Credit cards are abundant in the United States. According to Experian, the average American has approximately four credit cards. Credit cards are very much a part of typical life in the U.S. but believe it or not, the debit card remains almost as popular.
The Federal Reserve’s 2025 Annual “Diary of Consumer Payment Choice” found that in 2024 debit cards were the second most used payment method, making up 30 percent of total payments, compared to the 27 percent in 2020. Credit cards made up 35 percent of transactions in 2024, compared to 27 percent in 2020.
Despite the popularity of debit cards, much of the payment-centric content out there tend to center around credit card payments. But to find effective payment processing solutions, merchants should also have all the right information regarding debit card processing.
To that end, below is a detailed guide to help you understand debit card processing, debit card processing fees, and the smart implementation of debit card processing solutions.
Introduction to Payment Processing
Payment processing is a crucial aspect of any business that accepts debit and credit card payments. It involves the transfer of funds from the customer’s account to the merchant’s account, ensuring that transactions are completed smoothly and securely. Whether dealing with debit card transactions, credit card transactions, or other types of transactions, understanding payment processing is essential for businesses.
At its core, payment processing encompasses various components, including the types of cards used, the card networks that facilitate transactions, and the payment processors that handle the technical aspects. For businesses looking to accept debit card payments, credit card payments, and other forms of payment, a solid grasp of payment processing is vital. This knowledge helps in choosing the right payment solutions and managing transaction fees effectively.
Types of Cards
Businesses can accept several types of cards, each with its own set of characteristics and associated fees. The most common types are debit cards, credit cards, and prepaid cards.
- Debit Cards: Linked directly to the customer’s checking account, debit cards allow for immediate withdrawal of funds. Debit card transactions typically incur lower fees compared to credit card transactions, making them a cost-effective option for businesses.
- Credit Cards: These cards enable customers to make purchases on credit, with the card issuer covering the transaction amount initially. Credit card transaction fees are generally higher due to the involvement of more players and the increased risk of fraud and chargebacks.
- Prepaid Cards: Preloaded with a set amount of funds, prepaid cards function similarly to debit cards but are not linked to a bank account. They offer a convenient payment option for customers without access to traditional banking services.
Understanding the differences between these cards and the associated fees, such as debit card fees and credit card transaction fees, is crucial for businesses. This knowledge helps in managing costs and providing a variety of payment options to customers.
What is Debit Card Processing?
Debit card processing, in a nutshell, allows businesses to accept debit card payments. Attached to the consumer’s checking account, these payments move directly from the user’s bank to the merchant’s. The system that enables this is the payment processing technology and provider.
Let’s say you’re an eCommerce business owner. A customer has selected items they wish to buy from you, they’ve been moved to their shopping cart, and they’re ready to check out through the payment gateway. They click on the checkout button and are presented with payment options on the checkout page. Offering various payment options on the checkout page, including the ability to use their preferred debit cards, enhances customer satisfaction and streamlines the payment process.
The consumer enters their card number and hits confirm, which initiates the card payment process.
Statistically, about half of those card payments through your site will be made with a debit card.
The debit card processing steps differentiate debit cards from credit cards. The processor facilitates the reading of the card information, the approval with the acquirer and card network, and transferring of the transaction amount from the cardholder’s account to the merchant account.
Upon completion, the payment amount is automatically deducted from the consumer’s bank account.
Debit Card vs. Credit Card Payment Processing
On the surface, debit and credit card processing look the same—at least, from the perspective of the merchant.
Both kinds of cards have the card network brands on them (Visa or Mastercard, most commonly).
Both are processed through the same POS system.
Everything the merchant is required to do is the same: ring up the amount, tap (EMF contactless cards or mobile payments), dip (EMV chip), or swipe (Stripe), and wait for the approval.
The difference is in the backend. Credit card companies, along with banks and debit card processors, charge fees for transactions involving both debit and credit cards. These fees vary depending on whether the transaction is processed as a debit or credit. Debit cards pull funds directly from consumers’ bank accounts, while credit cards allow consumers to borrow funds up to a certain limit, which affects the fees charged by these entities.
How Credit Card Processing Works
Merchants are often more familiar with credit card processing, so we will start here to demonstrate the differences more easily.
In the credit card processing operation, there are a variety of players to facilitate the transaction:
- Point-of-sale hardware and software system provider
- Payment processing provider
- Consumer bank
- Card issuer
- Credit card network.
Using the same scenario as above with the eCommerce merchant, let’s say the customer inputs credit card information when they process their transaction through the checkout.
Once their card details are entered, they hit the confirm button, and the payment processing method is initiated.
The details of that transaction go from the online payments POS system through the payment processor and then move to the card network and issuing bank. The card network confirms that the card-issuing bank approves the transaction and has the credit to complete it in order to send the amount to the merchant.
The card issuer gets a percentage for each transaction, known as the interchange fee. This fee is divided among various credit card issuers such as banks and financial entities, depending on the transaction type and merchant category. The approval from the issuer goes back to the network, and then the network sends it back to the payment processor. The result then appears as an “approved” or “declined” message.
This all happens in real-time and takes a matter of seconds.
More players are involved in credit card processing
That said, this process is quite complex, and many players are involved so processing credit cards can be pricey. Everyone takes a little fee for their part.
The card issuer gets a percentage for each transaction.
The credit card networks set the interchange rates, which are applied to every transaction.
And the payment processor will have fees or membership pricing to cover the costs of their service.
Now that we’ve covered the inner workings of credit card processing, let’s compare it to how debit cards are processed.
How Debit Card Processing Works
It looks the same on the customer and merchant end to process debit cards and credit cards. However, on the backend, there are fewer players necessary for the process.
When a customer taps, dips, or swipes their debit card in-store (or types it as an online debit transaction), that information goes from the POS through the payment processor and is sent to the issuing bank.
Notice here that the card network is cut out of the process. The payment processor and issuing bank are in direct contact.
All the payment processor needs to know from the bank is whether there is enough money in the account. The bank confirms or rejects this, and that information goes straight back to the payment processor.
If approved, the money is automatically withdrawn from the customer’s account.
With the elimination of the card network, there is a reduction in the fees to process these debit card transactions.
Debit card payments are also considered less risky. There are fewer issues of fraud and chargebacks. For this reason, processing rates are lower than with credit cards.
Finally, there is just one difference that merchants will notice for some debit card transactions. Some require a PIN.
There are two different types of debit card transactions:
- PIN debit cards: PIN debit cards require the cardholder to enter a PIN number. This is a type of personal identification number that is entered at the point of sale to commence the transaction. This helps to prove that the cardholder is, in fact, the owner of the card. PIN debit transactions are processed through the debit network, which routes the transaction directly to the issuing bank, bypassing the credit card network and often resulting in lower fees.
- Signature debit cards: Signature debit transactions require the cardholder to sign for the purchase. The purpose of this is similar to the PIN. It is an identifier that helps the merchant to confirm that the card’s signature matches the consumer’s signature. This validates the transaction, similar to the process required for a credit card transaction.
While PIN and signature debit are the two main categories of debit card transactions, there are a few related or emerging types that differ slightly in how they’re processed. Here’s a breakdown:
- Contactless (Tap-to-Pay) Debit Transactions: These can be either PIN or signature-based, depending on the cardholder’s settings and the transaction amount. These utilize NFC (Near-Field Communication) technology, and are common with mobile wallets (Apple Pay, Google Pay) and contactless-enabled debit cards. These types of transactions are still processed through either debit or credit card networks depending on the setup, so it’s not a separate processing type per se, but a different interface for initiating the transaction.
- Card-Not-Present (CNP) Debit Transactions: These are generally used for online, over-the-phone, or mail order purchases, and these are typically processed as signature debit through the credit card networks (Visa, Mastercard). Since there’s no PIN entry, fraud risk is higher, and additional verification methods like CVV, address verification, or 3D Secure may be used.
- Prepaid Debit Card Transactions: Function similarly to regular debit cards but draw funds from a preloaded balance rather than a bank account, and they can be processed as PIN debit or signature debit depending on card settings and merchant terminal setup.
Card Network and Payment Processing
Card networks, such as Visa and Mastercard, play a pivotal role in payment processing. These networks facilitate the transfer of funds between the customer’s account and the merchant’s account, ensuring that transactions are completed efficiently.
Payment processors, which can be banks or third-party providers, handle the technical aspects of the transaction. They manage the transfer of funds, assess fees, and ensure compliance with industry standards. Key fees involved in this process include interchange fees and assessment fees, which are charged by the card networks and payment processors.
For businesses accepting debit card payments and credit card payments, understanding how card networks and payment processors work together is essential. This knowledge helps in selecting the right payment processing solutions and managing transaction costs effectively. Payment processors may charge a flat fee or a percentage of the transaction amount, so it’s important to choose a provider that aligns with the business’s financial goals.
How Much are Debit Card Processing Fees?
Debit card processing fees are lower than credit card processing but no less complex. There are still a number of factors that impact the price, and they are still dependent on interchange rates that are set by the card networks.
These will make up the largest portion of your processing fees. However, those rates are lower than with credit cards. The average interchange fee for debit card transactions varies based on merchant category, transaction methods, and other factors. These fees are set by the debit card networks (Visa, Mastercard, etc.).
Costs that go into debit card processing
1. Interchange rates
Interchange surcharges will vary depending on the size of the card-issuing bank.
Regulated banks (those with more than $10 billion in assets) incur a maximum rate for interchange fees which amounts to 0.05% plus 21 cents. The same fees will apply no matter how the payment is accepted. Whether the card is present or not, or if it is validated with a PIN or signature.
Unregulated banks or financial institutions (those with less than $10 billion in assets) have variable interchange rates depending on a wide range of factors:
- The size of the transaction;
- The merchant category code (retail, for example, is different from professional services);
- Card present or not
- PIN or signature.
PIN transactions attract lower percentage fees but higher transaction fees. Signature transactions attract higher percentage fees but lower transaction fees.
In this case, merchants processing larger purchase volumes should prefer PIN, and those with smaller purchases should prefer signatures.
Overall, merchants should prefer regulated banks.
2. Processing services fees
Payment processors are an essential element in the process. Without them, none of the parties can communicate.
Payment processors move the transaction information to the banks and card processing networks and back again. They also facilitate the movement of money into the merchant’s account.
No provider can offer a service for free, but they vary widely in how they charge. There are four pricing structures common among merchant services providers:
- Flat-rate / flat fee processing
- Tiered
- Interchange-plus (which includes a fixed fee added on top of the lowest interchange fee)
- Membership / subscription pricing.
In most cases, providers with interchange-plus or membership pricing are the most financially viable. The others can have inflated prices (flat-rate) or pricing structures that easily get out of control if not monitored intensely (tiered).
Mobile Payment Processors
In recent years, mobile payment processors like Square and Stripe have gained popularity for their small portable processing systems. These processors enable businesses to accept debit card payments and credit card payments using mobile devices such as smartphones or tablets. This flexibility is particularly beneficial for small businesses or those that need to accept payments on-the-go.
Mobile payment processors often offer lower upfront costs compared to traditional payment processors, making them an attractive option for small businesses that are just starting out or companies that have highly seasonal needs. By leveraging mobile payment processors, businesses can provide a convenient and secure payment option for their customers, enhancing the overall shopping experience. While these services are highly flexible, they may not offer the most competitive rates for merchants, especially those who process higher volumes or large dollar transactions.
No matter the direction you choose to go, it’s crucial to ensure that the chosen mobile payment processor is secure and compliant with industry regulations. This includes adhering to standards related to credit card transactions and debit card transactions to protect customer data and avoid penalties.
Security and Compliance
Security and compliance are critical components of payment processing. Businesses that accept debit card payments and credit card payments must adhere to industry regulations, such as the Payment Card Industry Data Security Standard (PCI DSS). This standard mandates the implementation of security measures like encryption and secure storage of payment information to protect customer data.
Compliance with PCI DSS and other regulations related to debit card transactions, credit card transactions, and other types of transactions is essential. Failure to comply can result in fines, penalties, and damage to the business’s reputation. For instance, non-compliance with PCI DSS may lead to dispute fees or other financial penalties.
Ensuring security and compliance not only protects the business from legal and financial repercussions but also builds trust with customers. By prioritizing these aspects, businesses can provide a secure payment environment and maintain a positive reputation in the market.
How Can Small Business Merchants Implement Debit Card Processing in Their Business?
Consumers want to pay with debit cards. For those without credit, the alternative would be to take cash out at the ATM. Naturally, this kills convenience and loses customers.
Setting up debit card processing is simple. With your merchant services provider, you will already have the capability to perform this process.
At Stax, we offer membership pricing, which is ideal for established businesses with consistent sales volumes. Debit card processing fees are consistent, easy to monitor, and cost-effective. Implementation is as simple as setting up payment processing and speaking to the team about how to calculate your fees and savings. Additionally, offering various payment methods, including digital wallets, is crucial to adapt to evolving payment trends and remain competitive.
FAQs about Debit Card Processing
Q: What is Debit Card Processing?
Debit card processing allows businesses to accept debit card payments. The payments move directly from the consumer’s bank to the merchant’s account facilitated by the payment processing technology provider.
Q: How does Debit Card Processing work?
In debit card processing, the consumer enters their card number and initiates the card payment process. The processor facilitates the reading of the card information, the approval with the acquirer and card network, and the transferring of the transaction amount from the cardholder’s account to the merchant account. Upon completion, the payment amount is deducted automatically from the consumer’s bank account.
Q: How does Debit Card Processing differ from Credit Card Processing?
While debit and credit card processing might look similar to a merchant, they differ in the backend process. Debit card processing involves fewer players, skipping the card network. All the payment processor needs to confirm from the bank is whether there is enough money in the account, leading to reduced processing fees.
Q: What types of Debit Card transactions are there?
There are two types of debit card transactions: PIN and Signature. PIN transactions require the cardholder to enter a personal identification number at the point of sale, while Signature transactions ask for the cardholder’s signature to validate the transaction.
Q: How much are Debit Card Processing Fees?
Debit card processing fees are lower than credit card processing fees but no less complex. Fees depend on various factors, including the size of the card-issuing bank, the transaction size, the merchant category, and the validation method (PIN or Signature).
Q: Can Small Business Merchants implement Debit Card Processing in their business?
Yes, they can. Consumers want convenience, and offering debit card payments provides that. With a merchant services provider, businesses have the capacity to perform debit card processing.
