What Is Debit Card Processing and How Does It Work?

Based on the recent report on India’s spending pattern in the first half of 2023 (January to June), people in India prefer to use credit cards more than debit cards. The report revealed that the number of debit card transactions fell sharply by 28% to 1.379 billion in H1 2023 compared to the same period in 2022. This indicates that people are opting for other payment methods like credit cards or digital wallets. 

On the other hand, credit card transactions surged to 1.550 billion, reflecting a significant increase of 19.6% compared to H1 2022. This trend suggests that people are becoming more comfortable with using credit cards for their transactions. It will be interesting to see how this trend shapes and impacts businesses and consumers in the coming months. But if you still use your debit card for many transactions, know how it works.

Must Read: What is a contactless debit card?

Defining debit card processing

At its core, debit card processing lets you, as a business owner, accept debit card payments from customers. Though the checkout seems the same, the background actions vary. Debit card users spend what’s in their bank, unlike credit card users who borrow from their issuer. When customers use their debit card to purchase, the funds are immediately deducted from their bank account and transferred to the merchant’s account. The process involves several steps, including authorisation, settlement, and funding.

Authorisation is the first step in debit card processing. When a customer swipes their card or enters their card details online, the information is sent to the merchant’s payment processor, which then sends the request to the customer’s bank. The bank then verifies if the customer has sufficient funds in their account to cover the transaction and sends an authorisation code to the merchant’s payment processor.

Settlement is the next step, where the transaction is finalised, and the funds are transferred from the customer’s bank account to the merchant’s account. This step usually takes one or two business days.

Lastly, funding is the process of transferring the funds from the merchant’s account to their bank account. This step can take up to three business days, depending on the merchant’s bank and debit card application.

Processing fees for Debit Cards

Processing fees for debit card payments vary. The main cost is the interchange fee card networks charge for handling transactions. Rates depend on the card-issuing bank size. Large banks have set rates, while small banks’ fees vary based on transaction size and industry. For small purchases, signature transactions are cheaper, while PIN transactions are more affordable for larger purchases.

Merchants can also negotiate fees with their payment processors, which can sometimes result in lower rates. Both merchants and consumers need to be aware of these fees, as they can add up quickly and affect the overall cost of a purchase. Some merchants may even offer discounts for using specific payment methods, such as cash or cheque, to encourage customers to avoid paying fees. Ultimately, understanding the different costs associated with payment processing can help merchants and consumers make more informed decisions when buying and selling goods and services.

Note: Hotlist debit cards won’t be considered for these charges as they’ve already been blocked. And the merchant won’t accept such cards for payment processing. 

Conclusion

Understanding how debit card processing works is essential for businesses and customers who wish to accept card-based payments. While debit cards may get less attention than credit cards, they are the preferred payment method for many customers. The process involves authorisation, settlement, and funding, and processing fees vary based on various factors such as transaction size and industry. By being aware of these costs, merchants and consumers can make informed decisions when making or accepting payments.