Debit vs Credit Card Processing

As a new business owner, one of the most important decisions you’ll need to make is how you’ll accept payments from customers. In the digital age, the importance of accepting card payments cannot be overstated—many consumers no longer carry cash and there’s an entire generation that’s never written a paper check.

To make an informed decision about the types of payments you want to accept, it’s essential to understand the differences between debit and credit card processing.

What is Card Processing?

Card processing is the method by which businesses accept payments from customers who use debit or credit cards. This process involves multiple steps and several parties, including the merchant (your business), the customer, the issuing bank (the bank that issued the customer’s card), and the acquiring bank (your business’s bank). Check out our full merchant services glossary to learn more about common terminology.

When a customer makes a purchase with a card, the transaction information is sent to the issuing bank for approval. Once approved, the funds are transferred from the issuing bank to the acquiring bank, and then to your business’s bank account.

Debit Card Processing

Debit cards are directly linked to a customer’s bank account. When a customer swipes their debit card to make a purchase from your business, the funds are immediately withdrawn from their checking or savings account to pay for the transaction.

Debit card transactions can be processed in two ways: as a PIN-based (Personal Identification Number) transaction or as a signature-based transaction.

Most modern debit cards can also be processed as “credit” cards without a PIN by running them through the credit function on your card reader. However, the funds are still withdrawn instantly from the customer’s bank account when processed this way.

Overall, debit card processing tends to be quicker and simpler than credit card processing, as the money is withdrawn right away, and you don’t have to worry about waiting for funds to settle.

Cost of Processing Debit Cards

Debit card processing fees are usually a flat or percentage-based fee. They’re typically lower than credit card processing fees because they carry less risk.

This is because the funds are immediately available and do not involve a line of credit.

Credit Card Processing

Unlike debit cards, credit cards are not linked directly to a bank account. Instead, they allow customers to borrow money up to a certain limit to make their purchases. The customer then pays back the credit card company, often with interest, over time.

When a customer swipes their credit card with your business, the bank effectively loans the money for the purchase to the cardholder.

The processing of credit card transactions is more complex than debit processing. Each time a credit card is used, the transaction information is sent to the credit card network (Visa, MasterCard, Discover, American Express), which verifies the availability of funds and sends an authorization code to complete the transaction if approved.

You as the business owner are not paid the funds right away when a customer uses a credit card.

The transaction is instead submitted to the card network, which transfers the funds (minus any processing fees) into your merchant account within 1-3 business days on average. This timeframe is known as the settlement period.

Cost of Processing Credit Cards

Credit card processing fees are usually higher than debit cards. This is because credit card transactions involve more risk, given that the issuing bank is essentially lending money to the customer.

These fees are typically a percentage of the transaction amount, plus a flat fee (ex: 2.9% + $0.10).

The exact cost of credit card processing can vary depending on several factors, including the type of card used (standard, reward, corporate), the way the card is processed (in person, online, over the phone), and your business’s industry and average transaction size.

Key Differences Between Debit and Credit Cards

Now that we’ve outlined the basic processing of debit and credit transactions, let’s look at some of the key differences between the two payment methods:

Processing speed – Debit transactions take funds immediately from the cardholder’s bank account and are deposited in your account more quickly. Credit takes 1-3 days to settle
Fees – Debit fees are typically lower than credit card processing fees per transaction. However, credit cards tend to encourage larger purchases
Fraud liability – For debit transactions, fraud liability rests more heavily on the merchant. With credit cards, card networks bear more responsibility for fraudulent purchases
Customer preferences – Some customers prefer to manage purchases with debit and avoid credit debt. Others like to take advantage of credit card rewards and benefits. Offering both gives customers options
Transaction limits – Debit cards have lower limits on purchase amounts than credit cards, which have high limits intended to encourage spending
Chargebacks – Chargeback rules generally favor the customer in credit card transactions. Debit chargebacks require proof from the cardholder that fraud occurred
Equipment needs – Debit cards require a PIN pad terminal. Credit cards can be processed with simpler swipe or chip readers

At the surface, debit and credit card transactions seem nearly identical.

However, understanding the key differences between the two can help you strategically set prices to maximize profit regardless and make data-driven decisions around the types of payments you accept.

Choosing Between Debit and Credit Card Processing

When deciding whether to accept debit cards, credit cards, or both, there are several factors to consider.

Customer preference: Credit cards are often preferred for larger purchases or online shopping because they offer better fraud protection and rewards programs. Debit cards, on the other hand, are often used for smaller, everyday purchases.

Customer demographics – Younger shoppers tend to prefer debit cards. Older, more affluent clients often go for premium credit cards.

Average transaction amount – If your business sees smaller purchases around $10-$20, debit cards make sense. Higher-value sales do better with credit. Offer both to maximize flexibility.

Your industry/business type – Retail, restaurants, and service businesses should offer debit and credit. Contractors or B2B businesses may lean more towards credit.

Processing costs: As mentioned above, debit card transactions usually cost less to process than credit card transactions. However, the exact costs can vary depending on your payment processor and the specifics of each transaction.

Risk: Credit card transactions carry more risk because they involve a line of credit. However, they also offer more robust fraud protection measures.

Transaction speed – How quickly you need to access funds affects the debit vs. credit decision. Debit offers faster settlement.

In most cases, businesses choose to accept both debit and credit cards to accommodate the preferences of as many customers as possible and streamline the checkout process.

The Role of Merchant Services Providers (MSPs)

Merchant services providers are companies that handle the details of processing card transactions. They provide the technology needed to accept card payments, ensure the security of the transaction data, and communicate between the merchant, the issuing bank, and the acquiring bank.

They charge a fee for their services, which is usually a small percentage of each transaction. Some also charge additional fees, such as monthly or annual fees, setup fees, and fees for other services like chargeback management and fraud prevention.

Choosing a Merchant Services Provider

Once you’ve decided to accept credit and/or debit cards, it’s time to choose a provider to facilitate those payments. This partner will provide the software, hardware, and account management to handle your transactions.

When making your final decisions, be sure to consider:

Pricing structure – Interchange plus pricing is more transparent than tiered or flat-rate structures. Make sure you understand your processor’s fees
Equipment provided – Processors offer POS systems, terminals, mobile card readers and other hardware. Review what’s included and any lease fees
Integration – Look for a processor that easily integrates with your POS system, accounting software, online store, and other business platforms
Reporting tools – Robust reporting allows you to track sales, monitor inventory, flag suspicious transactions, and use data to grow your business
Customer support – Find a processor with 24/7 customer support in case any payment issues arise
Data security – Make sure your processor meets industry security standards and protects your customers’ payment data

Check out our comparison table to learn more about our favorite merchant services providers. There, you’ll be able to compare pricing structure, reporting tools, customer support, and more.

You’ll also be able to read our full review of any provider you’re interested in.

Conclusion

Understanding the differences between debit and credit card processing is essential for new business owners. Although the fees associated with credit card transactions are typically higher, accepting both forms of payment can increase sales by providing customers with more payment options.

Remember, the choice between debit and credit card processing doesn’t have to be an either-or decision. The best strategy for your business will depend on your customers’ preferences, the nature of your products or services, and your comfort level with the associated costs and risks.

By weighing these factors carefully, you can make a decision that supports your business’s growth and success.