Credit Card vs. Debit Card Processing

Cashless transactions are the latest trend. More and more of the standard transactions every day are becoming cashless. Payments are being made increasingly in the forms of cards, e-wallets, or even online payments. Credit and debit card transactions are usually lumped into the same category. And on the end of merchants, that is somewhat understandable. Both credit and debit cards have a 16-digit pin code, expiration date, and pin codes. These cards are both issued by banks and credit card associations or even microfinance banks very recently. Both these cards are accepted at almost all credit card reading systems and generally have the same payment method. 

Fundamental Differences between Credit and Debit Card Transactions

At the end of the consumer, however, there is a distinct difference between the two payment methods. A credit card processing transaction is billed, and a statement for the expenditures is given at the end of the month. It can be paid off immediately or after a while, incurring interest. These are also sometimes authorized by the signature of the cardholder. On the other hand, debit card transactions are conducted in a way where the consumer has to pay for the purchase from their bank instantly for the purchase to be completed. It is almost the same as paying by cash or by check. The funds that are already deposited in the bank account are used to fund the purchase. A PIN or sometimes the signature of the cardholder is required to validate the purchase.

For merchants, the difference between credit card and debit card sales is much more subliminal than the consumer. The merchant's difference is the cost incurred upon the usage of a credit or debit card when it is ringed into the POS system. Nevertheless, it is different.

The Working of a Credit Card Transaction

Credit card-based transactions function on credit between the bank that issued the card and the cardholder. Firstly, the consumer's card is swiped through the POS terminal or card reader of the merchant. Then, after crossing through several financial institutions, the acquiring bank receives information to receive funds from the customer's issuing bank. The acquiring bank then contacts the issuing bank, relaying them information about the purchase and sending them funds. 

The bank that issued the card then verifies whether the customer wants to make the transaction has enough funds to proceed with the payment. If there is enough credit, the bank authorizes the payment. The acquiring bank (the bank of the merchant) pays the merchant. After two or three days, the two banks transfer funds to settle the charges of the payment. Now, the money paid to the merchant is finally owed by the customer to the issuing bank of the card. Based on the card's agreement, the consumer then has to pay the credit card issuing bank for the payments made at a specific time. 

Credit card transactions have a particular risk factor. The consumer might not pay their dues on time and may even avoid paying off their loan. Therefore they can have a higher cost to the process.

The Working of a Debit Card Transaction

Initially, the process is just like that of a credit card. The debit card is swiped at the point of sale terminal of the store or retail outlet. The card's magnetic stripe or EMV chip transmits data to the terminal regarding information about the customer's account. The data is then relayed to the credit card association affiliated with the card. The association verifies the formatting of the information relayed by the terminal. It detects whether the customer is fraudulent or not. Then the data is forwarded to the issuing bank. 

The issuing bank ensures the authenticity of the cardholder. Ensuring that it is not reported as lost or stolen and whether the card has sufficient funds are duties of the issuing bank. Once all of these have been checked without discrepancies, the bank issuing the card approves the transaction. Then the network calculates the amount that the merchant is to receive, and it is transferred often the same day.

The costs of debit card transactions are lesser than that of credit card transactions regardless of the interchange and network fees. The fees depend on the card's regulation and the transaction for which the card is being used. Suppose a customer only signs a receipt instead of entering their pin. In that case, the risk of it being an unauthorized transaction increases, increasing the processing cost affiliated with the transaction.

Advantages of Credit Cards

The concept of credit cards is much less attractive if you look at it from the perspective of paying interest on the money you have loaned. But there are some upsides to using a credit card over a debit card as well. Credit card issuing banks and associations are known to give out rewards based on credit card usage. Prizes such as airfare miles, cash backs, and points that the cardholder can collect to make future purchases are prevalent. These can add up to many savings for someone who uses a credit card regularly and wisely. 

Credit cards also come with benefits such as more extended warranties on products and discounts on prices. There is much more legal protection in data breaches for credit cards. Also, suppose someone makes an unauthorized purchase. In that case, the cardholder usually gets the disputed amount back before paying for it through the court.

Advantages of Debit Cards

Most debit cards do not have a lot of fees in comparison to credit cards. Credit cards charge multiple fees in connection to the payment of the borrowed money. Also, as the money is instantly deducted from the consumer's account, the debit card provides an increased sense of fiscal responsibility to the cardholders, preventing them from overspending. Therefore, it's much better for people who have trouble managing their expenses to use a debit card instead of a credit card to keep their spending in check.

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