It’s easy to think that debit card and credit card transactions are all processed in a similar way, but in actuality, it’s quite different. As a business owner deciding which payment methods to accept, it’s important to know the distinctions between credit card and debit card transactions.
I’ll walk you through how each of these card transactions work, as well as lay out some key differences. With this, you should gain a better understanding of how your business should handle them.
How Does a Credit Card Transaction Work?
Credit cards provide customers with a line of credit which allows them to purchase goods or services in advance and pay for them later. The issuing bank is the one paying for the product or service, with the consumer paying the bank back at a later date.
Whenever a customer uses a credit card to make a purchase at your store (online or brick-and-mortar), the transaction goes through a few steps:
- The customer’s card information is collected through your payment processor.
- The information is sent through to the aacquiring bank.
- The acquiring bank verifies with the card issuing bank that the customer has the credit available.
- The card issuing bank authorizes the payment and places the intended amount on hold.
- Once authorized, the acquiring bank sends the approval back to the payment processor.
- The payment is processed and the acquiring bank deposits the money into your merchant service account within 1-3 days.
This whole process happens in just a few seconds after a customer swipes their card or enters their details on the checkout page on your website.
How Does a Debit Card Transaction Work?
Unlike credit cards, debit cards only allow payments with money that already exists in the consumer’s account. Debit card transactions withdraw funds directly from a customer’s checking account when they make a purchase.
Because consumers are pre-authorized to withdraw their money, when a transaction is processed as a debit transaction, there is no additional waiting period for funds to be transferred to your merchant account.
However, debit cards can actually be processed in two ways:
PIN-based debit transactions process the charge immediately through the online debit network.
A customer’s unique PIN is used to verify the customer’s identity and allow for the immediate release of funds to the merchant. This is the traditional way of processing debit card transactions, but newer payment methods like contactless payments have seen this type of transaction decrease.
Signature debit card transactions, also called ‘offline transactions’ because they are off the debit network, work like credit card transactions.
Instead of immediately withdrawing the funds, the transaction passes through several interchange networks and the funds are held for several days before being released. Despite the name, actual signatures are no longer always required to be processed this way, as this method now includes contactless payments and online debit card transactions.
Online purchases will always process debit cards as credit/signature. In brick-and-mortar stores, customers may have the option to choose, if there is a PIN pad, but some modern point-of-sale systems only process debit cards as credit.
Credit Card Transactions vs. Debit Card Transactions: The Main Differences
At the point of sale, credit card and debit card transactions work in much of the same way. The only thing that changes is the network that is used to authorize and release funds. However, for merchants, this can lead to a few key differences:
Whether a credit or debit card is used, you will be charged a processing fee, though the fees vary depending on card type, issuing bank, and your payment service provider.
Debit card processing fees are generally lower than credit card fees, as they are considered less risky and also more limited by law. In the US, for instance, the Durbin Amendment limited debit card transaction fees to 0.05% + $.21 for banks with more than $10 million in assets.
Credit cards (and debit cards charged as credit) have higher fees because they are higher risk, and generally have to go through several different financial entities to be authorized, all of which take a cut.
Minimum Amounts & Surcharges
Credit cards can typically be subjected to minimum purchase amounts or surcharges which can help offset the cost of processing fees. This varies depending on location though so check your local laws before implementing these measures.
However, minimum purchase amounts and surcharges aren’t allowed for debit cards that are processed using a PIN, meaning any cost associated with processing these transactions will have to come out of your pocket.
Both card types have consumer protections in place in case of fraud or other problems with the transactions. If there is an issue and the customer disputes a charge with their bank, this becomes a chargeback.
For credit card disputes, a consumer has a longer period of time in which they can dispute a charge – often up to 120 days after purchase. A debit card user can also file, but they have much less time to do so – around 60 days – and will often be on the hook for more of the damage than credit card disputes.
Both disputes result in chargeback fees for you and can cause loss of revenue in the long run, but debit card despites tend to be easier to handle and are usually handled earlier than credit card disputes.
How Can a Business Accept Credit Card and Debit Card Transactions?
Pay.com lets you accept credit cards and debit cards online. We make it easy to decide which payment methods you’ll accept and which ones you won’t. If you run an ecommerce store, you can set up your own customized checkout page to provide your customers with a smooth payment experience.
With a quick and straightforward signup and onboarding process, Pay.com makes it simple to get your payment system up and running quickly. Not only that, but our rates are fully transparent, with no hidden fees. Click here to get started now!
What’s Better For Merchants, Credit Card Payments or Debit Card Payments?
Debit card payments are usually better for merchants. The processing fees tend to be lower, the disputes and chargebacks easier to handle, and the money is available quicker. Even when charged as credit, debit cards will still be easier to handle.
Plus, debit cards are still a very popular payment method globally, so offering this payment option will help appeal to a wide customer base. After all, while fees and expenses matter, ensuring a good customer experience by offering a familiar payment method can help build customer loyalty.
The Bottom Line
Accepting card payments – both types – is almost a necessity as more people move away from using cash. As a business owner in a modern world, it’s crucial to accept both credit and debit cards if you want to ensure customer loyalty and business success.