Why It is Not Legal to Pass on Fees for Debit Cards

Passing along the interchange or swipe fees to cardholders is an impactful way for merchants to avoid paying those. This practice, called surcharging or no-fee credit card processing can also benefit the customers. When merchants pay zero swipe fees on credit card sales, they don’t have to raise prices on services and merchandise to cover those costs. But many want to know why they cannot also pass along fees on debit card transactions. That’s an important question, deserving an insightful answer.

Two Rules That Prohibit Debit Card Surcharges

There are two sets of rules and regulations that prohibit surcharging when the customer pays by debit card (or a prepaid card). First of all, credit card brands such as Visa and MasterCard do not allow it, so debit card surcharges will violate the contract the merchant has with those companies. That can result in fines, and if the breach of contract continues or is serious enough the merchant risks losing the ability to accept those credit cards. The other restriction is because surcharging on debit card purchases is illegal under federal law. This law was part of the larger package of financial reform regulations called the Durbin Amendment, which was passed in the wake of the Great Recession.

Why Debit Fees are Treated Differently

But the Durbin Amendment also limited how much merchants could be forced to pay through interchange or swipe fees on debit card transactions. Those federally regulated debit interchange rates apply to PIN as well as signature debit transactions, and apply whether the card is physically present or not. The Amendment additionally gave merchants the power to choose their PIN debit networks, to increase competition. Those provisions all helped to reduce the cost of debit card transaction fees. Credit card transactions, by comparison, require more steps and parties involved in processing them, so they have higher fees than debit card transactions. That helps to explain why it is less profitable for a merchant to pass along debit card transactions fees to the customer, while surcharging on credit card transactions saves merchants significant amounts of money.

Where it Gets Tricky

Problems may arise when merchants are not sure whether the customer is using a credit card or a debit card. If they confuse them and inadvertently add a surcharge to a debit card transaction, they can wind up in violation of not just credit card company rules but federal law. But it can very difficult to distinguish between debit and credit cards, especially when the customer swipes the card quickly or the card is not even present during the transaction.

Automation That Protects Merchants and Customers

What to do, when the reward of adding a fee to a debit card transaction is so low and the risk is extraordinarily high? The most failsafe solution is to use an automated card reader that can instantly detect which kind of card it is. For example, NTC offers no-free credit card processing that utilizes an innovative but user-friendly plug-in technology that ensures no violations when using no-fee credit card processing. A surcharge is automatically tabulated and added only if it’s a credit card purchase, and never when the transaction involves a debit card. That ensures that everything’s completely legal, compliant, and worry-free.