How Debit Card Processing Works, for Small Businesses

Depending on which study you look at, debit cards are either the number one or number two preferred payment method of American consumers. So, as a small business, you’ll want to be able to take debit card payments. Fortunately, this is easy to set up. Most, if not all, payment processors who can help you do credit card processing can also help you do debit card processing.

This article takes you through the basic mechanics of how debit card processing works. Once you understand the process, you’ll have a better understanding of all the charges on your monthly statement. Even better, when issues come up, you’ll have a good idea on why you’re being charged extra. And, when disputes inevitably come along, you can deal with them better.

In the very near future, we’ll recommend a few good payment processors to you. That’s where we’ll cover the various pricing structures for debit card processing as well as for credit card processing.

For now, let’s focus on the mechanics of debit card processing.

The Major Difference Between Debit Cards and Credit Cards

Most people already intuitively understand the biggest difference between a debit card and a credit card. When you use a debit card, your bank takes the money out of your bank account right away to pay for a purchase. When you use a credit card, you get to pay all or a portion of your credit card charges at the end of the statement cycle.

But, for a merchant, there are other differences between taking a credit card and taking a debit card. The biggest difference is that a debit card payment usually costs less to process. As well, although a cardholder can initiate a chargeback for a debit card charge, they have less time to do so.

Debit Cards Usually Cost Less to Process

It usually costs a merchant less to process a debit card charge than a credit card charge. It also usually costs less to process a debit card refund too.

There are two ways a cardholder can charge a debit card: the PIN method or the “credit” method. (We’ll go into the mechanics of each later in this article). The PIN method requires a physical PIN pad, so you’d have to invest in the hardware. But, if you have a lot of debit card transactions, then the PIN method can save you a lot on processing costs. If you don’t have a lot of debit cards to process, then the “credit” method will save you more money. Either way, both debit card processing methods turn out to be cheaper than processing a credit card charge.

A law called the Durbin amendment also governs how much a bank can charge for processing debit cards. If the bank that issued the debit card has $10B or more in assets, then they can’t change more than the cap set by the Durbin Amendment.

Debit Card Payments Tend to Have Less Chargebacks

Chargebacks are less frequent with a debit card. Mostly, this is because of consumer protection laws governing debit card chargebacks.

A consumer has 2 days to file a chargeback after they discover an unauthorized debit card charge. Even then, they can still be liable for up to $50. If a consumer files for a chargeback within 60 days of the loss, then the consumer may be liable for up to $500. After 60 days, the consumer cannot file a chargeback.

In contrast, a consumer has between 60-120 days to file a credit card chargeback.

What is PIN Debit?

A PIN debit, as the name suggests, requires the cardholder to enter a PIN before authorizing a debit card charge. Since you have to have a PIN pad to punch in the PIN, PIN debits are possible only for in-person purchases.

PIN debits are more secure than “credit path” debits (see below). The PIN is an added layer of security to prove you are indeed you. After all, only you and your bank know this PIN.

When you run a PIN debit, your payment processor routes the card information through a specialized debit card computer network. The information ultimately ends up at the bank where you have the bank account associated with your debit card.

If there’s enough money in the bank account, then your bank debits the account right away. The bank then sends the money to the merchant to pay for the purchase.

Note that the money will land in your merchant account, if you have one. If you use a third-party processor to process your debit cards, you’ll see the money in your account at the third-party processor.

What is Credit or Signature Debit?

Sometimes—and especially for online purchases—there is no PIN pad for a debit card transaction. In this case, your payment processor runs the card through a credit card network such as Visa’s, Mastercard’s, or Discover’s.

Hence, this workflow is sometimes called a “credit” debit. For our website, we’ll call this a credit path debit, just to keep the idea clear. This is not an industry term. It’s an internal term we’re going to use here to keep our explanations clear.

Originally, a credit path debit requires a signature much like credit card transactions sometimes still require a signature. Often, though, the signature is waived.

As with a PIN debit, a credit path debit also pulls money from a cardholder’s bank account right away. But a credit path debit is less secure and more prone to fraud because there’s no double verification through a PIN.

The Debit Card Processing Workflow

A typical debit card processing workflow is similar to a typical credit card processing workflow. This is especially true for credit path debit charges.

The process starts when a person takes out a debit card to pay for a purchase. So you can easily see the difference, below is a modified credit card processing workflow. We’ve put the debit card-specific steps in italics.

1. Person swipes, taps, or dips the card into the card terminal or enters the card information online.
2. If using the PIN method, person inputs the PIN.
3. The terminal reads the card information and the PIN (if used) and sends the information and the purchase amount to the payment processor.
4. The payment processor sends the information to the correct card network as a credit path debit. If a PIN is used, then the payment processor sends the information directly to the issuing bank through a specialized debit card computer network.
5. The card network performs various checks for fraud. If the information is encrypted (usually via tokenization), the card network decrypts the information and sends it securely to the issuing bank.
6. The issuing bank checks the cardholder’s account. If the account has enough money for the debit charge, the bank clears the purchase and debits the account.
7. The clearance is sent to the acquiring bank and the payment processor. The processor forwards the clearance message to the merchant.
8. The cardholder walks away with the purchase.
9. The acquiring bank fronts the purchase by depositing the charged amount into the merchant account.
10. If there is a reserve account, money might be moved to the reserve account to ensure there is enough funds in that account.
11. The payment processor takes out its payment processing fees.
12. The merchant takes out the rest of the fees and deposits them into their own bank account.
13. If there is a return or chargeback up to 60 days after the debit card transaction, the chargeback fees plus the original charged amount are taken out of the merchant account or, if one is set up, the reserve account. Depending on your processor, the processing fees may or may not be refunded to you.

Every Small Merchant Should Understand the Mechanics of Debit Card Processing

In our view, every small business owner should know a little about debit card processing. This way, if anything goes wrong, you know where to start to ask questions.

Fortunately, debit card processing is quite similar to credit card processing. So, if you’ve learned one, it’s easy to learn the other. Or, if you’re short on time, bookmark this article and check back when you need to. Ask us questions on social media. We’re here to help.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.