit cards draw from a credit card line whereas a debit card freezes capital from a consumer’s account then draws from that account once settled. The second most important difference is the options available to you for debit card networks. There are key credit card networks like Visa, MasterCard, Discover, American Express, Etc. All of these brands are active in the debit card market but do not dominate the debit card market like they do in credit cards.
Types of debit cards:
Unlike credit cards, there are more debit card issuers that work with merchants, consumers and financial institutions. They all have the same basic service which is allowing consumers to make payments directly from their bank account or withdraw cash from an ATM. Here are the different types of debit card solutions that you can evaluate.
Pin Debit: The consumer sets up a pin for the card and enters it every time at the point of sale. In-store debit pin transactions are the most secure.
Signature Debit: These cards can work in a store or online and do not require a pin. They operate on the visa / MasterCard infrastructure and are prone to more fraud than the pin debit cards. Due to the increase in fraud processing can sometimes cost more for merchants.
Online Bill Pay: Certain web-based merchants will accept a pin debit online with the card not present. They enable these transactions by requiring more personal information from consumers in order to confirm their identity. The costs of accepting these payments are often lower than signature debit card not present transactions.
Debit Card Networks:
- Visa Debit Cards work like a digital check. Merchants can accept Visa Debit Cards with a signature, pin or neither depending on the point of sales system and payment amount. Visa Debit Cards come with a Zero Liability Policy, which means that consumers are 100% protected from fraudulent activity.
- Accel is a debit card solution by Fiserv. The Accel debit card allows consumers to make person to person or person to business payments. Merchants can accept payments in-store or online and can make money transfers. Consumers can withdraw funds from ATMs in the network.
- The Armed Forces Financial Network (AFFN) provides a variety of financial services including point of sales and ATMs near military bases. They have a broad network of credit unions, banks, and merchants that accept their cards.
- Culiance is an alliance of credit unions that work together to offer financial solutions. They offer debit card payments and ATM cash withdrawals. The alliance is focused on offering services and lowering retaliatory charges between members.
- Interac is a Canadian debit payment system and money transfer solutions. They position themselves as having competitive rates and low fraud rates.
- Jeanie is a Debit payment and ATM network which positions itself as one of the first companies to offer Debit payments. They partner with financial institutions to lower costs for merchants.
- Discover offers a checking account with a debit card that offers 1% cash back. It enables money transfers and withdrawals from ATMs and POS locations within its network of partners.
- Maestro is a global debit card network which is owned by MasterCard. Maestro is accepted anywhere within its partnership network of POS and ATMs.
- MasterCard Debit offers a global network of Debit payments with additional security and user protection.
- NYCE is a debit card solution for financial institutions. They have a long history providing debit card services, have a large network and offer surcharge-free cards.
- PULSE is one of the oldest debit networks and is owned by Discover. They partner with financial institutions in order to offer a broad network for customers.
- SHAZAM provides a variety of services to financial institutions including payment, ATM, risk mitigations, marketing, training, merchant services, etc.
- STAR offers pin debit, pin-less debit, and mobile debit payments.
THINGS THAT IMPACT YOUR DEBIT FEE
Debit card pricing is usually below that of credit cards but has many things to consider. When deciding on payment processing it is unlikely you will focus just on debit transactions. You will likely work with a merchant services company that offers a package of solutions to accept multiple forms of digital payment. Here are two great resources for understanding debit card prices and credit card prices. Every time a customer comes into your store they will likely have a different type of card with a different debit card network. As a merchant, you are expected to process the transaction with whichever form of payment they prefer. Here are several things that will impact interchange fees which are the bulk of the transaction costs.
- Type of card: Signature debit cards run on the credit card network and have more risk associated with them so have high fees. Pin debit cards run on different networks and lower fraud risks so have lower fees.
- Associated financial institution: Credit unions and small banks have different rates and operating costs than larger banks.
- Rewards: Cards with additional rewards and loyalty programs have increased costs to accept.
- Type of merchant: interchange fees are based on merchant type.
- Debit network: The specific network being accessed for a purchase will have a different pricing structure to meet the needs of their customers.
HOW TO PICK A PAYMENT PROCESSOR FOR YOUR PAYMENT NEEDS
Card networks care more about their banking customers than merchants or consumers. It is important to understand that the least valuable entity in the entire digital payment process is the merchant. This might seem a bit counter-intuitive because as a merchant you are paying them money. The organizations that make the most money out of the average digital transaction is the issuing and Acquiring Bank. Card networks like Visa take an average fee of 0.11% but keep the rates high on their network so that banks choose to work with their card network.
As a small retailer Square is usually the best option because of their easy and transparency of price. They are built for underserved retailers and act as a third party to run your transaction. Many retailers will grow out of Square and require a more customized solution for their business. When you open a bank account for your business the bank will potentially offer a solution to you from the large payment companies like First Data or Verifone. Pre or post-launch you might have other 3rd parties come knocking at your door. This is where independent sales organizations (ISO) come in. Good ISOs will have relationships with the right payment gateways, financial institutions and card networks in order to provide a more customized solution for your business.
With more options comes more confusion when it comes to prices. A good payment processor will work with you to make sure that the average cost per transaction across debit and credit networks meets your needs. As challenging as it might seem to find the right fit it is a significant cost to your business if you do not have a partner that is willing to adapt to your needs.
When choosing an ISO you want to find a trusted partner. Pricing is going to be confusing because of the variety of potential consumer payment solutions. A trusted partner will walk you through the process and make sure that you have the support you need to get your business up and running no matter what the situation is. These are important things to consider when working with an ISO:
- Pricing: Make sure there are no surprises. Here are some questions to ask:
- Is your business being properly categorized?
- Do they have the right average ticket value?
- What are the basis points per transaction?
- What is the percentage per transaction?
- If you combine all of the average costs per transaction do they meet your needs for your average ticket values?
- Will the pricing still work with smaller average ticket values?
- Support: Make sure that your business is up and running as quickly as possible if there is a problem. Here are some questions to ask:
- If your terminal goes down how long until you are up and running again?
- Will you have a technician in a minute, hour, day, week, month?
- Can you call somebody directly to get your problem solves?
- Do they genuinely want your business to be successful?
- Services: What other things do they do to support the success of your business. Here are some questions to ask:
- Do they include training?
- Do they provide marketing services?
- Do they charge for other types of support?
- Do they provide management or accounting solutions?
- Do they integrate with other business solutions?
DEBIT CARD INNOVATION
With the increased dependence on Debit Cards financial institutions are making the investment in improving the user experience, security, and benefits of using debit cards. Purchases are increasingly made online without your card present. This is referred to as Card Not Present Transactions (CNP).
We are all comfortable with the idea of taking out our debit card and entering our pin. If you think about the process it is not very efficient. Especially with you think of all the things that you can do instantly on your phone. That is why services like ApplePay and Google Wallet have allowed customers to keep their card on their phone and make a payment by putting your phone near the point of sales using NFC technology. These mobile wallets do not affect your current processing agreements. They simply allow customers to keep their cards on their mobile phone and pay more quickly. The card number is still at risk for fraudsters for online transactions.
The use of chip cards in a store has impacted the amount of in-store fraud but has done little to impact CNP fraud for online transactions. Your card number is accessed in many different ways by fraudsters then used to make unauthorized CNP transactions. Even though card companies will usually cover the cost of fraudulent transactions it takes time out of your day and impacts your ability to make payments when you need to request a replacement card. Card companies invest significant amounts of money on third-party fraud and security solutions which are passed on to the merchant.
With an increase in debit card use has come an increase in rewards offered with debit cards. These rewards are usually offered through the acquiring bank and increase the cost of processing those cards. They have not developed a new model for loyalty, they have simply tacked on traditional loyalty programs onto debit cards.
BLOCKCHAIN AND THE FUTURE OF ELECTRONIC PAYMENTS
Blockchain solutions offer a quicker, more cost-effective, more secure and more stable payment infrastructure if done correctly. Due to the attention that Cryptocurrencies like Bitcoin have received blockchain technology has become synonymous with currency instability and lack of transparency. The reality is that the opposite is true. Blockchain technology provides a complete ledger of transactions and does not need to depend on a traded cryptocurrency to operate. When the currency risk and transparency are stabilized, blockchain will be the best infrastructure for managing any transaction.
Recently the major credit card networks recategorized cryptocurrency transactions for credit cards. Now, if you purchase Bitcoin, for example, on your credit card you will be charged a cash advance fee. Some major credit card issuing banks have also limited the ability to purchase cryptocurrencies using their cards. All this has been done due to the recent cryptocurrency frenzy which has lead consumers to access credit lines to purchase cryptocurrencies in the hopes that their value will rise quickly. This type of behavior lead to consumers over leveraging themselves in order to make speculative investments. Debit cards on the other hand only utilize your money. Banks and credit card networks do not have a say over how you spend your own money. This has left debit cards as the only form of payment for cryptocurrencies other than direct ACH bank transfer.
Behavioral change is one of the biggest challenges to the adoption of new technologies. Requiring consumers to pre-purchase cryptocurrencies before a purchase of goods, with additional fees, is the first challenge. The second most relevant challenge is currency risk. Cryptocurrencies are currently synonymous with speculative investments. There is no question that cryptocurrency will play an important role in the future of financial services. The question is when will they have the stability and fluidity needed for mass adoption. For this to happen cryptocurrencies need to be based on a major currency or have a central stability functionality.
This is important because users need to very easily move in and out of cryptocurrencies. By nature, cryptocurrencies operate on a more stable, secure and faster infrastructure than traditional payment methods. Each cryptocurrency is different, but the core technologies behind cryptocurrencies, Blockchain, have advanced to the point of creating true improvements to the current financial infrastructure in the US. By utilizing blockchain technology and enabling friction free transitions from bank accounts to crypto accounts consumers can benefit from the efficiencies of cryptocurrencies while limiting the need for behavioral change.
There is a long history in debit cards with a variety of players that all have unique services and market share. The credit card networks and banks take the lion’s share of your transaction cost. As a small retailer debit and credit card payments are a must have, the question is how customized will be your solution and what will be your average cost per transaction. With the advent of blockchain technology and cryptocurrency, a lower cost, more secure, more stable, and faster group of payment options will emerge. Understanding who your customers are and what they need is the only important thing when evaluating your digital payment options. Although cash and check are still widely used in the US there is an increased trend to use digital payments because of innovation from companies like Venmo and Square. These solutions provide a better experience but still rely on the same legacy infrastructure that takes a large percentage of each of your transactions and offer mediocre service.
Seedpay helps local communities thrive by delivering a more secure and effective payment infrastructure. Local businesses depend on legacy payment infrastructure to run their business which is not built around loyalty. By using blockchain technology Seedpay is able to deliver payment solutions that meet statewide and local needs. Unlike other payment technology Seedpay has built an entirely new infrastructure that lowers costs, increases loyalty and seamless gives back to local communities.