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What are the implications of accepting debit cards versus credit cards?

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Debit vs. Credit More and more consumers are using debit cards, rather than credit cards. For the purposes of this explanation, a debit card directly "debits", or transacts an EFT (electronic funds transfer) from a customer's primary account--the first account linked to the card. A credit card generates an invoice, which the customer receives in the mail before he pays. This difference is very important, because both types of cards can accept PINs (personal identification numbers), or may be transacted, using signatures. Each type of card has its advantages and disadvantages. For the consumer, using a debit card can alleviate both the hassle of writing checks, and the need to carry a wallet full of cash. Consumers typically have the option of choosing "debit" or "credit" (merchants may or may not wish to offer both options). When debit is selected, the customer enters his PIN as he would at the ATM (automated teller machine), and his purchase is then treated as a cash, or POS (point-of-sale), transaction. The merchant may also elect to offer "cash back", which saves the customer a trip to the ATM, and saves him ATM fees, if an ATM is not available within his bank's network. When credit is selected, the customer signs a receipt, which the merchant then presents for settlement, before the purchase is posted to the customer's account, and then paid, via merchant services, to the merchant's account. An ATM card, without "credit" capability, can also be used at the point of sale, but is limited by the ATM networks to which a bank subscribes. Adding the Visa or MasterCard logo increases the consumer's ability to use the EFT option, rather than the cash or check options. The option for a PIN-based transaction with a credit card is typically treated as a cash advance at the ATM, although merchants can offer "cash back," as well. However, for the consumer, such cash advances charge a percentage, typically around three to five percent, versus the fees charged at out-of-network ATMs (which can average around $4.00 per transaction: e.g. $2.00 by the ATM vendor, and $2.00 by the consumer's bank). The merchant's decision to offer debit and/or credit must take into account the amount of his average sale vs. the daily limits that are imposed upon the consumer. POS-, cash- (ATM), and cash-advance limits are typically lower than signature limits, regardless of the amount of money available in an account; or of the customer's credit-card limit. POS transactions have typical limits between $100.00 and $1,000.00; ATM limits are between $50.00 and $1000.00, and are imposed by the bank in its effort to anticipate the demand for the cash in the machine; and cash-advance limits are dictated by the credit card company, and the entity advancing the cash. Limits on cards owned by businesses are typically higher than those owned by consumers. Conversely, debit-card, signature limits are typically around $1,000.00, but never exceed $10,000.00, regardless of the amount of the available balance. POS, ATM and signature limits are determined by several factors: the relative history that a customer has with the bank, the average balance that a customer keeps in his account, and his ability to maintain his account without overdrafts. Unlike POS limits, however, signature limits can be lifted (suspended) temporily, to allow larger purchases. Such suspensions are approved and set by the bank. The consumer lets the bank know how much he wants to spend, and the time-frame in which he expects to make his purchase: usually 12-48 hours. Another issue to keep in mind is the second type of daily transaction limit for signature-based purchases. That is, when a customer reaches ten unposted authorizations, he may not be able to authorize more until some have been posted. Whether a merchant offers debit and/or credit may also be dictated by the type of business. For merchants in the rental business--e.g. hotel rooms, cars, trucks, or equipment--a signature-based authorization is typically made for more than the final transaction amount, in the interest of anticipating charges, and protecting collateral. If a debit card is used, the consumer may not have the extra funds available for such a hold. A credit card may be a better choice for both the merchant and the consumer. Tip-based businesses, such as hairdressers, and particularly restaurants, use equipment that accounts for a gratuity--regardless of how this is ultimately handled--for signature-based authorization holds, prior to settlement. This means that the hold amount is often higher than the actual settlement, and may result in a lot of disgruntled customers who are questioning the higher hold amount. Gas stations, that require payment before pumping, can place authorization holds higher than the purchase amounts, which can inconvenience customers, as well, when needed funds are tied up. Service providers, of any type, may take card numbers for recurring payments. Even if the customer cancels such a contract, authorization holds can still tie up funds for several days, even without further action by the merchant. Authorization holds typically stay on a customer's account for three full business days, following the effective date, even after a "refund" is made to the customer. Without further action, the hold falls off, and the authorization balance is adjusted. Effective dates are Monday through Friday, excluding federal holidays. These are some transactions unique to certain businesses. A merchant-service provider can offer guidance for a particular business. For whatever reason, a customer may complain about multiple authorization holds for the same amount. This may be due to the equipment being used. Often times, a transaction--that appears not to have been authorized--may have actually gone through once, or even twice. A merchant may want to have the customer call his bank, to see if the transaction has actually gone through, or to provide a reason for the decline. The fees charged for accepting POS transactions are less than those for signature-based transactions. Banks typically do not charge a percentage of POS transactions, as they do with signature-based transactions. Instead, a fee of 10 to 25 cents is charged for each transaction. Although these fees add up, the cost is significantly less than a merchant would pay for signature-based, processing fees, or for check-processing fees. Also, both types of transactions, when using a debit card, are guaranteed, since funds are directly debited from the customer's account, and deposited into the merchant's, via the ATM network, or merchant services. Moreover, there is a lower incidence of chargebacks for debit-card transactions vs. credit-card or check transactions. Regardless of the fees, either type of transaction still carries a measure of risk for any bank. Transactions are authorized on "available balances", which may or may not reflect other electronic, customer authorizations. Moreover, such balances exclude paper-based transactions, which are usually reflected after posting. Customers, who don't keep accurate records, often double-commit their funds, creating great risk to banks, since banks must pay these guaranteed transactions. The result is that many banks, to limit the risk of hard loss, may close the cards of such customers, and may be unlikely to restore these privileges immediately, if such customers demonstate a propensity toward overdraft. It is true that chargebacks are less likely with the use of debit cards, but they are still very possible, especially with today's higher incidence of fraud, particularly with stolen cards. PIN-based transactions are less susceptible, due to the requirement of the PIN. Signature-based transactions are more susceptible to fraud, and a merchant may choose to protect himself by requiring picture ID on every card transaction. However, one business that is particularly susceptible to fraud is the gas station. Transactions at the pump, while signature based, do not require a signature. Consequently, it's very easy for a thief to deplete a customer's account with a rash of purchases to fill a fleet of cars--typically from different gas stations--before limits are reached. Internet-based businesses have a different set of issues not encountered by storefront businesses, and such issues may be more effectively addressed by a person running such a business. However, for obvious reasons, the merchant could only offer signature-based transactions. While credit-card transactions carry expenses for both the merchant, and the consumer (i.e. annual fees, cash advance fees, and interest), many consumers still prefer the "buy now, pay later" convenience of credit cards, and the potential for higher limits. On the other hand, debit cards are more easily obtainable, and typically don't require a credit application, despite the credit risk to any bank. (The exception would be the check-guarantee card, a debit card which also acts as a guarantee on written checks.) It may be in the merchant's best interest to have the capability to accept both POS and signature transactions, to allow consumers the option to use one or the other when limits are reached. Here are more opinions and answers from other FAQ Framers:
  • Fees depend upon the network that is used to carry the transaction. Newer Visa/MasterCard debit cards can travel over the credit-card networks, for which the merchant is then charged generally higher credit card fees. Using a PIN instead of a signature will send it to the bank's network.
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