Difference between Credit Card, Debit Card and Prepaid Card

Prepaid Card, Debit Card and Credit Card, all three helps anyone to make the payment in a cashless manner. With time, they have gained a lot of popularity. The purpose of all these is the same and that is to make a payment without using cash. The difference lies in their functioning and the source from where actually the payment is done.

These basics of how all of these cards’ transactions work and other important aspects of why the transaction declines are discussed here. Also, it discusses the charges on the debit card and credit card transactions.

Debit Card Transactions

Debit Cards are termed ‘Use Now’ Pay Now’ which means with its usage for the payment, you authorise your bank to give out your money from your bank account to which the account is linked with. It can be used at the ATMs too, to withdraw money and other functions that the ATMs provide, it can be used at the Point-of-Sales Machines or even the online purchases. You would require the Card Number, PIN (personal identification number), CVV, etc depending upon the Card and the mode of use, i.e. a payment gateway or POS.

Debit Card Transaction Process

• When the payment is initiated by the customer using a debit card, the customer card details are captured by the processor/terminal and sent to the Card-Processing Network.
• The Card Network Processors makes some fraud evaluation and forwards the request to the issuing bank
• The issuer would do their part of analysis for the card validation and if there is the transaction amount present in the bank account.
• After the successful process the money is taken out of the customer’s bank account (issuing bank).
• There is a process of Clearing in which all the authorised transactions are forwarded in a batch to the Card Networks which in turn forwards the same to the issuing bank that posts the transactions to the customers’ bank account.
• Lastly, in the Settlement process, the card network would make the calculations of the amount owed by the issuers to the network and the network to the merchant.

Debit Card Transaction Declined — Reasons

1. The PIN entered is incorrect
2. The Debit Card is expired
3. In case of the online purchases, it requires you to enter the OTP received on your registered mobile number and the password too. In case, if any of them are incorrect the transaction would decline.
4. If the International purchases are not authorised on your Debit Card or the type of Debit Card that you have does not support international purchases then that type of transaction would decline.
5. There are not enough funds in the account linked with that debit card. (Unless there is an Overdraft facility enables in your account, this might decline the debit card transaction)
6. Due to some technical issues, like network connectivity problems, authorization issues with the banks or at the merchant side, power failure at any point, etc would cause a debit card to decline.

Charges on Debit Cards

The types of fees being levied upon a debit card are like Regeneration of debit card fee, Annual Maintenance fee, replacement of debit card fees, replacement of lost/stolen debit card fee, charge on the regeneration of debit card PIN fee, etc. All these charges vary from bank to bank.

Credit Card Transactions

Credit Cards are a ‘Use Now, Pay Later’ type of cards. When the customer makes any payment using the credit card they are creating debt and borrowing the funds from the card-issuing financial company. There is a pre-set borrowing limit on that card already which is decided on the basis of the credit-rating of the cardholder.

The cardholder needs to pay-back the borrowed funds within the due date, there is no extra charge. However, if the due amount is not paid back there is an interest charged on that outstanding amount after the due date.

There is a late fee charged if even the minimum amount is not paid by the due date. In addition to that, the interest is levied upon the outstanding balance and the new payments as well, if the due amount is not paid in full.

Parties involved

• Cardholder: The customer who is making the payment
• Card-issuing bank: A financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently.
• Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
• Acquiring bank: The merchant’s bank
• Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
• Transaction network: The system that implements the mechanics of electronic transactions. May be operated by an independent company, and one company may operate multiple networks. There may also be a payment gateway or aggregator in between that processes the transactions between the merchant and the customer and all other parties involved.

The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

Credit Card Transaction Process

• Authorization: The customer makes the payment using a credit card, the details are submitted to the Acquiring bank (merchant’s bank) by the merchant. The credit card number, transaction and the amount to be paid is being verified by the issuing bank. After authorization, the paid amount is reserved on the card for the merchant to whom the payment was made.
• Batching: The authorized transactions are stored in “batches” and are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will remain valid for a period determined by the issuer, after which the held amount will be returned to the cardholder’s available credit on the card.
• Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction (as a debt on the cardholder). The settlement time period mostly takes around 2–3 days overall.
• Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totalling the funds in the batch minus the fees the merchant pays the acquirer for processing the transactions. Now the issuing bank owes the money from the customer.
• Chargebacks: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Credit Card Transaction Declined — Reasons

1. The credit limit is over on the credit card. That is the spendings have reached the limit provided on the credit card.
2. The previous payments are left to be paid and the card is suspended due to that.
3. The expiry date on the credit card is reached and the card is expired.
4. The credit card account is suspended due to fraud suspicions on the payments that are made as the purchasing pattern is being monitored by the Card issuers.

Charges on Credit Cards

There are various charges on credit cards like joining fees, annual fees, late payment fees, and bounced cheque. As mentioned earlier the Interest is charged on the outstanding amount if it hasn’t been paid by the due date.

However, most cards offer 100% lost liability protection. So, you are not liable for any unauthorized transactions made. Get to enjoy cash back, air miles, and reward points which can be redeemed and comes with various dining, retail, entertainment, and travel privileges (depending on the type of card you have), unlike debit card.

Prepaid Card Transactions

Prepaid Card is not linked to any bank account though it can be issued by a bank or any other non-banking financial institution. It is a ‘PayNow, Use Later’ type of Card, which means it needs to have a balance of a pre-loaded amount on it. This can be done through your bank account, Cash, or even a Credit Card.

Sometimes, it may have an overdraft facility in which you are able to use more than the balance on it. However, it will have extra charges or interest in it.

They may even come with a signature strip, the name of the company that has issued the card, and a card number.

Types of the Prepaid Cards are as follows:

• Open-Loop: Means these cards can be used at various locations approved by the banks and comes with bearing the logos of the issuer e.g. Visa, American Express, etc. They are issued by banks and are also known as open system cards or network branded prepaid cards.
• Closed-loop: Means the usage is bound to a specific location only that is at an outlet or an establishment.
• Semi-Open loop Cards: Means the usage can be outside the specific establishment with the wider range of the merchants. For example, the malls having various other retail chains.
• Single-Use Cards: Means it comes with a preloaded amount but needs to be disposed-off after the single-use. Also, it cannot be recharged again.