Debit Cards vs Credit Cards: How Does Payment Processing Differ?




You often hear the terms “credit card” and “debit card” lumped together as if they are the same thing. Although the ideas may seem interchangeable, they are not. As a business owner, you need to know the differences between these two forms of payment.

Basic Terms

In some ways, credit and debit cards are alike. Both have 16-digit account numbers, expiration dates and PINs. Both are issued by large and small banks as well as credit unions and other financial institutions. Both can be accepted by the vast majority of mobile and stationary credit card processing systems. However, the resemblance ends there.

Credit cards enable consumers to borrow money from a card issuer such as Visa, MasterCard, Discover or American Express, up to a set limit for the purpose of buying goods and services or obtaining cash. A credit card holder is billed each month not only on the funds that were used but also on interest from any unpaid balance that may have carried over from the previous payment period. Generally, credit card transactions are authorized by means of the customer’s signature.

In contrast, debit cards give consumers a way to spend their own money by withdrawing funds from monies they had already deposited with the card provider. Some debit cards use a customer’s signature for verification, but most require the entry of a PIN.

Advantages of Credit Cards

Credit cards offer unique advantages over debit cards. For one thing, consumers can reap rewards such as airline miles, cash back and points that can go toward purchases. For people who always pay their bills on time, rewards cards can lead to a significant savings over time. Furthermore, a customer can obtain and use a credit card for the express purpose of raising their credit score if their bill payment history is good.

In addition, many cards offer benefits such as extended warranties and lowest-price guarantees. Renting a car usually requires that a credit card be presented. If a customer does not have one, cash is generally required. Finally, credit cards offer more legal protection in the event of data breach or fraud. Disputes over lost, damaged or unauthorized purchases are handled efficiently, with the customer gaining access to the disputed amount of money while the investigation is in process.

Advantages of Debit Cards

Other than penalties for over-drawing an account, most debit cards have no fees whatsoever, unlike credit cards that charge for over-limit, late payments and annual membership fees. Many consumers say that making a purchase with a debit card feels more like using “real” money, leading to greater fiscal responsibility. For impulsive spenders, debit cards are definitely the safer route to take.

How Credit Card Payment Processing Works

Merchant services for small businesses provide companies like yours with everything you need to complete credit card transactions. When your customer makes a purchase, they dip or swipe their card through your reader. The information is passed by your system to a processor and then to the issuing bank where it is approved. Once the issuing bank approves the transaction, it sends an authorization back to your processor, who then passes it on to your software or terminal.

How Debit Card Processing Works

When your customer swipes their card through your terminal, your point-of-sale system reads the information off of the magnetic strip on the card and transmits it to a card processing network such as Visa, MasterCard, Pulse, Interlink, STAR Network or Maestro. After verifying the correct formatting of the data and checking for fraud, the network sends the information on to the bank that issued the debit card. The issuer makes sure the card has not been reported as lost or stolen, confirms that enough funds are available and tells the merchant if the transaction was approved. After the network calculates how much money is owed to you – often on the same day – the transaction is settled and you get your money.

Believe it or not, debit cards have their own unique set of protocols and regulations that govern payments. For one thing, debit cards have no minimum payment stipulations. On the other hand, businesses can require that customers’ purchases be at least $10 when they are using a credit card. Debit card payments cannot be surcharged even if the debit cardholder chooses “credit” on the point-of-sale terminal. Those payments made with credit cards can be surcharged.

In general, it costs less to process a debit card payment. This is true even though debit cards are subject to PIN debit network or interchange fees. The amount of the fees will depend on whether the card is regulated (issued by a bank with $10 billion or more in assets) or unregulated (issued by a smaller financial institution) as well as the size of the transaction.

If a card is issued by a smaller bank, fees will vary depending on whether the transaction took place using a PIN or a signature. PIN purchases are processed on a debit network, which generally has higher transaction fees and lower percentage fees. Credit networks are the opposite, featuring higher percentage fees and lower interest charges. That explains why PIN debit transactions are less expensive for higher purchase amounts, and signature debit transactions work best for smaller purchases.

These days, plastic forms of payment seem to come in numerous types. Keep in mind that they are by no means equal. Knowing this fact can ultimately save you money and help you to obtain the merchant services for small business that will work best for your company and your customers.