Debit or Credit_Who Pays Interchange Fees_I
Things you Need to Know About Debit and Credit Transactions
The choice of debit or credit transaction, when buying with plastic, determines the way your purchase will be processed, how long processing will take, and who will pay the interchange fees.
Choosing between debit and credit
When using a debit card sometimes we can choose the way our purchase is processed: whether it is going to be a debit or a credit transaction. In case of credit transaction you’ll have it online by punching in your PIN (or personal identification number), and things will be done very quickly. When opting for a credit transaction, you sing a charge slip and use no PIN; your transaction is offline and it will be processes like a plain-vanilla credit card purchase. This means that even with a debit card you will have a transaction pretty much like that with a credit card.
So what’s the big deal about it?
You must be wondering what you should care about all this. And probably you really shouldn’t, but there are people who do: retailers and bankers. When you make an offline (or credit) transaction, the retailer pays a percentage of your total purchase (about 2%) as an interchange fee to the bank that issued your debit/credit card. Whereas in case of online (or debit) transaction they pay a lot less (about 10 cents per transaction). Here the interests of retailers and bankers start diverging: banks would like you to opt for credit, since they get 2% of every dollar spent by you, while retailers would like you to choose debit and save them this huge interchange fee.
It’s only natural that banks will do their best to maximize their revenue. They will offer you incentives (such as sweepstakes or airline miles) for your preference of credit transactions, and will charge you a fee for online transaction (about $1-$2). When you discover these fees you’ll most likely opt for credit next time.
Your bank account is another thing affected by your choice of debit or credit transaction. When swiping your card to buying something, the machine checks for the amount available in your account and authorizes a purchase prior to knowing the exact amount you are going to use. In the result of this authorization the retailer “blocks off” more than you are going to spend and for several days this amount on your account becomes unavailable for you to spend. In case there isn’t enough money on your account, you will have to face overdraft charges greatly exceeding the amount spent on a particular purchase (say a $4 hamburger). To avoid this you can either keep some extra cash in your checking account or, if you don’t have this extra cash, use your PIN.
