Mark Dunn
January 26, 2023
min read

The First Consideration in Interchange is the Method of Payment

In this blog post, I’ll be describing the various types of electronic transactions that are accepted at most small businesses.  The reason why this is important is that the cost of processing a transaction is highly dependent on the type of transaction, that is credit, debit, prepaid, or ACH.

First, there is the credit card transaction.  The principal idea behind the credit card purchase is credit.   To get a credit card, you have to be extended a line of credit by a bank or financial institution.  The cardholder completes an application and if creditworthy, the financial institution establishes your credit line at a specific dollar amount, gives you terms of the credit program, and sends you a card.  The financial institution monitors your use of the card and reduces your credit line by the outstanding balance.  Your available credit is sometimes called “open to buy”.

Now let’s contrast that with a debit card transaction.  The debit cardholder deposits money into their checking account.  The debit card is linked to the checking account and purchases are debited from the funds on deposit in the account.  That, of course, means that the funds on deposit are reduced by the amount of the purchases.

There are two major types of debit transactions: Signature Debit (a check card transaction), where the cardholder signs a receipt; and PIN debit, where the cardholder enters a PIN number as a form of electronic signature.  These two types of debit transactions can originate from the same terminal but collect different data inputs and travel down different authorization pathways.  

Signature Debit exists under the Visa or MasterCard check card program.    When the merchant is running them on the terminal, these transactions seem very much like credit card transactions and the merchant may not know the difference.  The transaction is authorized similarly to a credit transaction, except the authorizing host is looking up funds on deposit rather than open to buy on a credit account.  The authorization message that goes back to the merchant’s terminal is virtually identical to a credit transaction.  

PIN debit is a transaction type based on what was originally a group of regional bank networks.  In the late 1970’s and 1980’s banks within various geographic districts around the US came together to form their own unique, shared online processing networks for clearing EFT  (Electronic Funds Transfer) transactions.  This was the network that linked ATM machines.

Since cash withdrawals were allowed from ATM’s, it was necessary that the balances be current to any moment in time.  Also, since transactions were allowed from unattended devices with no person available to verify a signature, the PIN (Personal Identification Number) would act as a secret code and substitute for a verified signature.  For the small merchant, PIN debit transactions at the point of sale require the cardholder to enter his or her PIN number on a PIN pad peripheral device or on the PIN enabled keypad of the terminal.

PIN debit card accounts are shared real time (or very near real time) balance systems.  They keep running balances that are updated as all types of transactions take place that affect the account.  Thus, when a PIN debit account approves a purchase for a certain amount, there is virtually complete certainty that the account has enough funds to cover the cost of the purchase.  

EBT is the acronym for Electronic Benefits Transfer.  EBT transactions are essentially PIN debit transactions that take place within the Federally-funded EBT program that runs within a state’s SNAP (Supplemental Nutrition Assistance Program) benefits program.  This is the program that used to be called Food Stamps.

A Prepaid card is like a debit card.   The cardholder prepays an amount into an account that is linked to the prepaid card.  Prepaid cards bear a card brand or financial institution logo, such as Visa or Amex.  Sometimes these are called “open loop” cards.    The principal benefit of financial institution branded prepaid cards is they may be used at any merchant that accepts payment cards.

ACH transactions are electronic payment transactions that move money from one bank account to another without a paper draft.  ACH stands for Automated Clearing House.  Many small to medium-sized merchants don’t need to do ACH transactions.  However, if you have clients with monthly payments like rent or monthly membership fees, you will need to have ACH payments.

Whatever merchant or business type you’re working with, Field Guide can walk you through the full range of transactions.  If you have any questions about a particular type of transaction, just give us a call.

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