The Right Choice Changes Everything
Empower Your Ambition With ECS
April 27, 2023
Debit card payment processing is a must-have for any business owner. Without payment processors, small businesses would not be able to translate customer card information into payments. But with the right card processing solutions, taking debit cards becomes a convenient way of collecting more payments.
Amazingly, around 10% of consumers still make all their purchases in cash. But the average cash transaction is around $22. While the average card transaction is that plus a Benjamin, minus a Hamilton. That’s $112 in case you don’t like history or math. This means that cash-only consumers are not big spenders…which probably comes as no surprise.
Now what about credit cards? Well, as it turns out, the POS system that you use for processing debit cards will also process credit card payments. But for the sake of argument, let’s continue breaking down consumer spending habits.
Debit cards account for around 67% of card payments. If we can take poetic license by adding 3% to that number, it essentially means that 7 out of every 10 customers are going to pay for their purchase with debit. Not credit.
Some consumers may stay away from using credit cards because of their interest rates. Banks try to get around this objection by assigning points and cash back to purchases. But even so, consumers spending outside of their means will quickly feel the burn. Especially since rates have topped 20%. Up 16% from just one year ago.
Here’s another reason that some consumers would rather use debit as a payment option: they can’t get credit to begin with. Around 42% of consumers were denied a financial product like a loan or a credit card. This may be because of their credit history, which is a significant percentage of your potential market. These consumers might turn to cash, but per our earlier statistics, the odds suggest they would rather use debit card payments than use cash.
So, now that we have established the importance of having a debit card processor, let’s take a look at how it actually works. In the old days, merchants would make a carbon copy of embossed card numbers for credit and debit card processing at a later point. This, of course, creates some security concerns in terms of storing customer data. And it also made processing cards a headache. As card information would have to be submitted to the banks in batches.
Today’s debit card solutions process payments at the point of sale. Making everything automated for the merchant. Debit processing begins when the customer presents their card information, either in the form of a physical card, or as a digital card uploaded into a mobile wallet. To keep our explanation of debit processing services simple, let’s start with the physical plastic cards that have been on the market since 1966.
At a high level, what happens next, is that your POS terminal sends the information to the card’s network (Visa, Mastercard, Discover, or Amex). These card networks will verify the data, including the likelihood of fraud. If everything checks out, they will send this information to the customer’s issuing bank.
This bank will then confirm the availability of funds in the customer’s account. Then it will pass that information back to the merchant’s POS to complete the purchase. After the transaction is done, the customer’s issuing bank will send funds to the merchant’s acquiring bank through the card network.
As you can see, there are a number of parties in this ecosystem: your bank, the customer’s bank, the card network, and the payment processor. And just like driving along a toll road, there are going to be costs along the way. These are interchange fees and processing fees which are bundled into the merchant discount rate. But as we are about to see, these fees can vary based on how debit card transactions are processed.
Although fees for payment processing solutions are a downside, they are unavoidable. Moreover, they are a necessary tradeoff for accepting this most popular and convenient form of payment. The key is finding debit and credit card payment processing with the most advantageous fee structure for your particular business. Or, you could always consider surcharge as an option if it is available to you, to cover your processing costs.
The most common form of debit processing has long been the PIN debit transaction. If a POS terminal asks a customer if they’re using debit or credit—and the customer chooses debit—they’ll be prompted to input a four-digit number that only they know.
Another common form of debit processing is the signature transaction. If a customer chooses credit on the terminal, the merchant is supposed to ask the customer to sign a receipt. A formality that has been dropped by card networks since 2018, but is still observed in restaurant settings. However, some POS terminals will prompt the customer to take a magnetic stylus and scribble their name on the screen.
And now on to the most important question: which method—pin or signature—is more cost-effective for business owners? Typically, signature debit transactions have higher percentage-based fees and lower transaction-based fees. Making them better for businesses with smaller average tickets.
By contrast, PIN debits have lower percentage-based fees and higher transaction-based fees. Making them better for businesses with larger average tickets. These are the types of questions that are best hashed out with a good payment processor and a dedicated account manager.
The debit solution they offer may even integrate with some analytic software. One that will break down the data of your customer habits. Armed with this information, you can then reapproach the payment processor to determine what types of transaction options you should present to customers.
For instance, as mentioned, most restaurants do not present customers with the option of choosing pin payments—and there are reasons for that. Of course, both of these options only make sense for transactions where the cardholder is present in front of the merchant: card present transactions.
You may be wondering about the security of each method. Regarding the pin number, banks urge their customers to avoid choosing pins that relate to personal information. This could be their birthdays or social security numbers.
The downside of this strategy is that it can be hard to remember pin numbers. The upside is that criminals cannot try to guess the pin number by using information easily obtained on social media. Or even a card-skimming device (more on that later).
Regarding the signature, for a number of years, merchants were required (at least on paper) to match the receipt on the signature to a signature on the back of your card or on a driver’s license.
As mentioned, card networks dropped this requirement in 2018, and most merchants don’t hold by it. Thankfully, there are other security measures now built into card payments. Secure payment processing offers encryption and tokenization. Particularly through the use of chips (again, more on that later).
For the consumer, there is little difference if a card is run as debit or credit. But for the merchant, there can be a significant difference in terms of fees. That’s because PIN debit card charges run through a different network than credit cards…sort of. The largest debit card networks—Interlink, Maestro, and Pulse—are owned by Visa, Mastercard, and Discover.
If you’re interested in the backstory to the creation of a separate PIN network, (you are interested, aren’t you?) It began in 2013 with the passage of the Dodd-Frank Act. More particularly, with the Durbin Amendment. This made serious changes to the payments landscape.
For one, it put a cap on how much banks valued at over $10 billion could charge merchants for taking debit cards. No more than 0.05% + $0.21 per transaction. Note that merchants are still charged other fees by the card networks and their payment processor).
It also allowed merchants to route debit transactions through a debit network of their choice. Instead of resorting to Visa. Which had previously dominated the payment landscape. These debit card networks facilitate both PIN and PINless (e.g. online) payments. But recall that if the signature method is selected at the point of sale, the charge runs through the regular (credit) card networks.
Unfortunately, many payment processors force PINless transactions to go through the regular card networks as a card-not-present transaction. This method however, has much higher fees. The upshot of this history lesson is that you should make sure to speak to your payment processor about how PIN (and PINless) transactions are routed. This will be sure to help ou discover fees that are are optimally low for you.
For decades, credit and debit cards were associated with a magnetic strip on the back. Which was the primary way of using plastic to make a payment. Even the term “swiping” became synonymous with making a payment. And it still is.
But the magnetic strip will eventually be going away. As card networks like Mastercard and Visa plan to totally phase them out of existence by 2030. A move that may have anthropologists wondering if people will continue to use “swipe” like they use other obsolete phrases… such as “dead ringer.”
The problem with magnetic strips is that they store critical card information in a static format. Such as the card number, pin, and CVV. The information contained in the strip is used to verify the card transaction. But the static nature of this storage also makes it susceptible to theft.
Criminals have been known to use cleverly hidden skimming devices to collect information from the strips. Which is then sent to a nearby recipient—perhaps someone wearing sunglasses, parked in a beat-up Pontiac with a solid six inches of fast-food wrappers on the dashboard.
All “jokes” aside, thankfully there is a solution to the static data storage risk, and that is the EMV chip. Credit and debit cards now come with EMV chips, which can be inserted into payment terminals. Rather than relying on static, ever-present information to facilitate transactions, these chips generate encrypted, one-time codes with each transaction. This makes criminal attempts to skim information off the card ineffective because every transaction is different.
The POS terminals that you use will need to be equipped with a chip reader. However, this is standard practice today. What is more likely to occur in the near future is that POS terminals will only have chip (and contactless) readers. No magnetic strip reader.
But there is yet another debit card payment modality on the rise, and that is contactless payments. Contactless payments have already been around for a few years. But they accelerated during the Covid Pandemic. Consumers became more conscious of potential health risks such as touching a POS terminal that dozens or hundreds of other people touch every day.
As many as 20% of card payments in the U.S. may be contactless. In fact, Barclays Bank in the U.K. believes that number may be closer to 91% in the kingdom of fish, chips, and warm beer. Consumers are increasingly embracing the idea of waving their magic payment wand over card terminals to settle their tabs.
80% of U.S. consumers use contactless payments at least some of the time. As a result, 67% of businesses have responded to this trend. They have made contactless payment options a permanent feature of the store landscape.
One reason consumers and merchants love contactless payments is that they don’t require swipes, insertions, PIN numbers, or signatures. Contactless payments use near field communication (NFC) which limits the transmission of information to just a few inches. Effectively barring interference from skimmers who would attempt to steal card information, even remotely.
Encryption and tokenization—the aforementioned generation of one-time codes for every transaction—effectively render PIN verification useless. The end result is faster, more seamless transactions.
A new and somewhat offbeat payment modality that is increasing in popularity are QR codes. These codes are checkerboard patterns that cardholders can scan with their smartphone camera. They will then be prompted to navigate to a payment portal on their phone. There, they can make a payment with their debit card.
Even if the customer is in front of you, this is essentially a debit card online payment. As they will ultimately be inputting their card information as if they were shopping at home. The upshot of this difference is that you should (as mentioned) make sure that your payment processor can run these as PINless debit transactions instead of card-not-present transactions. Since those fees are much higher.
But if you have your ducks in a row in terms of mobile debit card processing, QR codes are a great way to collect payments. You don’t need a POS terminal to take payments. You just need to point customers to a QR code over which they can scan their smartphone camera and make a payment on your online payment gateway or virtual terminal. This makes QR codes a great option for popup shops and satellite locations.
They can also create a seamless checkout experience for service-based sole proprietorships who want to collect payment at the end of a service rendered. And an increasing number of restaurants are switching to QR codes as gateways to menus patrons can browse on their phone, even placing orders and settling their tabs.
One thing to keep in mind is that there are two types of QR codes: static and dynamic. Static QR codes can only direct cardholders to one location, for all time. This means if you ever change your website or want them to be guided somewhere else, you’re out of luck. By contrast, dynamic QR codes allow you to change the end destination.
Debit cards can also be stored in a mobile wallet. A mobile wallet consists of card information stored on a smartphone, which will ultimately use NFC technology to make contactless payments at the point of sale. Younger consumers are increasingly embracing digital or mobile wallets, which is yet another reason you should work with a payment processor that provides contactless POS terminals.
In fact, mobile payments may soon surpass even contactless plastic card usage. More than 101 million Americans use mobile payments at least somewhat regularly, which accounts for 43% of smartphone owners.
Consumers enjoy the ease of using mobile wallets and not having to carry physical wallets around. If states switch to digital forms of ID, this may accelerate the consumer trend toward mobile wallet use (only).
Of course, there are some downsides to mobile wallet usage, which include running out of battery. Some consumers also enjoy using their wallets to store sentimental items, but if Grandma can learn how to navigate the photos app, this objection might be reduced in scope as well. Overall, it’s clear that merchants should be ready to accept mobile debit cards as one of their payment methods. Most merchant services can facilitate this type of debit processing.
Not all businesses have a brick-and-mortar presence. And even brick and mortars can benefit from the complimentary satellite of an online store. A debit and credit card processing company should also be able to offer its merchant accounts easy integration of their online payment gateway to the merchant’s website.
The debit card online payment process has backend similarities to in-person transactions, but there are some obvious differences. These types of transactions are categorized as card-not-present, since the card is not in front of you. They are arguably more susceptible to fraud, since anyone with a tangible card can input the card information and make a payment.
This is why debit card processing fees and the interchange rate will be higher for online purchases (and QR codes, at that). But them’s the breaks. Once again, these downsides can be parsed out with a good payment processor who can create the most beneficial fee structure for your business.
Debit card processing can also work for recurring payments. Member access processing is well-suited for subscription models. Some of these subscriptions are geared toward consumers (like the delivery of entertainment content) and others are geared toward businesses (like payroll software). Others are both B2C and B2B, such as financial management software.
And sometimes subscription services involve the delivery of information, just like the good old days of subscribing to paper magazines. If your business involves delivering a daily newsletter with (for example) stock trading tips or health advice, debit card processing can work to build you a steady cash flow every month.
We should mention that for the purpose of subscription services, debit card numbers do bear some slight risk in terms of interrupted cash flow. If the customer loses their debit card or it gets stolen, the number will change, and you will have to recollect payment from the customer. In some instances, this will result in customer churn.
One way to avoid this is to explore ACH payments. ACH payments use bank account numbers and routing numbers to pull payment directly from one bank account to another (in simplified terms). However, ACH payments are awkward for customers to complete in person, which is why you should still accept debit cards. This is especially true if your business has a brick-and-mortar presence.
There are some businesses that (for whatever reason) still only want to accept cash. It’s getting increasingly hard to think of examples, but for the sake of illustrating our argument, let’s say you own a pinball arcade. A debit card program may still be in order, because most consumers don’t carry cash—but an ATM payment processor, or a POS at a register can bridge that gap.
Moreover, if it’s possible to switch to plastic transactions, it’s something you should consider. The reason is that debit (and credit) transactions can be tracked and studied. A good payment processor will offer (or integrate) analytic solutions that can greatly improve the efficiency of your business. Inventory tracking and analysis of customer behavior all become sets of data you can respond to with ordering, marketing, and even store layouts.
As you can see, a debit program is a necessary part of running a business today. Payment card solutions often have the ability to process credit and debit transactions. But as there are a variety of ways to process modern debit cards (online, PIN, signature, contactless) And even a potentially separate card network just for debit. It’s a complicated topic.
There are different percentages and flat fees that can impact your bottom line. Depending on the payment process. This is why it’s important to avoid working with monolithic payment aggregators like PayPal, Square, or even Shopify.
What’s better for your bottom line is to work with a payment processor who can take the time to get to know you, your business, and answer any questions you might have. Contact us today to learn more about debit card solutions.
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