How Does a Debit Card Work?

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When people want to purchase items, they can use a debit card to pay for items whether it be groceries, clothing, or monthly bills. When you open a checking account at your local bank, then you will get a debit card so you don’t have to write out a check every time you want to use the money that is in your checking account. Depending on the bank, you may have to pay when you use the card, especially at an ATM. When you use the card to pay your bills directly, usually that does not cost you a fee. It depends on the bank that gives you the card whether or not you will be charged a fee and if so, when. This is how a debit card works.

Debit cards look just like credit cards but debit cards work differently. If you use a credit card, you are paying with money that you currently don’t have but you expect to have the money by the time your next credit card statement is due. When you use a debit card, you are using the money that is already in your checking account.

Benefits Of Having A Debit Card

  • You don’t need money on you when you decide to purchase something. You either insert or swipe the card (if a debit card has a chip, you will insert it chip side first) and then enter your four-digit Personal Identification Number.
  • When the card is charged, money is removed from your checking account immediately. The money must already be in your account or your card will be declined.
  • You can get your hands on money if you have your card. Anytime you need actual cash, just go to any ATM. If you use an ATM that is not connected to the bank that issued your debit card, you might have to pay a fee. If you buy something using the card itself, you might get cash back depending on who issued the card.

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What Is A Personal Identification Number?

Your Personal Identification Number (often referred to as PIN) is a four-digit code that allows you to authorize transactions through your card., When you are first issued your debit card, it will come with a preset number but you can change the number right away if you won’t be able to remember the PIN that came with your card.

When you buy something with your debit card, you will have to enter your four-digit PIN. The PIN makes sure no one but you is using your card and therefore only you have access to the money in your checking account.

It is very important that you keep your PIN to yourself. Don’t write your PIN on the card or in your wallet. When you come up with the PIN for your card, it must be a number you will be able to memorize.

Difference Between Processing Credit & Debit Cards

When you use a debit card or a credit card to buy something, it’s the same process for a customer. The only difference is with a credit card, you don’t have to enter a PIN. The seller processing the payment has different processes regarding what a customer uses to pay. One thing that is similar between both cards is how long it takes before the seller gets paid. If you would like more details on what goes into processing payments from these cards, that is discussed below:

When it comes to debit cards, they can be processed in two different ways. The way most people choose to have their cards processed is the Debit Online PIN procedure. This is when you select Debit, enter your PIN after swiping or inserting your card like most people choose when they buy something from a store with their debit card. The second processing method is the Credit Offline Signature procedure. Depending on which option you choose will decide which network the card will go through. The process looks the same but the seller will be charged a small fee depending on whether somebody uses a credit or debit card.

We have talked a lot about debit cards at this point so that’s why we will cover the processing procedure of credit cards first.

The Procedure Of Paying With A Credit Card

Instead of having the money already in an account, the customer and the bank issuing the card agree on a line of credit. When the customer uses a credit card to pay a bill, the money goes a similar path then it would if you used a debit card. The steps are below:

1: The information surrounding the charge will be sent to the bank of the seller.

2: The bank the seller uses asks for the money from the bank that the customer uses.

3: If the customer has not gone over their credit limit then the bank of the customer will pay the bank of the seller.

4: The bank that the seller uses will pay the seller with money from .the bank of the customer.

5: After a couple of days, the bank of the seller and the bank of the customer will take care of the charges between them.

6: All that is left to be paid is the amount between the customer and the bank of the customer.

7: The customer pays their bank once a month based on what they agreed to when the customer received the credit card.

The banks have to be careful when it comes to credit cards because their customer might end up not paying the agreed amount.

The Procedure Of Paying With A Debit Card

When a customer purchases with a debit card, they already have a bank account that the bank can take from to cover the cost. So when the bank of the seller contacts the bank of the customer, the bank of the customer allows the transaction and then uses the money from the bank account of the customer to pay for the sale of the items.

When the banks are dealing with debit card transactions, they don’t have to worry as much as they would with a normal credit card transaction. One reason the banks don’t have to worry about debit cards as much as credit cards are when the bank allows the charge, they can make sure the designated account of the customer has enough money to pay for the charge. If there isn’t enough money in the bank account, the bank can decline the charge. With credit cards, the bank is trusting that you’ll have the money to pay them back when the time comes but the bank is expecting you to already have money to cover the bill when you use a debit card.

Do Business Owners Need Special Technology To Accept Credit Card and Debit Card Transactions?

Yes. If you are going to have a physical location that allows customers to visit and purchase items, then you will want to open a merchant account. You can have one that is a normal bank account which will need more information to get up and running but are very secure. Payment Aggregation is much quicker to get up and running and you don’t have to worry about waiting for the approval of anything.

The account will record every sale by itself while aggregators combine your sales with other businesses that use them to keep their prices from being too high. If you go with an aggregator and they notice something that seems suspect in any way, they will stop all financial business dealings until the matter is resolved.

Acquiring A Card Reader

There are different card readers you can get and which one you get will be decided on what you are selling. You may have to buy one unless the merchant account you signed up for gives you one for free.

However, if you have to sign a contract that lasts longer than two years or allows you to purchase the card reader for a certain amount of time, that is a warning sign of a bad deal. Contracts usually do not last much longer than two years and the readers they provide won’t have outrageous prices to the point where leasing would be a better deal.

What If You Want To Accept Credit Cards While You’re Traveling

If you are going to be accepting payments when you’re out in the world then you need a phone app that will handle payments and has good customer service should the app not work. You’ll also want to be able to accept payments if you are in an area that doesn’t have cell phone service or online capabilities so try to get an app that will work online and offline.

You’ll also need a card reader that you can take on the road with you. However unless you are a big business, it would be best to accept a processor that has its phone app and card reader. Some processors include PayPal, Squares, and Shopify.

If you are going to be selling on websites like E-Bay, and Bonanza or more categorized specific websites then you will need to pick a processor that will process credit cards like the options listed above. Many websites allow the use of PayPal since that is the most popular.

Hopefully, after reading this, you understand the difference between debit cards and credit cards as well as everything that goes into using those cards to purchase an item. Additionally, that is how a debit card works. If you are planning to run your own business, you will want to decide how you are going to take payments in person since many people don’t carry cash on them.


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