Debit Cards
The Way Debit Works
While credit cards and debit cards look similar, the key difference is where the funds derive.
With a credit card payment, the account number on the card is tied to a line of credit offered to the consumer by the issuing bank which in turn provides the funds to pay the merchant.
With a debit card payment, the account number is linked directly to the cardholder’s bank account and the amount is immediately deducted from their account balance. (Issuing bank must confirm the cardholder has available funds to complete the transaction.)
Milestone for the Popularity of Debit
1966The Bank of Delaware launches a debit card pilot program as an alternative to carrying cash or a checkbook. Adoption is slow because there’s no technology connecting merchants to banks outside their state.1
1969The first Automatic Teller Machine (ATM) in the U.S. makes its appearance at Chemical Bank in Rockville, New York, enabling consumers to withdraw cash using a form and a PIN number. Debit cards made the process more user-friendly in the 1970s.2
2017Approximately 66 percent of American consumers say they prefer debit cards over credit cards because they give them more control over their finances by preventing overspending and interest charges.3
Debit Card Design
Like credit cards, debit cards are imprinted with the cardholder’s account number from the issuing bank.
Cards are programmed with a Personal Identification Number (PIN) to protect merchants and banks from fraudulent payments.
When making purchases in-store or at the pump, cardholders must correctly enter their PIN into a payment terminal, if they choose to process as PIN debit, to confirm their identity in order for the payment to be accepted. Otherwise, debit run as a credit transaction only requires a signature.
The PIN system helps authenticate the user. With EMV chips being added to debit cards, this provides an additional level of security and reduces the risk of fraudulent and counterfeit debit transactions (Click here to learn more about EMV).
The Mechanics of Accepting Card Payments
The Debit Transaction Process
Payments made with debit cards are processed the same way as credit cards. The only difference is that once the transaction is identified as a debit payment (which either happens automatically through the POS system or manually by the cardholder), the cardholder is prompted to enter their PIN. After authenticating the PIN, the payment is routed to a debit network, such as First Data’s STAR, Pulse, NYCE or SHAZAM, which handles authorizing, clearing and settling the transaction for the merchant.
Some debit cards are also attached to a credit card network to enable signature debit transactions which can be processed as either debit or credit. Depending on the POS system used, the merchant or the cardholder is given the choice. If credit is selected, the transaction will be routed through the associated credit network and will require signature for authentication rather than a PIN.
Source
1 ”A Guide to the ATM and Debit Card Industry,” Federal Reserve Bank of Kansas City, 2003
2 ”The ATM at 50: It Was Invented before the Debit Card (and Other Weird Facts),” MarketWatch, 28 June 2017
3 ”Here are the only 3 times you should use a debit card,” CNBC, 17 October 2017