Understanding Debit Card Transactions

The Fed’s payments study is published every three years and tracks trends in how people pay for merchandise. The study estimates the total number and value of payments made between 2006 and 2009 using checks, debit cards, credit cards, automated clearinghouse (ACH) payments (electronic checks often used to process recurring payments) and prepaid cards. According to the Fed study, debit card use experienced the largest increase in the total number of transactions than any other payment type between 2006 and 2009. Shoppers used debit cards 12.9 billion more times in 2009 than in 2006. When not paying with cash, Americans used, in descending order:

• Debit cards: 37.9 billion.
• Checks: 24.4 billion.
• Credit cards: 21.6 billion.
• ACH: 19.1 billion.

Additionally, debit cards are quickly catching up to credit cards and cash as a primary means of sales transactions, and are expected to exceed $2 trillion in transaction volume by 2010, according to a new study by market research firm Packaged Facts.

So what is up with debit cards?

The debit card transactions can be categorized into two types, on-line debit card transactions and off-line debit card transactions.

In an on-line debit card transaction, the authorization process is online, which confirms the card, you enter your PIN number and the system determines if there are adequate funds in the account for meeting the transaction. If it is accepted, the customer is able to buy merchandise from the business and the necessary amount is immediately transferred from the account of the customer to the business.

In an off-line debit card transaction, an online authorization process is carried out, which confirms the card and checks if there are adequate funds in the bank account for satisfying the transaction amount. If the amount is there, the customer can carry out the transaction and signs a receipt

The basic difference between an on-line debit card transaction and an off-line debit card transaction is that on-line debit card transaction requires a PIN number for authorization and off-line debit card transaction requires the signature of the customer for authorization

You may be saying, “Who cares how each transaction is processed?” You should and here’s why. When you do an off-line transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee. With on-line transactions the retailer gets those done for a lot less, maybe the only pay 10 cents or so per transaction.

Blocking or How your Money gets Frozen with a Debt Card

Some businesses routinely block a card for the estimated cost of a transaction. So they set aside or block money in your account for the transaction and you cannot spend that money anywhere else. If you use your debit card at a pump that does not require a PIN, your bank regularly will block out an amount, $50 to $100 on your card and you cannot spend it anywhere else. If your account is low, and you buy ten dollars worth of gas with your debit card, it could be a problem if the gas station blocks all transactions for $50 to $100. And then doesn’t "un-block" as you drive away, but waits until that evening, or worse, a few days later as they group a bunch of transactions together into a “batch" transaction. You could end up bouncing checks or be refused transactions by other merchants due to the block or multiple blocks before the transactions are processed. While the length of the hold is up to your bank, the amount of the hold is up to your gasoline retailer.

So here is what you do.

If you pay at the pump, use a credit card. If you just have to use a debit card to get reward points, pay inside where you can use your PIN number. I realize that this is not popular, but remember that PIN based transactions are registered immediately and the money is gone.

And by the way, cash is still good. Furthermore, and some gas stations, tired of paying high fees to your bank, now give a discount of up to a dime a gallon for cash. Look for such deals.

Article by Wil G.

Related posts:

1. You Have to Know Where Your Money is Being Spent