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Online vs. Offline Debit Transactions

How to decide which processing method is right for your business

Opinions expressed by Entrepreneur contributors are their own.

Q: Theterms "PIN-based" and "signature-based" oftencome up in discussions about debit card acceptance. What do theseexpressions mean? And how do the payment options differ?

A: Theterms refer to the two distinct ways in which debit payments areprocessed: online and offline. Online debit transactions call forcustomers to endorse payments by submitting their personalidentification numbers (PINs) at the point of sale, while offlinetransactions require shoppers to sign sales receipts.

The following information can help you understand more aboutPIN-based and signature-based debit transactions, and how eachpayment option can benefit your business.

Online Debit
PIN-based debit transactions are fast, convenient and secure. Inbrick-and-mortar environments, shoppers initiate online debitpayments by swiping their debit cards through magnetic cardreaders. The customers then key their secret codes into encryptiondevices called PIN pads. The transactions are authorized in realtime, funds in the customers' accounts are capturedimmediately, and money is transferred into storeowners'accounts in two to three business days. Merchants pay a nominaltransaction fee. And because the customers authorize theirpurchases with PINs, the risk to merchants of chargebacks isvirtually nonexistent.

To accept online debit payments, you must have a merchant account, a debitprocessing service, a payment terminal, a receipt printer and a PINpad. Many payment processing companies offer both credit and debitcard services, but you must be approved for them separately. Youcan obtain a terminal and printer with an integrated PIN pad orpurchase a discrete, free-standing PIN-entry device and connect itto your payment system. Just remember that your customers must beable access the device and enter their codes in private.

Practically speaking, this type of debit transaction iscurrently available in the physical world only, not the Internet. Anumber of financial institutions have introduced thatmay advance the development of PIN-based debit processing on theWeb, such as digital certificates, smartcard solutions and compactdisc-based systems. But no widely-accepted operating standards haveyet to be established.

Offline Debit
Unlike online debit transactions, offline debit payments do notinvolve PINs. Offline debit cards (or check cards) are typicallyissued by credit card companies through their participating banks.The cards may be used everywhere credit cards are accepted,including over the Internet.

In the physical world, customers who choose to make offlinedebit purchases must hand over their check cards. Merchants swipethe cards through their payment terminals and complete the debit sales the same waythey process credit card transactions. The customers then signsales drafts that authorize the merchants to charge theiraccounts.

On the Web, customers enter check card information intobrowser-based forms, just as they would for credit card purchases.The data is encrypted, captured by transaction processors and sentto the credit card processing networks for authorization.Transactions normally settle in two to three business days.

Because check card transactions are processed through the samenetworks as credit cards, they often incur the same discount ratesand transaction fees. If your business is already equipped toprocess credit card transactions (for instance, you have a merchantaccount, a credit card processing service and either a terminal andprinter or payment-processing software), you should also be able toprocess offline debit payments.

Making the Choice
Both forms of debit acceptance let merchants offer paymentflexibility to their customers, which in turn can capture impulsebuying, generate higher-ticket purchases and improve customerloyalty. But PIN-based debit transactions offer added advantages,such as:

  • The option to provide cash back to customers, which increasesstore traffic.
  • A fast way to move shoppers through the checkout line.
  • Virtual elimination of chargebacks and fraud.
  • Higher transaction approval rates.
  • Potential for additional revenues from surcharges.

The benefits are clear. With minimal investment,brick-and-mortar merchants can use PIN-based debit transactions tohelp increase their sales and profits.

But what does the distinction between signature-based andPIN-based debit mean to your business? If you're an Internetmerchant, check card acceptance can give you access to buyers whomay not qualify for credit cards, such as teenagers. Plus, youreceive funds from approved transactions quickly and securely.Perhaps most important, you can accept signature-based debitpayments with relative ease because they're processed much likecredit card sales.

If you own a business in the physical world, you enjoy theflexibility to process signature-based debit payments as well asPIN-based transactions, which provide increased security andopportunities to generate additional revenues.

Contact a payment service provider with experience in debitprocessing to learn about the payment options that best suityour business--and discover how debit card acceptance canhelp improve your company's bottom line.

Cardservice International Senior Vice President ofSales John Burtzloff is in charge of sales strategy andexecution and thus is responsible for managing all aspects of thecompany's marketing, communications, telesales, checkguarantee, new accounts and sales support activities.

The opinions expressed in this column are thoseof the author, not of All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.

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