How Debit Cards Work

A debit card is a plastic card which provides an alternative payment method to cash when making purchases. Physically the card is a ISO 7810 card like a credit card, however its functionality is more similar to writing a check as the funds are withdrawn directly from the cardholder's bank account; some cards are referred to as check cards.

The customer's card is swiped through a card reader or inserted into chip reader and the merchant usually enters the amount of the transaction before the customer enters their account and PIN. There is usually a short delay while the EFTPOS (Electronic Funds Transfer at Point of Sale) terminal contacts the computer network (over a phone line or mobile connection) to verify and authorise the transaction.

In some countries the debit card is multipurpose acting as the Automatic Teller Machine card for withdrawing cash and as a check guarantee card. Merchants can also offer "cashback"/"cashout" facilities to customers, where a customer can withdraw cash along with their purchase.

The use of debit cards has become wide-spread in many countries and has overtaken the check, and in some instances cash transactions by volume. Like credit cards, debit cards are used widely for telephone and internet purchases. Anyone doubting the ubiquity of debit card usage need only witness the inconvenient delays at peak shopping times (e.g. the last shopping day before Christmas), caused when the volume of transactions overload the bank networks.

Online and offline debit cards

There are currently two ways that debit card transactions are processed: online debit cards and offline debit cards. Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction may be additionally secured with the personal identification number (PIN) authentication system and some online cards require such authentication for every transaction, essentially becoming enhanced automatic teller machine (ATM) cards. One difficulty in using online debit cards is the necessity of an electronic authorization device at the point of sale (POS) and sometimes also a separate keypad to enter the PIN, although this is becoming commonplace for all card transactions in many countries. Overall, the online debit card is generally viewed as superior to the offline debit card because of its more secure authentication system and live status, which alleviates problems with processing lag on transactions that may have been forgotten or not authorized by the owner of the card. Banks in some countries, such as Canada and Brazil, only issue online debit cards.

Offline debit cards have the logos of major credit cards (e.g. Visa or MasterCard) or major debit cards (e.g. Maestro) and are used at point of sale like a credit card. This type of debit card may be subject to a daily limit, as well as a maximum limit equal to the amount currently deposited in the current/checking account from which it draws funds. Offline debit cards in some countries are not compatible with the PIN system, in which case they can be used with a forged signature, since users are rarely required to present identification. Transactions conducted with offline debit cards usually require 2-3 days to be reflected on users’ account balances. This type of debit card is similar to a secured credit card.

Many debit cards are actually capable of accomplishing both types of transactions, depending on the availability of proper equipment at the POS.

In the United Kingdom, Solo and Visa Electron are examples of online debit cards, which are typically issued by banks to customers whom the bank does not want to go overdrawn under any circumstances, for example under-18s.

Cards for mail, telephone and Internet use only

Special pre-paid Visa cards for mail, telephone (MOTO) and Internet use only are made available by a small number of banks. They are sometimes called "virtual Visa cards", although they usually do exist in the form of plastic. Such cards can be used whenever the remote store accepts Visa cards. Before making the transaction, the customer transfers the required amount of money from his main account to the card's sub-account using the bank's website or the telephone. Next, the customer gives the card number and the CVV2 code to the merchant, who authorizes the transaction electronically, as with a regular Visa card. If there is enough money on the sub-account, the bank grants the authorization and locks the adequate amount on the sub-account.

Such a card prevents fraud by a card number thief even if the card is not blocked, because the customer normally does not store any money on the sub-account and fraudulent transactions do not get authorized by the bank. For extra security, the CVV2 code is not printed on the card but rather sent separately to the customer in a secured envelope.

The bank also rejects local transactions, that is ones that are not made over the Internet, mail or telephone. However, some merchants use software incompatible with Visa regulations and send authorization requests that wrongly tell the bank that the transaction is not a MOTO/Internet one, in which case the bank rejects the request. Additionally, some merchants do not use electronic authorization at all, in which case the transaction cannot be completed as well. For these two reasons the card is unusable with a small minority of Internet, telephone and postal stores.

Article Source : http://wikipedia.org