Q: Can accepting debit cards really benefit my business? How do debit transactions work, and what services and equipment do I need to process them?
A: Debit cards are a popular payment choice for both merchants and consumers. They are commonly regarded as safer than cash, more convenient than checks and less expensive than credit cards. And thanks to the introduction of offline cards, debit payments are now more prevalent than ever. According to data compiled by ATM & Debit News, transactions made with offline debit cards alone during the first nine months of 2001 totaled $4.8 billion, up 26.3 percent from $3.8 billion during the same period in 2000.
Consumers value their debit cards because this payment option quickly and securely moves checking account funds without the hassles or risks involved with paper checks. Security features such as personal identification numbers (PINs) also protect shoppers against theft and fraud. Perhaps most important, consumers who make debit card purchases are free of the finance charges associated with credit cards.
Debit cards benefit merchants, too. Notably, a debit transaction can only be completed if sufficient funds are available in the customer's account, so the merchant's payment on an authorized transaction is virtually assured. Debit acceptance also helps merchants by boosting revenue from impulse purchases, lowering the risk of employee theft and offering access to customers who do not have or use credit cards. These customers prefer debit cards because they act virtually the same as cash, only with much more security. In addition, supermarkets offer "cash back" on debit cards so that they can reduce the quantity of cash on hand. Handling large quantities of cash is not only risky due to theft, but also expensive. Someone has to count it, lock it up, recount it, bring it to the bank, etc.
Two types of debit transaction occur: online and offline. Online debit payments require the secure entry of a PIN at the point of sale. It is important to note that this type of debit transaction is only available in the physical world, as no operating standards have yet been established for securely processing PINs over the Internet. However, new industry initiatives are expected to advance the development of PIN-based debit programs for the Web.
A shopper can initiate an online debit payment in a brick-and-mortar store by swiping his or her debit card through a magnetic card reader. The customer must then key his or her secret code into an encryption device called a PIN pad. The transaction is authorized in real time, funds in the customer's account are captured immediately, and money is transferred into the store owner's account in two to three business days. The merchant pays a nominal transaction fee. And because the customer authorizes payment with a PIN, the risk of a chargeback is virtually nonexistent.
To accept online debit payments, you must have a merchant account, debit processing service, a payment terminal, a receipt printer and a PIN pad. Many payment processing companies offer both credit and debit card services, but you must be approved for them separately. You can obtain a terminal and printer with an integrated PIN pad or purchase a discrete PIN-entry device and connect it to your payment system--just remember that your customers must be able access the device and enter their codes in private.
Unlike online debit transactions, offline debit payments do not involve PINs. Offline debit cards (also known as check cards) are typically issued by credit card companies through their participating banks. U.S. consumers make the majority of their offline debit purchases with the Visa Check Card or MasterCard's MasterMoney card. These enhanced ATM cards carry the Visa and MasterCard logos, respectively, and may be used everywhere the credit cards are accepted, including over the Internet.
A customer who chooses to make an offline debit purchase in the physical world authorizes the merchant to charge his or her account. On the Web, the customer enters check card information into a browser-based form, just as he or she would with a credit card. The data is encrypted, captured by the transaction processor's secure payment gateway, and sent to the credit card processing networks for authorization. Transactions normally settle in two to three business days.
Because check card transactions are processed through the same networks as credit cards, they often incur the same discount and transaction fees. If your business is already equipped to process credit card transactions (i.e., you have a merchant account, credit card processing service, and either a terminal and printer or payment-processing software), you should also be able to process offline debit payments. In fact, you may be accepting them now and not even know it.
To find out how debit acceptance can benefit your business, contact a payment service provider with experience in debit processing. A well-established transaction processor that offers a comprehensive line of payment products, quality customer service and a solid fraud-protection plan can save you time and money by offering reliable solutions as well as ongoing merchant support.
Tim Miller is COO of Cardservice International and has more than 15 years of experience in the credit card processing industry.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.