Financial Reform Watch

Published — May 3, 2011 Updated — May 19, 2014 at 12:19 pm ET

How much does it really cost to process debit card purchases?

Debit cards using signature are most profitable for U.S. banks

Introduction

UPDATED June 29, 2011 – The table of fees below was updated with revised survey data issued by the Federal Reserve. Several card networks corrected their previously provided data, the Fed said, which cut the overall average fee for prepaid cards to 40 cents, from the Fed’s previous figure of 50 cents.

Exactly how much it costs big U.S. banks to process a Visa or MasterCard debit card transaction has long been murky – until the Federal Reserve surveyed the industry a few months ago and came up with a figure of 12 cents per swipe.

The processing fee is set by card networks such as Visa and MasterCard, which typically issue confidential fee schedules to member banks twice a year. The card networks — not the banks — decide how much banks can collect from retailers each time a shopper swipes a debit card to pay for a purchase.

The Fed sought to get a clearer sense of the actual processing costs by surveying large banks that issue debit cards, payment card networks, and banks used by retailers.

Survey responses revealed a significant gap between what banks collect each time a customer swipes a debit card — an average of 44 cents — and what it costs the bank to actually process the purchase. The data also showed that banks are collecting nearly twice as much to process signature-based debit cards compared to PIN-based debit cards.

The Fed included in its calculation expenses for authorization, clearance and settlement. Banks argue the Fed ignored system-wide costs such as security, customer service calls, and cardholder rewards programs.

“Issuers have other sources, besides interchange fees from which they can receive revenue to help cover the costs of debit card operations. Moreover, such costs are not recovered from the payee’s bank in the case of [paper]check transactions,” the Fed said.

Below is a summary of the Fed’s survey findings:

All debit cards PIN debit swipes *

Signature debit swipes **

Prepaid debit cards

Consumer Purchases

Annual transactions 37.7 billion 14.1 billion 22.5 billion 1.0 billion
Total value $1.45 trillion $584 billion $837 billion $33 billion
Average value $38.58 $41.34 $37.15 $32.54

Fees Collected by Banks

Total fees $16.2 billion

$3.2 billion

$12.5 billion $500 million
Avg per transaction 44 cents 23 cents 56 cents 40 cents
Avg per transaction value 1.15 percent 0.58 percent 1.53 percent 1.28 percent

Actual Bank Cost of Processing Transaction

Median total cost 11.0 cents 8.0 cents 13 cents 61 cents

* PIN-based debit transactions require entering a private identification number when purchasing an item.

** Signature-based debit transactions require the customer’s signature.

Sources: Federal Reserve proposed interchange fee cap issued Dec. 28, 2010. Federal Reserve’s final interchange rule issued June 29, 2011.

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