Debit card processing is the fulcrum upon which today’s electronic payment system spins because this is how a customer can make purchases or retrieve cash directly against his or her accounts.
While a debit card transaction occurs, a series of secure, interlinked steps ensures the payment goes through.
In this blog we will take a closer look at debit card processing, how such a process works, and the major pieces involved in processing firms, from fees to times of transmittal.
What is Debit Card Processing?
Debit card processing is a system that enables transactions made with debit cards. It allows a cardholder to pay for goods or services or take out cash using funds directly linked to his bank account.
It functions using an elaborate network of payment processors, banks, and lines of communication, all of which verify and validate the transactions.
Unlike credit cards, in which money is borrowed and paid back at a later time, debit card transactions are immediate and drawn directly from the cardholder’s bank account.
This immediacy makes the use of debit cards appeal to many consumers for daily purchases since the majority of consumers do not build up debt on these types of cards.
How Does Debit Card Processing Work?
In general, there are a few steps concerned with the process of any given debit card transaction. These are:
- Transaction Origination
The process starts at a point when a consumer swipes, inserts, or taps his/her debit card through any given payment terminal. While making some purchases online, he/she types in the relevant details of the card.
- Data Transmission
In turn, it sends the card information to a payment processor. This processor serves as a liaison between the acquiring bank, which is the merchant’s bank, and the consumer’s bank, also known as the issuing bank.
- Authorization Request
The authorization request is transferred by the payment processor to the consumer’s bank, also called the issuing bank. This request verifies whether sufficient funds are available with the consumer’s bank account for the transaction amount.
- Verification and Approval
The card-issuing bank is also sent for verification, which then checks the status of the account to check if the PIN or CVC provided is appropriate. If funds are available and everything seems fine, the bank approves the transaction.
- Transaction Settlement
In case of approval, the amount is subtracted from the consumer’s bank account and transferred to the merchant’s account. The process, from an in-store purchase, might take merely a few seconds, though online it might take a bit more time.
- Settlement
The final settlement that occurs after authorization is the movement of funds into the merchant’s account. These settlements are facilitated by debit card processing companies, which handle the clearing and settlement of all transactions to ensure their accuracy.
Read about: What is a Merchant Acquirer? Know Everything About.
Key Players in Debit Card Processing
The processing of a debit card transaction engages several players which come together and ensure a seamless transaction experience. The following are key players that come into play in the process:
Issuing Bank: This would be the bank issuing the debit card to the consumer.
Acquiring Bank: This bank maintains the account of the merchant and receives the value of the transaction.
Payment Processor: This intermediary facilitates communication between the payment-receiving and issuing banks.
Debit Card Processing Companies: Companies operating networks for the authorization and clearing of settlements include Visa, Mastercard, and Discover.
The processing companies are very relevant as they ensure that the security of a transaction is maintained at high speed and in confirmation with regulatory requirements.
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Debit Card Processing Fees
With debit card processing, while the benefits of convenience exist, there exist several associated fees. The fees will depend, among other things, on the underlying transaction amount, the payment processor, and the merchant’s agreement with their bank. Other common fees include:
- Interchange Fees: These are paid by the merchant’s bank to the issuing bank as a percentage of the transaction amount.
- Processing Fees: It is charged by a debit card processing company for using its network.
- Flat Transaction Fees: Some processors use per-transaction fees, which work out better for high-volume clients.
These are fees that go to cover infrastructural costs of the processing of a debit card and the security thereof, at different rates, depending on whether or not the transaction was PIN-based-involving a PIN-or signature-based.
Read about: Interchange Fees Explained: A Simple Guide for Business
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Types of Debit Card Transactions: PIN-Based vs. Signature-Based
The major types of debit card transactions include the following.
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PIN-Based Transactions
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- The cardholder must enter his or her PIN to verify the transaction.
- Mostly processed via an EFT network.
- Fees on PIN-based transactions are invariably much lower since they reduce fraud.
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Signature-Based Transactions
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- The cardholder signs for the transaction. Often, the Visa or Mastercard networks process these.
- Common for online or phone purchases in which no PIN entry is possible.
- Generally involves higher processing fees because of the higher risk of fraud.
Debit Card Processing Time
Debit card transactions take only a few seconds to complete. However, settlement takes some time to complete, which varies as follows:
- Instant Transaction: In case the merchant has processed an in-person transaction, it may be instantaneous. This means a merchant will instantly receive the authorization in just a few seconds.
- Batch Settlement: Some of the transactions are settled in batches at the end of the business day, which means the money might not appear immediately in the merchant’s account.
It could also vary depending on whether it was in peak hours or across different time zones.
Benefits of Debit Card Processing
These are the advantages of debit card processing for merchants and consumers alike. The advantages include the following:
- Instant payment: The funds are transferred instantly, hence reducing the credit risk for the merchants.
- Lower Fees: Generally, debit card transaction processing will cost less, thus reflecting lower fees when compared with credit card payments.
- Increased Security: The verification through PIN and the payment gateways through secure modes reduces fraudulent cases.
- Consumer Convenience: Since debit cardholders do not accrue any debt or interest charges, debit is a preferable option when it comes to everyday spending.
Choosing Debit Card Processing Companies
Selection of an ideal debit card processing company is of paramount importance to the merchants because this aspect ensures a reduction in transaction fees, and enhances speed, and security.
Some of the key parameters in choosing an appropriate debit card processing service provider include:
- Competitors’ Processing Fees: The merchant requires a competitive rate that suits his volume and frequency of transactions.
- Security of Payments: Advanced encryption, tokenization, and fraud prevention tools are some of the key things to be put in place to protect sensitive cardholder data.
- Processing Time: The processor should ensure that the transactions are processed as quickly and efficiently as possible to derive customers’ satisfaction.
- Customer Support: Available Customer support can ensure that any issues are dealt with as soon as possible to minimize downtown.
Some popular Debit card processing companies include PayPal, Square, and Stripe, among other electronic payment processing systems enabling easy debit transactions in companies of all sizes.
Debit Card Processing Issues
Anyway, the processing of debit cards may not be so favorable for merchants as it carries some disadvantages for them:
- Fraud Risks: The processing of a fraudulent transaction or loss of information about a card may lead to chargebacks and loss of revenue.
- Processing Fees: These can be transactional and, for heavy volume businesses, could become quite expensive, to the point of affecting profitability.
- Security and Compliance: Compliances towards standards like PCI DSS will avoid penalties.
Future of Debit Card Processing
New technologies are continuously emerging in the debit card processing industry, especially in contactless and mobile. Most of the companies offering debit card processing services also tend to dwell upon the following:
- Contactless Payments: NFC-enabled debit cards along with mobile wallets make debit card transactions faster and easier.
- Increased Security: Many, if not all, are implementing biometric verification, tokenization, and AI-powered fraud detection.
- Global Reach: With the expansion of the processing networks around the world, consumers can make use of their debit cards for international transactions, and this expands the reach of businesses.
This means that debit card processing will continue to get even easier, faster, and more secure due to increased electronic payment processing growth along with technological innovation.
Conclusion
From enabling fast and secure transactions, debit card processing, although seemingly straightforward in approach, integrated into today’s type of payment system is brought about by a sophisticated network that includes banks, processors, and debit card processing companies.
It is in this regard that understanding how debit card processing works might allow businesses to optimize their payment system to improve their customers’ satisfaction on the grounds of fees, time taken in processing, and security features.
As the world moves steadily forward with cashless transactions, debit card processing remains a strong influence on how we all make our payments.
With the right merchant processing company and putting in place secure practices, businesses are well-placed to maximize such benefits as can come from debit transactions without added costs and risks.
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