Guide: Credit Vs Debit Card Online Payment Processing

Most people know the difference between a credit card and a debit card. A layman might ask- what is credit card? How is it different from a debit card?

A credit card is offered by an issuer/bank and allows you to borrow money. Credit card transactions are deducted from the credit limit of the cardholder. On the other hand, a debit card is directly attached to the user’s bank account. Therefore, debit card transactions are deducted from the cardholder’s bank account. Debit cards and credit cards can also differ based on payment processing. Read on to know more about debit/credit card online payment processing.

How are credit/debit card online payments processed?

Before knowing the dissimilarities between payment processing, let us know the general payment processing system for debit/credit cards. Credit/debit card payment processing starts with the authorisation step. The steps in the authorisation of debit/credit card payments are as follows:

  • The cardholder enters the card details on a secure payment gateway for online payment. People also swipe debit/credit cards in POS machines to make payments. Individuals use NFC (Near-Field Communication), tap-to-pay, and other contactless methods to make payments via debit/credit cards.
  • Merchants or online vendors are partnered with payment processors. A payment processor issues an authorisation request to the respective card company or bank.
  • After verification of a few details like security number and shipping address, the issuer confirms the payment. Alternatively, the issuer can choose to decline the card transaction and raise a flag.
  • The authorisation result is conveyed to the merchant by the payment processor.After the authorisation part, next comes the settlement part. Online payments are transferred to the merchant’s bank account during the settlement process. Steps in the settlement process for online payments are as follows:
    • Merchants group the authorised transactions and forward them to the payment processor.
    • The payment processor gets in touch with the card companies or banks. They request the issuer to pull funds from the customer’s bank account or credit limit.
    • The issuer then forwards the payment to the respective merchant. However, funds are transferred only after an interchange fee. Since funds are transferred from one source to another source, interchange costs are incurred by the card associations. For the same reason, they levy payment processing or interchange charges on the merchant.

    The process of settlement can take some time. Some reliable card companies offer merchant settlements in less than 24 hours. Some may even take 2-3 business days to settle merchant payments.

    Specific differences for debit card online payment processing

    Besides the aforementioned process for debit/credit card payments, some methods are specific to debit cards, like:

    • Debit card users have access to a PIN (Personal Identification Number). With PIN authorisation, funds are immediately transferred to the merchant’s bank account from the customer’s bank account.
    • An age-old practice of debit card payment processing is the signature authorisation. However, this process can take 2-3 business days, and the merchant will have to wait for the funds. In this process, marked funds are held in the customer’s bank account and transferred to the merchant after verification.Note that the signature authorisation method is an offline method. It does not fall into the category of debit card online transactions. Also, PIN verification can only be used at a physical store. With the help of POS machines, customers can make payments by swiping their cards. However, online payments do not need these methods. For example, when ordering an item online via a smartphone, we enter the complete debit/credit card information.

      Understanding different types of processing fees

      Since funds jump from one source to another before reaching the merchant, a processing fee is charged. There can be many interwoven processing charges that the merchant is unaware of. For the same reason, merchants research the processing charges of different payment providers before choosing one. Some common types of processing fees for debit/credit card online transactions are as follows:

      • A basic type of processing fee is the interchange charge. It is forwarded to the card issuer by the merchant. Interchange fees can differ from one card issuer to another.
      • Card networks also charge assessment fees from merchants. Extensive card networks spread throughout many jurisdictions and usually charge assessment fees from merchants.
      • As discussed above, merchants prefer to partner with payment processors/providers to manage the flow of funds. The payment processor fee is forwarded to the respective provider.

      The major difference between processing charges of debit and credit cards

      Usually, the interchange fee for debit cards is minimal. It is because funds are directly transferred from the customer’s bank account. The transaction will not go forward if the customer’s bank account is devoid of funds. For credit card payments, the risk increases, and so does the processing fee. With a reliable issuer, merchants/customers can slash unnecessary costs. Know the processing charges for debit/credit card online payments!

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