What Is The Difference Between Debit Cards and Credit Cards?

For the merchant, it boils down to two things:

1. The cards are processed differently.
2. They have different fees.

Based on just these two points, the winner would be debit cards, because the overall fee for a simple, debit card transaction is less than the processing fees for a credit card transaction. In 2011, as part of an economic regulatory reform that affects almost every one of the nation’s financial services industries, congress passed the Durbin Amendment, limiting the maximum amount of interchange fee an issuing bank can charge a merchants for processing a debit card transaction. Authored by Illinois Senator Dick Durbin to resolve the long-time conflict between card issuers and merchants over the high cost of credit card interchange fees, this new regulation reduces the original fee of 44 cents per debit card transaction to a maximum interchange fee for a debit card transaction of 21 cents.

What is the difference between debit cards and credit cards? For example, let’s say your rate to process credit card transactions is 2.0%. Yes, that’s high, but hey, for our example, it’s easier to do the math! If your customer makes a $100 purchase and pays for it by credit card, you’ll pay your processing company $2.00 in interchange and transaction fees. But if your customer pays with a debit card, you pay only 44 cents per transaction. It may seem this only amounts to a small savings on each sale. But multiply that by hundreds, or thousands of dollars in sales, and you can see why merchants prefer debit cards to credit cards. However, nothing is ever quite that simple, is it, so let’s move on.

How To Process a Debit Card To Get The Best Rates

There are two basic ways to use a debit card:

1. Online Debit or PIN Debit:
Each bank that issues debit cards is associated with one or more payment networks. When a customer uses a debit card to pay for a purchase, he selects debit on the payment terminal, swipes his card and enters his PIN (Personal Identification Number) on a separate, securely encrypted PIN pad. This information is transmitted through a secure payment network directly to your customer’s bank. The PIN provided by your customer acts to authorize the transaction. If there is enough money to cover the purchase amount in the customer’s account, the transaction is approved. This process only takes a few seconds and the transaction is complete. This debit transaction has a single transaction charge and the lowest fraud risk.

2. Offline Debit or Signature Debit:
Debit cards that display a credit card brand logo, like MasterCard or Visa, can also be processed like a credit card. When no PIN pad is available, or for on-line purchases, the debit card transaction is routed through the card brand’s network, but the funds are still deducted from the cardholder’s checking or savings account. With a debit card-present transaction, the card is verified from the magnetic stripe on the card and your customer signs a receipt the same way he would if he used a credit card. Online transactions are verified against the address from the billing information.

What’s The Downside to Processing Online Debit Transactions?

Remember that secure encrypted PIN pad we mentioned earlier? Every payment terminal must have a PIN pad to process online or PIN debit transactions. Not only will you have the initial cost of the pads, but each processor uses a unique encryption. If they update their security encryption, all your pads will have to be updated as well. And if you change processors, your PIN pads may have to be replaced. For a large retail operation, this cost could run into the thousands. But with more and more consumers choosing to use their debit cards instead of paying interest on credit cards, most retailers will agree that the savings and security far outweighs any equipment cost.

So maybe next time you ask your customer, “Will that be credit or debit”, you should really ask “Do you wish to pay for your purchase with a credit card, or with your debit card as an online transaction or with your debit card as an offline transaction?” Hmmm, that’s a mouthful, but think of the money you could save if you asked. There is quite a difference between debit cards and credit cards.