The differences between Credit vs Debit Card Online Payment Processing are widely understood. Debit cards are directly linked to a customer’s bank account and transactions pull funds directly from that account. Credit cards are an entirely different type of account; transactions do not withdraw funds from an actual bank account, instead, they count against the available credit limit. When the customer chooses their payment type, they understand where the funds will withdraw from, but don’t typically have in-depth knowledge of how each payment type is processed, particularly online.
In this article, we’ll explore the differences between credit and debit card processing, and what you need to know for online transactions.
Payment Processing Basics
Before we explain the differences between credit and debit card processing in an online environment, we’ll first discuss the basics of payment processing for debit and credit cards, as they are very similar. For a deeper dive, check out this article for an overview of credit card processing.
Credit vs Debit Card Online Payment Processing
How debit and credit card processing works
For all intents and purposes, credit cards, and debit cards run with signatures, and are processed the same way, the main difference being the funding of each account type. Debit and credit cards are both processed in three steps: authorization, settlement, and funding. Below is a simplified flow of the steps to process debit card and credit card transactions.
The authorization step of credit and debit card processing happens in six sub-steps:
- The cardholder initiates a transaction. Card information is either entered into the payment gateway online at checkout, or a card reader is used to swipe, insert the chip, or tapped to pay using contactless, near-field communication (NFC) technology.
- The merchant requests payment authorization from their chosen payment processor.
- The payment processor communicates with the appropriate card association (think Visa, MasterCard, Discover, or American Express) to request payment authorization from the issuing bank.
- The card-issuing bank verifies information such as billing address, security code, and expiration date.
- The issuing bank then either approves or declines the transaction.
- Finally, the bank sends the status of the transaction back through the card association and merchant bank, and then to the merchant.
This entire process may seem time-consuming but happens rather quickly at the point of sale, often in near real-time. For eCommerce transactions, debit or credit card information is entered into a virtual terminal–a web-based application that allows electronic payments to be processed–but the transaction processing steps are the same.
Next up is the settlement and funding process, which is how the merchant account receives the funds. This takes place after the authorization process is complete.
- Merchants batch their authorized transactions and send them to the payment processor.
- The payment processor communicates with the card associations, which then communicate with the issuing banks, to pull the appropriate funds from the various financial institutions.
- The issuing bank charges the cardholder’s debit or credit card for the transaction amount.
- The bank then transfers the funds to the merchant’s bank and deducts the interchange fees. Finally, the funds are deposited into the merchant’s bank account.
Differences Specific to Debit Card Processing
Besides the funding difference between debit and credit cards, debit card transactions can be processed in two ways:
- Authorization with the Personal Identification Number (PIN). When swiped or inserted at a payment terminal, the customer enters their PIN to authorize the transaction. The PIN is known by the cardholder and issuing bank as a way to authenticate the transaction. When a debit card is used with a PIN, the funds are withdrawn immediately and the transaction is shown on the customer’s bank account.
- Authorization with a signature. This method essentially runs the debit card as a credit card, using a signature as the authorization. This method takes more time to process and funds are “held” from the customer’s bank account. Typically, these transactions clear within 1-3 business days and withdraw funds from the customer’s account.
Online Debit Card Payment Processing
For online payments, a PIN is not used when processing a debit card transaction. Because of this, debit and credit card transactions are processed in the same fashion. The term for a signature-based debit card transaction is called an “off-line” transaction. Visa or MasterCard debit cards can be processed in this fashion.
Processing Fees for Card Payments: How Does Debit Card and Credit Card Processing Compare?
Depending on your payment processor, there may be variable fees depending on how the card is processed. Below are the basics of card processing fees–and for a deeper dive into the hidden fees you may encounter, check out this article.
There are several fees associated with accepting card payments. There are too many fee structures to go in-depth in one article, so merchants should research the most cost-effective and reliable options when choosing a payment provider. Standard processing fees are split into three categories, interchange, assessment, and payment processor fees.
Interchange fees
Interchange fees are the bulk of payment processing fees and are paid to the financial institution managing the card used for payment. Interchange rates vary by the financial institution and are a standard for accepting debit and credit card payments.
Assessment fees
Assessment fees are paid to the card networks–think Visa, Mastercard, Discover, and American Express.
Payment processor fees
Payment processor fees are paid to the company selected by the merchant to manage the details of moving the payment from the cardholder to the merchant. Depending on your payment processor, this is frequently a percentage of the transaction amount (with or without a capped dollar amount). Some payment processors will also charge an interchange markup, which is typically a set amount in addition to the set percentage.
Processing Fees: Debit Cards vs Credit Cards
The interchange fee paid by the merchant varies on a number of factors, from the card issuer to the payment type and more. Debit cards usually have a lower interchange rate compared to credit cards because they are considered a lower-risk purchase than credit cards. Additionally, the card issuer and type will also have varying interchange rates.
For example, a Visa debit card, consumer credit card, or business credit card has differing interchange rates.
Interchange and assessment fees are outside of the merchant’s control because the customer chooses to pay with either credit or debit, and may have a variety of payment options available to them.
The bottom line is, with many payment processors to choose from, it’s important to do the research to ensure your payment processing partner is not overcharging your business, and that the service is able to scale to your business needs.
Stax offers simple pricing, free of contracts or hidden fees. Our membership model has three tiers, ranging from $99-$199 per month for up to $500,000 in annual processing (above which we can create a custom plan). Additionally, we never mark up the direct cost of interchange, and we offer the ability to pass the surcharge to the customer to save your business money.
Another important note is that many payment processors have contracts, additional fees, and stipulations–so it’s important to read the fine print when weighing your options for payment solutions. For example, some payment processors charge a PCI compliance fee, verification fee for virtual checks, or transaction fees which are added to the interchange rate.
Choosing Your Payment Solutions Provider
For the customer, payment processing is usually simple. They simply present their method of payment to the merchant or enter it online—assuming no unforeseen issues, the transaction is complete in mere moments.
But business owners have several important decisions to make about which processing solutions they choose and the method of payments they’ll accept. This is especially important for a small business looking to control costs and meet its customer’s needs.
FAQs about Online Payment Processing
Q: What is the difference between debit and credit card online payment processing?
Debit cards are directly linked to a customer’s bank account and transactions pull funds directly from that account. Credit cards do not withdraw funds from an actual bank account, instead, they count against the available credit limit. Online transactions of both card types follow the same process, involving authorization, settlement, and funding steps.
Q: What are the basics of payment processing?
Payment processing for online debit and credit cards involves three main steps: authorization, settlement, and funding. During authorization, the cardholder initiates the transaction, the merchant requests payment authorization from their chosen payment processor, and the card-issuing bank verifies and approves or declines the transaction. Settlement and funding follow these steps, involving the transfer of funds from the issuing bank to the merchant’s bank after charging the cardholder’s account.
Q: Are debit card transactions processed differently compared to credit cards?
Yes, debit card transactions can be processed in two ways: authorization with the Personal Identification Number (PIN) which immediately withdraws the funds, and authorization with a signature, which processes the debit card as a credit card and takes longer to process.
Q: How are online debit card payment transactions processed?
For online payments, a PIN is not used. Debit and credit card transactions are processed similarly. The term for a signature-based debit card transaction online is known as an off-line transaction.
Q: What fees are associated with card payment processing?
Payment processing fees are divided into three categories: interchange fees (paid to the financial institution managing the card used for payment), assessment fees (paid to the card networks like Visa, Mastercard, Discover, and American Express), and payment processor fees (paid to the company managing the payment from the cardholder to the merchant).
Q: Do debit cards and credit cards have different processing fees?
Yes, debit cards usually have a lower interchange rate compared to credit cards because they are considered lower-risk purchases. Also, the card issuer and card type have varying interchange rates.
Q: How do businesses choose their payment solutions provider?
Businesses make several important decisions on accepting certain payment methods based on cost-control, customer needs, reliability of the options, and an in-depth understanding of contracts and additional fees set by potential payment processors.
