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Debit Cards and Payment Processing

Jul 16, 2008
In order to accept credit card payments, merchants need to have a payment processing method available to them. Typically, this means having use of a merchant account. This allows the merchant to accept major credit cards such as Visa and Mastercard. The downside to having a merchant account is the wave of fees that are attached to every transaction. Depending upon the merchant account contract, these fees can dramatically reduce the profitability of a transaction.

Today, more consumers are using debit cards to purchase items. While many merchants know that accepting debit card transactions will lower their payment processing fees, they often fail to realize that there are different types of debit card transactions, each with different fees. Below, we'll describe the difference between accepting debit cards and credit cards. You'll also learn how you can lower your fees even further by accepting direct debit transactions.

Debit Card Versus Credit Card Processing

From the merchant's point of view, there's only 1 notable difference between accepting a debit card and a credit card for a transaction. While a credit card allows the customer to tap into a credit line, the debit card allows the merchant to withdraw money for payment directly from a customer's bank account. The main benefit for the merchant is that processing a debit card transaction implies less risk for the bank. Therefore, the discount rate applied to the transaction is lower.

What Is A Direct Debit Transaction?

A direct debit transaction has the same result as a normal debit card transaction. The money is taken from the customer's bank account and transferred to the merchant. However, the process through which this happens is different. Processing a debit card for payment must be done through the merchant account. These transactions follow the same stream through the network as transactions processed with a credit card.

By contrast, a direct debit payment goes through the Automated Clearing House (ACH) network. It's transferred between banks. As long as a merchant has authorization to process ACH transactions, the direct debt can be performed through a business checking account.

Lowering Fees Through Direct Debit

Even though processing a debit card transaction through your merchant account will usually result in lower fees than a credit card transaction, you can lower your fees further. A normal debit card payment will typically have a discount rate of 2-3% attached. A direct debit payment carries a flat fee. Most of the time, it's $1 or less per transaction.

Here's an example of how much you can save by accepting a direct debit payment. Assume a transaction is $200. Using your merchant account to process a debit card payment with a 2.25% discount rate, you would pay $4.50. Accepting a direct debit payment through the ACH network would cost $1 (or less). If you complete 300 transactions per month of similar size, you could save over $1,000 per month.

Getting Started With Direct Debit Payment Processing

Accepting direct debit transactions is simple. You should start by asking your bank if they can help you gain authorization for ACH payment processing. Unlike establishing a merchant account, you won't be required to sign a long-term contract. You'll likely be able to use your existing business checking account for processing the payments.

As a merchant, you will still need to maintain your merchant account to process credit card payments. But, for customers who wish to use their debit cards to purchase items, consider becoming authorized for ACH payment processing. It's transparent to the customer and less-costly for you, the merchant.
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This article is brought to you by PaySimple, a leading provider of merchant account services.
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