How Debit Card Processing Works

The Debit Card Payment Process Simplified

With the widespread popularity of debit cards among consumers, the ability to accept debit card payments is critical for most businesses, large or small.

The tutorial below explains how debit card processing works for merchants, including the crucial differences between signature debit and PIN debit transactions.

Debit Card Processing:
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Payment Processing 101

Knowing the ins and outs of debit card processing can help you determine the most cost effective way for your business to accept debit card payments.

Want to know more about payment processing as a business owner? Click the button below to access our paymentprocessing guide.

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What is Debit Card Processing?

Debit card processing is a service that allows your customers to make purchases or payments with their debit cards. The merchant’s end of this service is provided by payment processing companies, so you will need access to a merchant account through an agreement with a payment processor or payment facilitator to accept debit card payments at your business.

Unlike credit cards, debit card processing works by withdrawing funds from your customer’s bank account. Because a payment will only be authorized by your customer’s bank if the relevant funds are available, debit card payments present fewer risks of fraud and payment disputes (called chargebacks) and have lower processing fees as a result.

What is the Debit Card Payment Process?

The debit card payment process is the series of steps every debit card transaction goes through between the point of sale and the money from the transaction ending up in your business’s bank account.

Accepting debit card payments at your business is a lot like accepting credit card payments, but there are a few key differences merchants need to know:

The cardholder presents their debit card as payment (either in person, over the phone, or online). For in-person payments, the cardholder could have the option to choose “credit” (signature debit) or “debit” (PIN debit) and either sign a receipt or enter a personal identification number (PIN).
The merchant transmits transaction information to a payment processor through a payment portal of some kind. This portal could be a physical payment terminal or an online payment gateway. This portal could be a physical payment terminal or an online payment gateway.
The payment processor relays the transaction and card data to the appropriate network. The network could be a PIN debit network or a credit card network (Visa, MasterCard, etc.) depending on whether it’s a PIN, signature debit, or card-not-present transaction. We’ll discuss these distinctions below.
The network then sends the transaction data and authorization request to the bank that issued the customer’s debit card.
The issuing bank checks the customer’s available funds and either approves or denies the transaction.

If the transaction is approved, the issuing bank transfers the funds for the payment back through the relevant network and to your business’s merchant account for settlement.

Related: How Credit Card Processing Works

Signature Debit vs. PIN Debit Transactions

Generally, there are two ways available to process debit card payments: 1) signature debit and 2) PIN debit.

What is Signature Debit?

Signature debit transactions are debit card payments processed through the Visa or Mastercard networks—which means the transaction goes through the same channels as credit card payments involving those branded cards and are subject to the card network’s interchange fees. Signature debit is sometimes called “offline debit card processing” because no PIN debit network is involved.

For in-person payments, a signature debit transactions happens when your customer swipes or inserts a debit card and selects the “credit” (instead of the “debit”) option at the payment terminal. The customer typically signs a printed receipt, and the funds for the payment are deducted from the customer’s bank account after the payment is cleared and settled.

Note, however, that merchants often have the option to waive the signature requirement for smaller tickets.

What is PIN Debit?

PIN debit transactions are debit card payments processed through PIN debit networks (companies like Star and Accel) instead of a credit card network. Since PIN debit transactions take place outside of the infrastructure used to process credit card payments, they are often confusingly called “online debit card transactions.” Here, “online” simply refers to the fact that the transaction goes through a PIN debit network.

PIN debit transactions happen when your customer selects the “debit” option at a payment terminal and enters a PIN (personal identification number) instead of signing a receipt. The interchange rates set by card networks for debit transactions don’t apply to PIN debit transactions. Instead, you’ll pay PIN debit fees set by the PIN debit networks.

Are Card-Not-Present Transactions Signature or PIN Debit?

Most card-not-present debit card payments are processed as signature debit transactions, so they go through either the Visa or MasterCard networks. This includes debit card payments made online and over the phone, as well other cases where the merchant has to key in the card information at the point of sale.

And, yes, that means “signature” debit can refer to transactions where no signature is possible or required. If you’re thinking that the term “signature” used here is pretty stupid or misleading—not to mention the awful term “offline debit card processing” for signature debit (which can refer to transactions made through a website!)—we completely agree.

Debit Card Fees for Merchants

The technical differences between signature debit and PIN debit transactions often don’t matter much to most businesses, but the processing fees involved can make a big difference depending on how your business works:

Debit card fees are generally lower than the fees for accepting credit cards because a credit card payments are essentially short-term loans (and hence riskier for card issuing banks).
Interchange fees and rates for debit card payments are capped at 0.05% + $0.22 for debit cards issued by so-called “regulated banks” (bigger banks with assets of $10 billion or more in assets). This is one result of the Durbin Amendment (15 U.S.C. 1693o-2).
Interchange rates for non-regulated or exempt banks are generally higher, but they are still far lower than interchange rates for credit card payments.
Signature debit and card-not-present transactions are subject to the card network’s interchange rates mentioned above.
PIN debit transactions, however, are processed through separate PIN debit networks and are subject to the PIN debit network’s fees instead (though the Durbin amendment still applies).

Is PIN Debit Cheaper than Signature Debit?

In general, you’ll find that signature debit transactions tend to be cheaper for businesses with very low average tickets, while businesses tend to save through PIN debit transactions when their average sale is higher. Here’s why:

The credit card networks’ interchange rates for non-regulated debit cards tend to have lower per-transaction fees and higher rates on volume. As a result, signature debit usually costs merchants less than PIN debit when the merchant processes a lot of small-ticket transactions.
Conversely, PIN debit networks tend to charge lower rates on volume and higher per-transaction fees. That means you’ll typically pay more for signature debit than PIN debit when you’re processing a lot of higher-ticket transactions.

Ultimately, though, whether your business accepts only signature debit or both signature and PIN debit should rest on how you do business, what your business can afford, and the payment options your customers need.