1. What is debit card processing?
2. How does debit card processing work?
3. Basics of debit card online processing
4. The difference in debit card processing and credit card processing
5. Advantage of debit card processing over ACH payment

Modern consumers rarely keep actual, physical cash on hand these days. Instead, with convenience and speed in mind, most people pay in person and online with a card. And though credit cards are a popular payment method, many people choose to use debit cards to make payments. Many businesses today need to know how to understand and implement both debit and credit card payment processing.

Processing debit cards is something every business has to do, and likely does do on a daily basis. 28% of all payments made are done with a debit card. Though debit card processing may seem like common sense, there is actually some amount of nuance and complexity to accepting debit cards. We’ve created this guide to help business owners better understand just what goes into the process and how to best navigate.

We’ll dive into what debit card processing is and how debit card payment processing works, exploring the basics of debit card online processing–including debit card processing time and the fees often associated with debit card processing–showing the differences between debit and credit processing, and finally outlining the advantages of debit card processing over ACH. 

We will start with exploring the bigger picture of just what debit card processing is.

What is debit card processing?

Debit card processing is the series of steps that occur between a customer using their debit card to make a payment, and the payment actually being processed and deposited into the merchant’s bank account. The actual, physical debit card looks and acts no differently than a credit card, but where a credit card pulls funds from a credit line, a debit card draws payment from a customer’s existing bank account. Another way to look at it is the behind-the-scenes actions that take place for a merchant to accept debit cards as a payment method.

To accept debit cards–and credit cards–a business must first select a payment processor. This payment processor will be the behind-the-curtain software that allows you to process debit card payments. They’ll also provide all of the needed tools for either in-person debit card processing–point-of-system set-ups, etc.–or, for debit card online processing, a payment gateway.

There are, for the most part, two kinds of payment processors:

• Merchant account providers
  • Companies that provide super competitive pricing but have a more involved sign up process. These are companies like Payment Depot or Payline Data. 
• Payment service providers (PSPs)
  • Companies like Paypal or Square that provide fast, easy set-up but charge flat debit card processing fees that can add up in the long run.

At the end of the day, your payment processor should reflect the type of business you run.

How does debit card processing work?

When a customer swipes their debit card for payment, it seemingly instantaneously draws money out of their bank account to pay for whatever it is they’ve purchased. And though this is true, that debit card payment processing time is fast and efficient, there are many steps taking place just out of sight. Those steps look something like this:

1. The customer uses their debit card to make a payment.
2. The point-of-sale system used by the merchant takes the debit card information and sends it to one of the debit card processing companies (Visa, Mastercard, etc.) the merchant is using.
3. The processing company ensures all of the debit card information is valid and eliminates any possibility of fraud.
4. The processing company then takes the validated data and sends it along to the bank that issued the customer’s credit card.
5. The customer’s bank checks to make sure that the customer has enough money to actually make whatever payment they’re attempting to make, and then makes a decision to accept or reject the payment.

If approved, the merchant will finish their transaction with the customer and then whichever one of the debit card processing companies being used will then be responsible for the authorization, clearance and settlement of the transaction. Meaning, the debit card company will have to verify the amount of funds owed and then deposit that money into the merchant account. 

Basics of debit card online processing

One of the many advantages of paying with a debit card is that you can use it to pay for goods and services online. Debit card online payment processing has its own series of similar but slightly different steps due to the fact that debit card payment processing online involves slightly different tools to ensure it works properly. 

Instead of a customer interacting with a merchant in person and swiping, tapping or dipping their debit card to make a payment, they interact with a debit card processing payment API within a merchant’s website. The debit card information is entered, passed along from a payment portal to one of the many debit card processing companies out there before being verified and passed along to the customer’s bank for final approval. From that point, much like in in-person debit card transactions, the customer walks away with their purchase and their bank transfers money from their bank account to the merchant’s account. 

DEBIT CARD PROCESSING TIME

Debit card processing time is usually extremely fast. It takes seconds for the initial debit card payment to go from the merchant through the debit card processor and then from there to the issuing bank before being approved. After this point, fund transfer from the issuing bank to the merchant account usually happens within 24 hours.

DEBIT CARD PROCESSING FEES

Processing debit cards comes with associated fees. These debit card payment processing fees can vary in cost based on a handful of factors. The most common fees, and oftentimes the largest, are interchange fees. 

Interchange fees are what payment processing companies charge for debit and credit card payment processing transactions. These fees are based on the size and type of customer’s issuing bank. Banks can be regulated (i.e. a bank with over $10 billion in assets) or unregulated (a bank with under $10 billion in assets) and each come with different fees. Regulated banks have a set fee structure that can’t exceed .05% plus 21 cents per transaction.

Unregulated banks have a much more complex interchange fee structure that varies based on a host of factors like the transaction size, the industry of the business (sometimes called a merchant category code) and others. 

Regardless of whether or not the bank is regulated or unregulated, the average interchange fee reported by the U.S. Federal Reserve is 31 cents. 

A business will also have to contend with payment processor markup. This is a debit card processing fee that’s added by the payment processor as a cost of doing business with them. These can fall into one of three categories:

• Flat-rate

  • A one time cost that encompasses all of your payments not matter how many or how much

• Tiered

  • A cost structure that varies based on the number of transactions you make

• Interchange-plus

  • Debit card processing fees tallied based on each individual transaction

The difference in debit card processing and credit card processing

The difference in debit card processing and credit card processing is vast. The two processes are almost entirely different, with credit card processing involving more steps. 

When you process a credit card the payment has to go to a payment processor before it goes to the credit card company and then to the issuing bank. With a debit card, you skip this step entirely and the payment information is sent directly to the debit card company and then to the issuing bank. This occurs because when a customer uses a credit card, they aren’t just pulling from their bank account, they are pulling from a line of credit so the payment processor is needed to pay the merchant, before collecting the funds from the customer at a later date.

And because of this extra step, processing credit cards is a more expensive process that involves more fees added on to payments from the payment processor. On the other hand, debit cards are considered to be less likely to be victims of fraud, so the fees associated with them are typically less.

Advantage of debit card processing over ACH payment

Debit cards have many advantages over ACH payment. A few of these benefits include:

• Faster payment processing time

  • ACH payments are much faster than traditional payment methods like checks, but much slower than processing debit cards. ACH transactions can take anywhere from 4 to 10 days while debit cards, because they’re processed using a real time system, are quickly processed with funds being placed into the merchant account in less than 48 hours.

• Improved cash flow

  • Faster processing means faster access to working capital and that means businesses using debit cards over ACH payments will be able to have a better ability to maintain and manage a healthy cash flow.

• Less returned transactions

  • Debit cards are immediately approved if the customer has enough money in their bank accounts. This means a customer isn’t going to make a payment and then find out days later that the payment has been rejected. Which, because of the lengthy time it takes for an ACH payment to be approved, can be issue when paying using ACH.

• Customer appeal

  • Simply put: customers use debit cards more than almost any other payment method. By offering a preferred payment method, businesses are providing a benefit to existing and potential customers. Beyond that, debit cards allow for cashback, another popular feature with customers. ACH payments are less commonly used and do not offer cashback or other features debit cards do.

Debit card processing is a massively popular payment method with customers today. If a business wants to maintain a healthy customer base and an even healthier cash flow, they need to have the capabilities of processing debit cards.