Credit card payment processing involves borrowing funds from a credit line, while debit card processing entails direct access to the user’s bank account, with transactions instantly deducted from available funds. Businesses that accept card payments often accept both credit cards and debit cards. However, debit cards are considered less risky, so financial institutions charge lower interchange fees Costs merchants pay to accept and process credit and debit card payments. for processing debit cards.
Key takeaways:
- Credit card transactions involve borrowing funds from a credit line, while debit card transactions directly access the cardholder’s bank account.
- Interchange fees are higher for credit card transactions than for debit card transactions.
- The difference in interchange fees will not significantly affect businesses with payment processors that use a flat-rate model but will matter for processors using an interchange-plus model.
Credit Card vs Debit Card Transactions Comparison
Credit Card Transactions | Debit Card Transactions |
|---|---|
|
|
|
|
|
|
|
|
|
|
With credit card transactions, customers are essentially borrowing money to be paid back later, but merchants should understand that this comes with higher fees and a longer time for the funds to be credited. There’s also a longer period for customers to dispute charges, up to 120 days.
On the other hand, debit card transactions deduct money directly from a customer’s bank account, which can be more cost-effective due to lower interchange fees. It has the added security of requiring a Personal Identification Number (PIN) for authorization, and the whole process for the merchant, from sale to pay-out, is quicker because there is no need to hold funds. The risk of a chargeback A reversal of a payment card transaction initiated by a card issuer because of a dispute filed by the payer or customer. is also lower because the window for customers to dispute charges is shorter, only up to 60 days.
It’s worth noting that debit card payments can sometimes be processed as credit card transactions. The transaction goes through the credit card network when customers:
- Use their debit card and choose “Credit” on the card reader terminal
- Use their debit card for online transactions
- Provide the card details for the merchant to key into a virtual terminal, or
- Use signature authorization instead of entering a PIN
This can impact fees and processing times because the debit card will be processed just like a credit card.
Chip-and-PIN vs Chip-and-Signature Processing
Chip-and-PIN and chip-and-signature are two distinct methods of processing transactions using EMV chip cards. These authentication processes add an extra layer of security to payment transactions.
Chip-and-PIN transactions require the cardholder to enter a PIN at the point of sale. This method ensures that even if the physical card is lost or stolen, unauthorized individuals would still need the PIN to complete a transaction. Lower interchange fees for debit cards only apply for chip-and-PIN transactions.
In contrast, chip-and-signature transactions rely on the cardholder’s signature for transaction verification. After inserting the EMV chip card into the card reader, the user is prompted to sign a paper receipt or an electronic device. While it provides additional authentication, a signature can be easier to forge compared to a confidential PIN. The interchange fees for credit card transactions apply when a card is processed using chip-and-signature.
Debit Card vs Credit Card: Processing Fees
When comparing debit card vs credit card merchant fees, businesses need to take a close look at the processing fees, which are deducted from payments made by your customers for each transaction.
Interchange Fees
A critical aspect of credit and debit card transactions are interchange fees, which make up the bulk of card processing fees. To accept card payments, you must pay the interchange fees associated with every transaction. Think of these fees as toll fees in the world of debit and credit card transactions. When a customer uses their card to buy something, these service fees need to be paid to banks and card companies to make that transaction happen.
These fees aren’t random; card networks like Visa, Mastercard, American Express, and Discover carefully set them. The fees vary based on things like the type of card used, the nature of the store, and how the payment is made. Each card network has its own fees, adding up to the overall cost for businesses that accept their cards.
Card networks typically set lower interchange fees for debit card transactions compared to credit card transactions because of the lower risk associated with debit card transactions. Here are some of the typical ranges of fees for the two largest card networks:
Card Network | Credit Card Transactions | Debit Card Transactions |
|---|---|---|
1.43% to 2.70% | 0.05% + 21 cents | |
1.43% to 2.60% | 0.05% + 21 cents | |
*Values on the table are estimated rates | ||
Fee Structures
Merchant service providers Financial institutions that provides businesses with tools and services needed to process payments such as credit card transactions. and payment processors play a crucial role in facilitating card transactions for businesses. Some providers charge a monthly service fee for providing a host of merchant services on top of the processing fee for all transactions made. Two pricing models are commonly used by providers for charging transaction fees: interchange-plus pricing and flat-rate pricing.
Interchange Plus Pricing
The interchange-plus model involves passing the actual interchange fee, set by card networks, to the merchant, along with an additional transparent markup. With interchange-plus pricing, businesses may get lower interchange fees for debit card transactions. Here are some payment processors that use interchange-plus pricing:
Monthly Fee | In-Person Transaction Fee | Online and Keyed-In Transaction Fee | |
|---|---|---|---|
 | $0 | Interchange + 0.15%–0.4% + 6–8 cents | Interchange + 0.15%–0.5% + 15–25 cents |
 | $79 | Interchange + 8 cents | Interchange + 18 cents |
 | $99–$199 | Interchange + 8 cents | Interchange + 18 cents |
Flat Rate Pricing
In the flat-rate model, merchants pay a fixed percentage or fee for each transaction, simplifying the fee structure. Regardless of the card type or transaction specifics, the cost per transaction remains constant.
With flat-rate pricing, all card transactions are charged the same in-store and online/keyed-in rates—there is no difference in fees between debit card and credit card transactions. Here are some payment processors that use flat-rate pricing:
Monthly Fee | In-Person Transaction Fee | Online and Keyed-In Transaction Fee | |
|---|---|---|---|
 | $0 | 2.6% + 10 cents | 2.9% + 30 cents/3.5% + 15 cents |
 | $0 | 2.29% + 9 cents | 2.99% + 49 cents/3.49% + 49 cents |
 | $0 | 2.7% + 5 cents | 2.9% + 30 cents/3.4% + 30 cents |
Debit Card vs Credit Card: How Processing Works
Credit cards and debit cards are processed in similar ways by payment processors. The differences between them are mainly the processing fees and settlement times. Here’s a quick overview:
Credit Card Processing
- The customer initiates the transaction
-
- Card details are provided through a card reader, online, or a virtual terminal.
- The merchant’s processor requests authorization from the card issuer or bank
-
- Transaction details such as card information, transaction amount, and merchant details are sent to the card issuer or bank.
- The card issuer or bank reviews the request and approves or declines the transaction.
-
- This process involves checking if the amount in the cardholder’s credit line can cover the transaction amount.
- If the transaction is approved, the card issuer provides an authorization code to complete the sale. The amount is added to the amount the cardholder owes.
- The cardholder’s issuing bank deducts the amount from the customer’s available balance. The payment processor deducts the transaction fee and transfers the remaining amount to the merchant’s account.
The transaction only takes a few seconds or minutes but settlement time on the merchant side may take longer for credit card transactions. With credit cards, the funds may take a couple of business days to be fully cleared and deposited into the merchant’s account. This delay allows for authorization, verification, and settlement processes to take place.
Debit Card Processing
- The customer initiates the transaction
-
- Card details are provided through a card reader with PIN authentication from the cardholder. If the card payment is made online, through a virtual terminal, or with signature authentication, debit cards are processed using the credit card network, following the steps above, and charged with credit card interchange fees.
- The merchant’s processor requests authorization from the card issuer or bank
-
- Transaction details such as card information, transaction amount, and merchant details are sent to the card issuer or bank.
- The card issuer or bank reviews the request and approves or declines the transaction
-
- This process involves checking if there is enough balance in the customer’s bank account.
- If the transaction is approved, the card issuer provides an authorization code to complete the sale. The amount is immediately deducted from the customer’s bank account.
- The customer’s bank deducts the amount from the customer’s bank account. The payment processor deducts the transaction fee and transfers the remaining amount to the merchant’s account.
For debit card transactions, the funds may be cleared and available to the merchant more quickly, often within one to two business days.
Tips for Saving on Card Transaction Fees
There is no such thing as free credit card processing, but there are strategic steps you can take to optimize cost savings on card transaction fees:
- Ensure Debit Cards are Processed as Debit Transactions: If your payment processor uses an interchange-plus pricing model, make sure that debit cards are processed and treated specifically as debit transactions rather than routed through the credit card network. This can lead to lower interchange fees, saving you money on each transaction.
- Set a Minimum Amount for Credit Card Transactions: Consider setting a minimum transaction amount for credit card payments. This can be an effective way to mitigate the impact of transaction fees on smaller purchases, making the cost per transaction more manageable for your business.
- Avoid Splitting Transactions: Refrain from splitting a single transaction into multiple smaller transactions. Payment processors may apply fees on a per-transaction basis, so consolidating purchases into a single transaction whenever possible can help reduce overall transaction fees.
- Utilize Surcharging for Credit Card Transactions: Explore the option of surcharging for credit card transactions. While regulations regarding surcharging vary, some businesses pass on the cost of credit card transactions to the customer by adding a small fee. This allows businesses to offset some of the transaction costs associated with credit cards. Consider payment processors that allow you to pass on the fee to your customer such as Helcim and CardX. Read our Helcim review and CardX review.
Frequently Asked Questions (FAQs)
Click through the sections below for common questions on credit card vs debit card processing:
Debit card processing involves immediate deduction of funds from the cardholder’s bank account, typically with lower associated fees and a faster authorization process. In contrast, credit card processing entails borrowing funds against a credit line, often resulting in higher interchange fees, a more complex authorization process, and delayed access to funds.
Yes, generally, debit card transactions tend to process faster than credit card transactions. This is because debit card transactions are typically authorized in real time, immediately deducting funds from the customer’s bank account. In contrast, credit card transactions may involve a more complex authorization process, as the transaction depends on the available credit limit and may include additional steps to verify the cardholder’s creditworthiness.
No, debit and credit card processing fees are not the same. Debit card transactions generally have lower interchange fees compared to credit card transactions, making debit card processing more cost-effective for businesses. The specific fees can vary based on factors such as the type of card, the card network, and the processing model employed by the merchant service provider. However, if your payment processor uses a flat-rate pricing model, you are charged the same processing fee for credit and debit cards.
Bottom Line
Debit card transactions, which directly access the user’s bank account, generally come with lower interchange fees and faster processing times, making them a cost-effective choice. On the other hand, credit card transactions, while offering the flexibility of borrowed funds, incur higher fees, longer crediting periods, and an extended dispute window.
For businesses using a flat-rate pricing model, the difference in interchange fees might not be a significant factor. However, those employing an interchange-plus model can optimize cost savings when processing debit cards. Debit card transactions also have shorter settlement times and dispute windows than credit card transactions.
