A debit card enables payments by drawing funds from the cardholder’s bank account. Unlike a credit card, where the spending limit is determined by the financial institution that provides the card, the limit for a debit card is the existing money in the cardholder’s account. This payment method is very popular around the world, with roughly 3 billion Visa debit cards in circulation in the first quarter of 2023. But while they are fairly intuitive to use, these cards require a lot of work behind the scenes to complete a purchase.

Below, we’ll explain how debit cards work, how they’re different from credit cards, and how platforms such as Stripe can help your business accept debit cards more easily.

What’s in this article?

• What is a debit card and how is it different from a credit card?
  
• How does a debit card payment work?
  
• What are the pros and cons of debit card payments for businesses?
  
• What tools enable businesses to accept debit card payments?
  
• How does Stripe simplify debit card payments?
  
• What fees are associated with debit card transactions?
  
• How do businesses improve debit card acceptance?
  

What is a debit card and how is it different from a credit card?

A debit card is linked directly to a bank account. It uses existing funds in the account to make payments. This serves as the spending limit, which can discourage overspending, as purchases are immediately debited from those funds. This also means transactions settle as soon as they’re approved. Customers usually receive debit cards automatically when they open checking accounts with banks.

With a credit card, the credit card issuer lends the customer funds up to a specific limit, instead of the customer using their existing funds. Credit cards come with monthly statements, and customers can choose how much of their statement balance to pay off—though not paying off a balance in full can result in interest charges. It’s often harder for a customer to get a credit card, as a financial institution needs to assess their creditworthiness. The approval process looks at factors such as income and credit score. This is unnecessary for debit cards, which allow the cardholder to make transactions only if there’s enough money in their account.

How does a debit card payment work?

Although debit card payments seem quite simple, several steps must occur in the background to complete a purchase. The exact sequence can vary depending on local rules or the card network (e.g., Visa, Mastercard), but here’s how it generally works.

Authorization request

As a business owner, when a shopper enters their debit card info online or taps a card reader in person, your payment system communicates with the card network to transmit the transaction details.

Card network routing

The card network passes the transaction details to the issuing bank, which is the bank that issued the customer’s debit card. This ensures that the transaction can be processed according to that network’s rules.

Bank check

The issuing bank checks the cardholder’s account balance to determine whether there is enough money to cover the charge. If everything is in order, it places an authorization hold and sets the funds aside. If there aren’t sufficient funds, the issuing bank declines the transaction.

Authorization response

The issuing bank sends a message back through the card network, either approving or declining the transaction. The card network then passes the message to your payment system. Your checkout flow will display whether the transaction was accepted or declined.

Clearing and settlement

At the end of the day (or sometimes immediately, depending on the payment flow), transactions enter a clearing stage. During this stage, the sum moves from the cardholder’s bank to your acquiring bank or payment provider. Settlement happens when the funds enter your bank account or your payment provider’s bank account; this can take a few business days.

What are the pros and cons of debit card payments for businesses?

There are many benefits to accepting debit card payments but also a few drawbacks.

Pros of debit cards

• Wide acceptance: Most adults with bank accounts have debit cards. They’re a go-to payment method for many people. Businesses that accept debit cards offer these customers their preferred payment method.

• Low risk: Because a debit card quickly draws from existing funds in a checking account, this payment type is more likely to be settled than a paper check. If the customer’s bank approves a payment at the point of sale (POS), that means the money is there. This helps lower the risk to your business.

• Easy setup: If you already accept credit cards, you can usually accept debit cards without much extra configuration, as modern payment gateways typically handle both types of cards.

• Potential savings: Debit interchange rates can be lower than credit card rates, especially with debit regulations in the United States (which cap the fees large issuers can charge). That can mean a slightly lower acceptance cost overall.

Cons of debit cards

• Immediate withdrawal: Because the funds are debited from the customer’s account right away, a shopper might be more cautious about spending. While this isn’t always a major drawback for businesses, it can influence average order values.

• More dispute potential: Debit and credit cards have similar but not identical chargeback timelines and procedures. A customer might be quicker to escalate a debit dispute because the money has already left their account, so be prepared with strong proof of transaction details.

• Geographic restrictions: Debit card acceptance can vary from country to country. For example, in some places, local debit networks have their own rules and processing flows. Addressing these requirements can require extra effort if your business operates internationally.

• Potential spending limits: Some banks impose daily transaction limits on debit cards. Depending on how the card is used that day, a bank might decline a large transaction even if the funds are available.

What tools enable businesses to accept debit card payments?

Much of the technology used to accept credit cards also works for debit cards. Online sellers often use payment gateways or software development kits (SDKs) provided by payment processors, and many brick-and-mortar stores rely on POS systems that read both debit and credit cards. Here’s how these tools facilitate debit card transactions.

Online payment gateways

A payment gateway collects debit card details and passes them to the processor. Stripe Checkout has prebuilt payment pages you can embed on your site or link to for payments. You can also integrate a custom payment form with direct application programming interface (API) calls, if you’re comfortable coding.

POS hardware

Physical card readers come in many forms, from smartphone attachments to full-fledged terminals. To accept debit cards, the reader must be able to read the card’s magnetic stripe or chip and route the encoded information to the correct network. If you need personal identification number (PIN) entry—as is the case with some in-person transactions—you’ll need hardware that can process PINs as well.

Virtual terminals

A virtual terminal is software that simulates a physical card reader and allows you to enter card details manually. Many virtual terminals can handle both debit and credit data, although there are sometimes special rules for certain kinds of debit transactions.

How does Stripe simplify debit card payments?

Stripe accepts a wide range of payment methods, including major debit cards and regional card networks in different countries. Here are a few ways Stripe can help businesses:

• Unified integration: A single Stripe integration lets you process both credit and debit cards.

• User-friendly processing flows: Stripe Checkout, Payment Links, and the Elements library all provide ways to gather payment details, whether you’re a business owner without much technical training or a developer with advanced needs.

• Security measures: Stripe invests heavily in maintaining compliance with standards such as the Payment Card Industry Data Security Standard (PCI DSS). It tokenizes your data to keep raw card numbers off your servers and make compliance much easier.

• Global acceptance: Stripe connects with major card networks around the world. If you’re selling internationally, it can integrate with popular debit networks to serve customers across countries.

• Analytics and insight: The Stripe Dashboard tracks debit and credit transactions, your authorization rates, and any declined transactions in real time. With this insight, you can adjust your approach to better serve your customers.

What fees are associated with debit card transactions?

Whenever you process a debit card transaction, you’re likely to see different fees applied. They vary by region, card network, and bank, but these are the most common costs you can expect.

Interchange fees

This is often the largest fee for many transactions. The issuing bank receives an interchange fee in exchange for putting up the money when a cardholder makes a purchase (after checking that the funds are in place). These fees are generally a percentage of the transaction, plus a fixed fee.

Assessment or network fees

The card network typically charges a small percentage to handle the processing routes. This rate is usually nonnegotiable and set by the network.

Processor markup

Payment processors also charge a markup for routing transactions, keeping data safe while in transit, and handling payouts. This can be a flat fee, a small percentage, or a blend of these two models.

Subscription or monthly fees

Some payment processors charge monthly or annual fees for access to their platforms. Stripe offers pay-as-you-go pricing so you don’t pay subscription fees for basic processing capabilities.

Authorization or compliance costs

In certain cases, you might also see small charges for features such as address verification and 3D Secure authentication. These features help minimize instances of fraud or unauthorized transactions, and they can appear as additional line items.

How do businesses improve debit card acceptance?

Once you start accepting debit cards, you should adjust your payment strategy to accommodate them. Here are a few tactics to consider.

Make checkout as easy as possible

Customers tend to scrutinize their debit card payments more than they do other methods since the funds leave their accounts right away. If your checkout process has too many steps or isn’t clear, the buyer might abandon their cart. A simple checkout process can increase your conversion rate, and tools such as Stripe Checkout can prominently display what types of debit cards are accepted.

Keep your account up-to-date

Payment providers and card networks require that you keep your business information (e.g., address, contact details) current to avoid administrative issues. You should also check whether your descriptor (i.e., the description of your business on the customer’s bank statement) is something customers will recognize to minimize disputed charges.

Use advanced fraud prevention

Stripe Radar and other AI tools can detect suspicious patterns and stop fraudulent transactions before they escalate. Configure your risk thresholds so you can catch these transactions without blocking legitimate sales.

Adjust your authorization and capture settings

If you run an online store and ship physical goods, you might authorize a payment first and then capture the funds after you check inventory. Stripe allows you to place an authorization hold for a short window as you confirm availability. Customers can feel uneasy if their money’s tied up for too long, so keep these authorization holds short.

Communicate your refund policy

Debit card refunds return to the same bank account. If your customer receives a partial or full refund, explain how many business days it might take to see the funds in their account. Because debit cards are tied to checking accounts and feel more “real,” customers can get anxious if they’re uncertain about when they’ll get their money back.

Monitor your metrics

Track your acceptance and chargeback rates, as well as average transaction size for both debit and credit card transactions. That data can help you create promotions or special offers that resonate with both debit and credit card customers. If you notice that an especially large portion of your customer base pays with debit cards, you could emphasize that you accept that payment method on your site to attract similar buyers.