Credit vs Debit Card Online Payment Processing: What’s The Difference

The differences between credit and debit cards 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.

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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.

How debit and credit card processing works

For all intents and purposes, credit cards, and debit cards run with signatures, 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:

  1. 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.
  2. The merchant requests payment authorization from their chosen payment processor.
  3. The payment processor communicates with the appropriate card association (think Visa, MasterCard, Discover or American Express) to request payment authorization from the issuing bank.
  4. The card-issuing bank verifies information such as billing address, security code and expiration date.
  5. The issuing bank then either approves or declines the transaction.
  6. 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.

  1. Merchants batch their authorized transactions and send them to the payment processor.
  2. 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.
  3. The issuing bank charges the cardholder’s debit or credit card for the transaction amount.
  4. 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:

  1. 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.
  2. 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 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 Versus 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 have 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 business is not being overcharged by your payment processing partner, 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.

With Stax, you can accept online and traditional payments without the burden of extra fees or costly contracts. We’ve also got you covered with 24/7 customer support and insightful analytics for your business. If you want to start with or make the change to award-winning merchant services, reach out to learn more.

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