What Is Debit Card Processing, and How Much are Debit Card Processing Fees?

Credit cards are abundant in the United States. According to a 2022 study cited by CNBC, the average American has four of them. Credit cards are very much a part of typical life in the U.S. but believe it or not, the debit card remains the most popular.

The Federal Reserve’s annual “Diary of Consumer Payment Choice” in October 2021 found that debit cards are the most used payment method, making up 28 percent of total payments among the consumers studied. Credit cards, comparatively, made up 27 percent.

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.

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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…

The consumer enters their card number and hits confirm, which initiatives 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.

How Credit Card Processing Works

Credit Card Processing

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.

This 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 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

Credit Card Processing

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.
  • 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.

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.

These will make up the largest portion of your processing fees. However, those rates are lower than with credit cards. 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:

  1. Flat-rate / flat fee processing
  2. Tiered
  3. Interchange-plus
  4. 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).

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.

Contact us today to learn more.

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