Debit VS Credit Transactions: The Complete Small Business Guide

The differences between credit and debit transactions are simple from the consumer’s perspective. For a merchant, the differences run deeper and are less commonly understood.

Regarding debit versus credit transactions, both result in the merchant receiving funds within the same time frame. However, the cost of processing the two kinds of transactions can be quite different. Add in the fact that customers can choose between credit and debit during the transaction process regardless of whether a credit or debit card was used, and merchants have a lot to consider.

Read on to understand the differences between credit and debit transactions and what they mean for your business. Fortunately, the best credit card processing companies for small business make it easy to accept both types of transactions.

The Basic Difference Between Credit And Debit Transactions

The difference between credit and debit transactions is this: Credit transactions go through the credit processing network, and what the merchant pays depends on the merchant’s payment processor. By contrast, debit card transactions are processed through a different network, and the merchant is charged a debit-specific rate.

Though processing costs vary depending on numerous factors, debit card transactions typically cost the merchant more than credit card transactions if the transaction is quite small. Debit transactions typically cost the merchant less than credit transactions as the transaction gets larger.

How Credit Transactions Work For Businesses

Credit cards essentially are revolving lines of credit between the issuing bank and the consumer. When a consumer pays with a credit card, the money is transferred in roughly the following way:

1. The payment information is transmitted through multiple tiers of financial entities to the acquiring bank.
2. The acquiring bank asks the issuing bank for payment.
3. The issuing bank, after it makes sure the consumer has enough credit, authorizes the payment.
4. The acquiring bank pays the merchant.
5. Typically, two to three days later, the two banks pay each other to settle the charges.
6. Now the only money owed is between the consumer and the issuing bank.
7. The consumer pays the issuing bank on a monthly basis, according to the terms of the credit card agreement.

For the banks, there is some risk involved in credit card transactions because the consumer might default on the loan.

How Debit Transactions Work For Businesses

Debit cards work differently because the consumer has already pre-authorized the bank to take the money from a specific bank account. When the issuing bank of the debit card gets a payment request from the merchant’s bank, the issuing bank authorizes payment and then, without waiting for additional authorization, takes the money out of the consumer’s bank account.

There is very little risk of default to the issuing bank on a debit card charge because the issuing bank can make sure the bank account has the money before authorizing payment and can place a hold on that amount until the money can be transferred out of the account. Again, the distinguishing difference between a credit card charge and a debit card charge is that, with a debit card, the issuing bank is allowed to reach into the consumer’s bank account to take the money right away.

We’ve gone over a high-level view of how a debit charge works, but if we dig a little deeper, debit card transactions get more complex.

Charge Paths For Debit Transactions: Debit As Credit Transactions VS True Debit

Generally, there are two behind-the-scenes ways a debit card can be processed.

The first way is called the debit/online/PIN debit method (a.k.a. the true debit option), and the second way is called the credit/offline/signature debit method (a.k.a. the credit path debit charge option). If the customer selects “credit”, the transaction is sent through the credit card processing network. If the customer selects “debit”, the transaction is sent through a different computer network, and the merchant is charged a debit-specific rate for the transaction.

Typically, this question is only asked if the merchant is at a brick-and-mortar location and has a PIN pad on their point of sale terminal. If the merchant operates online, uses a POS terminal without a PIN pad, or uses a third-party processor such as Square, Stripe, or PayPal, then the question won’t be asked because the credit method will be the only processing option.

What Happens When A Consumer Selects The Credit Path Debit Charge Option

When a consumer makes a credit path debit charge, the transaction is sent through the system like any regular credit card charge, except that it is flagged as a debit transaction. The payment request goes from the merchant to the processor to the acquirer to the issuer. The issuer — that is, the bank where the customer keeps the bank account tied to the debit card — puts a hold on that amount of money in the account and then authorizes the acquirer to release the money to the merchant.

The merchant is paid in the same way and in the same time frame as any typical credit card charge. It can take up to three days for the issuing bank to pay the acquiring bank for the money the acquiring bank already fronted to the merchant for the debit card charge. This payment timeline mainly has to do with the way credit card companies, acquirers, and issuers settle charges between themselves.

What Happens When A Consumer Selects The True Debit Charge Option

The behind-the-scenes money movement works differently with a true debit charge. Instead of borrowing the credit card company’s communications network, the true debit charge uses various other communication networks for interbank money transfers. This is the same path used by ATM networks, wire transfer networks, electronic bill payment networks, or even direct deposit paychecks.

With a true debit charge, when the debit card issuing bank gets the payment request, it places a hold for that amount of money in the consumer’s account and transfers the money through normal interbank money transfer channels to the merchant’s bank. The hold on the consumer’s account is much shorter than it would be with a credit path debit charge because banks settle these transfers much more quickly — sometimes in just hours, and typically by the end of the business day.

Because money is transferred so quickly, the true debit charge typically requires an added layer of security in the form of a PIN. The PIN is encrypted and serves as additional evidence that the debit cardholder has authorized the charge.

A merchant is charged differently when running a debit card transaction as a true debit charge or as a credit path debit charge. The reason is simple: it costs money to send information through these (typically computer) networks, and each network charges a different amount.

Even though the way the banks transfer the money is the only real difference between a true debit charge and a credit path debit charge, the credit path debit charge is subject to different rules (set up by the credit card companies) and is treated differently under the law.

What’s The Difference Between Credit And Debit Merchant Fees?

Merchants are charged per credit or debit transaction.

If a card (whether credit or debit) is processed through a credit card network, it will be charged the typical credit card transaction fee. If a debit card is processed through the debit card network, the transaction is charged a debit card rate. Some processors, in an effort to compete for your business, offer a fee for a credit path debit charge that falls between a standard credit card charge and a true debit charge.

For debit cards backed by US banks, the federal standard rate (see the Durbin Amendment to the Dodd-Frank Act) for banks with $10 billion or more in assets is currently 0.05% + $0.21 per transaction ($0.22 if the transaction meets certain fraud criteria). Smaller banks can charge more, and processors who contract with large banks can add to this government-set base charge. For non-US banks, the rates can be even lower.

Check your processing agreement to see the amount applicable to you, as this rate may be negotiable. For credit cards, the rate varies, so check your credit card processing agreement for the precise amount. This charge typically applies to both true credit card transactions and credit path debit card transactions.

Between pure debit transactions and credit path debit transactions, smaller charges cost less if processed as credit path debit charges, while larger ticket items cost less if processed as true debit charges.

Our comprehensive guide to debit card processing fees details the true cost of debit card transactions, while our guide to credit card processing fees provides a similarly detailed look at credit card transactions.

More Key Differences Between Credit & Debit Transactions

The difference between credit and debit transactions extends beyond per-transaction rates. Let’s explore some of the other differences.

Disputes

Credit and debit card disputes are covered not only by different consumer protection laws, but they are also modified by credit company rules if the transaction is run through credit card companies. Both credit and debit card disputes will first show as a chargeback on a merchant’s statement. The merchant can respond to the chargeback (and pay appropriate fees) according to the procedure set by the merchant’s processor.

Debit card disputes tend to show earlier in the chargeback cycle. Consumer protection laws covering stolen debit cards give the consumer a specific time frame to report a stolen card. If the consumer reports outside of that time frame, the consumer must pay for all the unauthorized charges, and the merchant gets to keep the money.

With credit card disputes, a different set of laws govern fraudulent charges, and the consumer is typically liable for only up to $50 of the charge. The consumer also has longer to dispute the charge, so the merchant might have to answer a dispute later in the chargeback cycle.

Minimum Amounts & Surcharges

For a true credit card charge or a credit path debit charge, merchants can require a minimum transaction amount a customer must charge for using a credit or debit card. Additionally, as long as a state’s laws allow it, the merchant can attach a surcharge to the use of a credit card to recover processing fees for the card. Mostly, what the merchant can and cannot do depends on the credit card company’s rules, and these rules discourage surcharges and encourage the use of the cards for transactions of any size.

With a debit card, merchants cannot require a minimum amount, nor can they add a surcharge for the use of the debit card. Debit cards are regulated by a very different set of laws than credit cards, and current laws forbid requiring a minimum charge or adding a surcharge to a true debit card transaction.

Here’s a comparison between credit and debit transactions.

Commonly Asked Questions About Debit VS Credit Transactions

Does The Difference Between Credit VS Debit Transactions Matter For Small Businesses?

For merchants, the differences between credit and debit transactions come into play when determining your processing costs, your surcharging policies (should you decide to implement any), and even when determining the POS equipment you need. Because a PIN pad is needed to initiate true debit charges, a merchant must buy a point of sale terminal with a PIN pad before true debit charges can be processed. For larger ticket items, a true debit charge can cost the merchant less to process than a credit charge or a credit path debit charge.

Ultimately, merchants want consumers to have a smooth purchasing experience, which includes an easy checkout. This means being able to accept any form of payment that is convenient to the customer — probably through one of the largest payment processing companies available for small businesses to choose from. While differences exist in the cost of debit and credit card processing, this cost is likely minor when compared with keeping customers satisfied so they continue to patronize your business.

To learn more about payment processing costs, read our comprehensive guide to credit card processing fees.