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Cost of card payment for customers and merchants

Cards are one of the most popular payment methods amongst customers. Card payments are processed faster, and customers have a quicker purchasing experience. However, there are costs associated with making a card transaction, and in this article, we will see what those costs are and whom they impact. 

Card payments involve multiple parties, mainly the customer paying with the card, the merchant accepting the card payment, the banks of both the customer and the merchant who process the payments in the back and the card issuing companies (Visa or Mastercard). 

Once the customer provides the card details and submits the order to buy, the information is passed through the Payment Gateway, the Payment Processor, and the card company before reaching the merchant's bank. The bank verifies the payment and responds with an approval or refusal back to the parties, and based on the response, the payment may be settled within 3 business days. 

Learn from our article how card payments can impact customers and retailers:

Are you paying anything for card transactions?

As a customer and holder of a debit or credit card, you may pay some fees for holding and using your card. As a debit cardholder, you may pay a small monthly card maintenance fee to your bank, and the card service fee varies from bank to bank. You may also need to pay overdraft fees if your bank allows you an overdraft. You may also pay currency conversion fees for credit and debit cards if you buy in another currency. In these cases, the bank usually informs you of the fees before making a payment. Under general European law, your bank cannot charge you an increased rate for making card payments across the EU/EEA, all charges must be equivalent to domestic charges. But as a customer, you do not pay anything for your online card transaction. Your bank or card company cannot charge you any extra fees or surcharges because you are using a particular card. It applies to all card transactions and payments made within an EU state and other Member States.

Note that American Express and Diners Club credit and debit cards and business or corporate credit cards where your company is invoiced instead of you are not protected by EU payment service standards, and you may be charged a fee for using these cards.

What card processing fees include?

Card processing involves a lot of exchange of information before a payment is approved. The fees depend on the type of card, whether debit or credit, and the card network, issuer, and payment processor. 

What card transactions can be charged?

Businesses may have preferences regarding the type of payment they accept from their customers. Generally, most customers would either bring a debit card or a credit card. Both cards are subject to some kind of charge, both for the cardholder and the business, but the business carries the majority of those costs. 

A debit card

Most financial institutions will provide you with a debit card when you open a savings account. The card is tied to your bank account, so when you pay from your debit card, whether that is in person or online, your money will be deducted from your bank account directly. When you use your debit card, the transaction can be done either by entering your PIN or by signing your name.

When you make a purchase through PIN debit, the transactions go through a PIN debit network, and you are charged a small flat transaction fee or a debit network fee. These charges are lower than others, especially for large transactions. 

Debit card transactions for signature debit go through card networks. Signature debit transactions are processed in the same manner as a credit card through the card company and are subject to interchange fees. The processor also charges you, although it is a small amount. The debit card fee amount will depend on the pricing model of your card.  

A credit card

Unlike a debit card, a bank will not automatically provide you with a credit card. Instead, based on your credit score and your financial habits, your bank may offer it to you. Credit cards allow you to spend up to a credit limit, which you later need to repay with interest. For a customer, the charges will generally include a monthly fee, interest, conversion fees for international purchases, and withdrawals from ATMs.

For the merchant/seller, when you make an online card transaction, merchants pay credit card fee called the Merchant Service Charge (MSC), which is composed of 3 main fees:

How much can a card payment cost?

Charges related to card payments vary according to jurisdictions, card companies, processors, and issuers. A small business can expect to pay around 2.87% to 4.35% for processing payments through credit cards. A company can expect to pay, on average, 1.3% to 3.5% per transaction. The charges depend on the card companies. Mastercard's credit card processing fee on average is 1.29% to 2.64%. Visa's processing fees vary from 1.29% to 2.54% per transaction.

The cost for debit cards differs wildly based on merchant type, the type of authentication used during the transaction, and the card company itself. The cost of processing pin debits ranges from 0.44% to 1.09%, and signature debit fees can range from 0.56% to 1.41%. Some of these fees are capped under the Durbin amendment for non-exempt card issuers at 0.05%. 

Who is paying the most in card transactions?

The merchants bear the brunt of the cost when customers use cards to make their purchases.

Various factors impact the MSC, such as the card type, brand, location etc. These charges can add up and can be expensive for small businesses. As a result, the Interchange Fee Regulation (IFR) was introduced to curb the negative effects of the high charges. IFR capped the Interchange fees to 0.3% for credit cards and 0.2% for debit cards. While the IFR successfully capped the Interchange charges, the Regulation ignored the other two fees - The acquirer fee and Network fees - leading to an increase of the unregulated charges. The CMSPI found an estimated annual cost increasing over 400 Million EUR within two years of introducing IFR and added 1 Billion EUR more to merchants' annual costs since 2017. In 2021, Mastercard increased their acquiring fees, authorisation fee and a few other fees all across the EU and EEA, while they increased interchange fees on transactions between the UK and the EU following Brexit. The merchants who bear most of the costs are generally small gas stations, small retailers and e-merchants. The 2021 change added a further financial burden on merchants up to 96.6 Million EUR in annual costs. 

Are European merchants paying more than ever to accept card payments?

European merchants, on average, pay 83% less than American merchants. The average interchange fee in Europe is rated at 0.96%, compared to the 1.76% that American companies pay. Despite European merchants paying less than their American counterparts, a European retailer is still paying more to accept card transactions due to an increase in the other charges under MSC. 

Which countries pay the highest fees for card transactions?

Canada has the highest average interchange fee, coming in at 1.78%. Interchange fees in the United States, on average, are around 1.73%. In the EU, Poland has the highest average interchange fees at 1.53%, followed by Croatia at 1.48%. France has the lowest interchange fees due to regulations at 0.22%.

Summary

Making payments with cards, whether debit or credit, will incur fees. These charges are neither harmonised nor stable as they depend on multiple factors, such as card companies, the type of card, the type of transaction, etc. Although customers do not bear the majority of the costs, it is the seller and merchants who have to without passing the cost on to the customers through a surcharge. 

Debit cards consist of a few charges, some of which customers have to pay, like maintenance fees and monthly fees. When a customer uses the card to make a purchase, they will be charged additional charges such as network fees and interchange fees. Credit cards have far more fees than debit cards. Apart from interchange fees, credit cards also have processor, network, and merchant fees. Although interchange fees have been capped by regulation, card companies are increasing the fees for unregulated charges. As a result, retailers are not paying more in fees. 

The IFR had a variety of results across the European Union. Some countries have definitely benefitted from the interchange fee cap, while others, not so much. In general, the smaller businesses will face the brunt end of the subsequent increases of the unregulated fees. The CMSPI recommends bringing all card fees under the IFR. Even though the card fee increase will not influence customers directly at the moment, market competition will eventually dwindle as smaller businesses go out of business, and customers will be left with few devices or choices to make card payments. 

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