How Debit Card Processing Works

​Introduction 

With mobile payments on the rise and the concept of mobile wallets increasing in popularity, it's becoming clear that the mobile wallet will eventually replace cash and cards. But until then, retailers and merchants still need to find effective and affordable ways to accept these forms of payments. 

A debit card gives the cardholder electronic access to their bank account at the financial institution. It can be used instead of cash to make purchases. A nominal debit card processing fee is charged by debit card processors as a way of conducting business.

Companies use debit card processing services as a way of steering clear of all the hassle that comes with handling paper checks. Read on to find out everything you need to know about how debit card processing works.

The Real Cost of Debit Card Transactions

A study conducted by the Federal Reserve found that 40 percent of consumer transaction activities involve cash, with debit card transactions making up 17 percent and credit card transactions only accounting for 17 percent of consumer transaction activity.

Different payment methods are popular with different generations and income levels. These are factors that every merchant should be aware of. Millenials and households that make less than $25,000 each year tend to favor using cash over other types of payment. On the other hand, senior citizens prefer credit cards and checks. However, you will be unlikely to find anyone under 35 who likes to use checks.

The same research done by the Federal Reserve also shows that debit cards are the payment method that is preferred overall, with cash being the most popular backup. Most people tend to use their debit cards to handle daily expenses which is pretty much the same way that they use cash.

This is important for merchants to understand as it means that credit and debit cards aren't interchangeable from their perspective. Credit card transactions assess different rates than debit card transactions which means that even though you have a great rate on credit transactions, you may be paying too much for debit transactions.

The cost of processing debit cards is usually less than the fee for processing credit cards. There's a common misconception among a lot of business owners that debit cards don't cost anything to process, or that the debit card processors only charge a flat fee.

This is because some processing companies only advertise the fact that they offer a 0 percent fee for debit transactions but fail to mention the additional costs of wholesale processing.

So what’s the true story?

Typically, processing debit cards is less expensive than processing credit cards. A processor may only charge their markup as a flat fee. But, debit cards are subject to PIN debit network fees or interchange fees.

Within the debit cards category, the least expensive authorization method depends on some factors that include card type (whether it's regulated or not) and transaction size. Regulated cards are debit cards that are issued by a bank with more than $10 billion in assets and these were capped by the Durbin Amendment.

They cost about the same whether the transaction is authorized by signature or PIN. The costs for cards issued by smaller banks, however, depends on the authorization method with PIN debit card transactions being the cheaper option for larger purchase amounts. For smaller purchases, signature debit card transactions are less expensive.

Authorization methods affect costs because of how the transactions are routed. It makes a difference whether the transaction is processed on a credit network (for signatures) or on a debit network (for PINs). Every purchase incurs a transaction fee and a percentage fee.

Signature debit has lower transaction fees but higher percentage fees while PIN debit is the opposite. The PIN debit fees vary according to the network. The signature debit fee follows the interchange schedule of the card brand.

This means, for example, that a Visa debit card that is authorized with a signature will be charged based on Visa's debit interchange schedule and not the PIN debit fee schedule.

Understanding How Debit Card Processing Works

When customers swipe their cards through your terminals, your point-of-sale system takes the information from the card's magnetic strip and transmits it to the card processing network (whether it's MasterCard, Visa, Pulse, Star Network, Maestro, or Interlink).

After the correct formatting of the data is verified and the fraud checks are conducted, the network then transmits the information to the bank which issued the debit card.

The card issuer ensures that the debit card hasn't been reported as stolen or lost. They also confirm that there are enough funds available in the account and then tell the merchant if the transaction was approved. The network calculates what is owed to you (this often happens on the same day) and then the transaction is settled and you get the money in your account.

Debit cards have their own unique set of protocols that govern payments. They have no stipulations for minimum payments. However, businesses can require that customers make purchases of $10 and above when using credit cards. When using debit cards, even if customers choose 'credit' at the point-of-sale terminal, payments can't be surcharged. Only payments made with credit cards are surcharged.

Understanding the Interchange-Plus Model Signature vs. PIN Debit Transactions

As previously stated, debit cards are gaining steam among today's consumers. This means that as a business owner you have to understand how debit card fees work if you want to reap the benefits of debit transactions in the coming years.

Yes, the debit transaction fees are way smaller than credit card processing fees, but they also add up over time and why would you want to pay more than you need to anyway? Basically, there are two debit transaction types that we will focus on here: Signature Debit and PIN Debit.

Signature Debit Transactions 

These occur when a customer swipes their debit card at a credit card terminal after which they sign a printed receipt (or use a device for digital signature capture) to verify the transaction. Such transactions are commonly initiated when customers swipe their debit cards through terminals and then choose to process the cards as 'credit'.

PIN Debit Transactions

These happen when customers swipe their debit cards through credit card terminals and then enter the PIN (personal identification number) on the keypad to verify the transaction. These kinds of transactions are typically initiated when customers choose to run their swiped card as 'debit'.

The main difference between a PIN debit transaction and a Signature debit transaction lies in the processing network utilized by each one. Pin debit payments are routed through ATM/banking networks such as STAR, SHAZAM, NYCE, or ACCEL while Signature debit transactions are processed via credit card networks such as MasterCard or Visa.

Because of the networks they use, PIN debit payments are usually called 'online' payments. The banking network corresponds to the kind of account (a banking account) that is attached to the card. Conversely, Signature debit payments are usually referred to as 'offline'.

PIN and Signature Debit Transactions Incur Interchange Fees

Just like with credit card transactions, the processing network charges a fee per transaction to process each payment. Baseline costs vary depending on the size of the bank that issued the card, the type of your business, and the method of capture used.

In addition to the basic fees, you will also have to pay the provider markup charged by your merchant account provider, same as you would have to with credit card transactions. The provider markup varies for those on tiered pricing but remains fixed for those on Interchange-plus pricing.

How to save money on debit card payments

Most debit cards don't have any fees whatsoever other than penalties for over-drawing the account (unlike credit cards where you get charged for late payments, over-limit, and membership fees). A lot of consumers feel that making purchases with debit cards is more like using real money which leads to increased fiscal responsibility. Debit cards are also the safer route for impulsive spenders to take.

But how can you save money on debit payments?

Now that you know that the most cost-effective option for debit payments for your business varies depending on a lot of factors, there's no one solution that is the best overall for all merchants but there are a few things that you can do to get the lowest swipe rates that are available to you:

1. Get Interchange-Plus Pricing

A lot of merchant account providers claim that they can help you save money with a flat rate for all debit transactions. While this may be true in some cases, if you want to get prices on debit swipes that are the most transparent and competitive, you must have a flat markup over Interchange for individual transactions instead of a blanket rate covering all card swipes.

This is of particular importance concerning regulated debit transactions. If, for example, a provider gives you a flat rate of, say, 0.5% for all debit payments, it may sound like a good deal. You will be saving on a lot of your exempt transactions, after all. Exempt transactions can often be in excess of 1% in basic interchange fees.

But, the 0.5% rate from the processor would potentially be a massive markup over regulated debit cards as these process at 0.05% plus $0.21. Using this model you will almost never benefit when you accept regulated debit cards, and consumers use these more commonly than exempt debit cards. 

2. Your Merchant Category Code

Remember that your type of business (as expressed by your provider) is one of the important factors that influence the cost of your debit payment fees so it's important to know your merchant category code. This will help you understand which rates apply to your debit transactions.

Your provider will be able to supply you with all the information you need with regards to this. 

3. Compare your Category Code Interchange Rates Across All Networks

Interchange-plus pricing is important here. If you negotiated for a flat fee above the Interchange on debit transactions, you will be able to save money when you process debit transactions at the lowest Interchange rates possible. The Interchange rates for regulated debit transactions (for both signature and PIN debit) are fixed at 0.05% plus $0.21, but PIN debit transactions have a switch fee added to each transaction. 

This means that PIN will always be slightly more expensive on regulated debit transactions. So, as a general rule of thumb, you will save more on regulated debit transactions when you process them as signature rather than PIN debit. 

On the other hand, exempt cards have varying Interchange rates which means that you will have to compare between PIN and signature networks in order to determine which one has the best Interchange rates for exempt cards. 

4. Business Rules For Accepting Debit Payments

After determining the networks that offer the best Interchange rates for your type of business, the last step is for you to ensure that your employees know everything they need to about processing cards at the lowest possible rates. It may be helpful when swiping debit cards, to think of each transaction as either a 'large bank' debit card or 'small bank' debit card. 

Cards that have been clearly issued by regulated banks should be processed as a signature debit transaction, but with cards from small, exempt banks, you should know beforehand the network that will give your business the best rates for exempt cards so that you can process the debit payment accordingly. 

Debit Card Processing for Check Dominated Industries 

At GAM Payments, a lot of businesses in check-dominated industries such as management companies, vacation rental owners, inns and B&Bs, and non-profits trust us to handle their online debit card processing. 

Our company has years of experience as payment industry leaders and we have developed debit payment processing solutions with a host of powerful features to help your business reconcile as well as gain insights from analytics and handling industry-specific data. All the solutions we provide are focused on security and reliability. 

In Conclusion

In this age where most consumers favor debit transactions over credit, you can't overlook the necessity of betting a fair rate for all your debit transactions. Whether you rely on mobile processing or the traditional merchant account, or even some combination of the two, we can provide you with workable solutions. 

At GAM Payments, we can also help you understand the method of processing debit (PIN or Signature) which will save your business the most money. Get in touch with us today to speak to us about how debit card processing works and to find the solution that will work best for your both your customers and your company.