Life used to be so simple. You want something, you offer something in exchange. I’d like a sack of grain, here is a fine chicken. Deal. Then we invented cash, which greatly simplified the process – a uniform standard of value and much easier to fit in your pocket than a chicken. Next came checks; paper IOUs that avoided the need to carry large amounts of cash around – very dangerous! All the above have been around in one form or another for centuries, at least. But in last few decades, the number of payment methods has ballooned and it’s getting darned confusing.
We’re here to help! Pro Tip – you can skip to the end of this blog if you just want to know what to do. But if you’re interested in what’s happening in the background, read on.
Pretty much everyone understands credit cards. Back in the 1920s, merchants began allowing customers to charge purchases with a promise to pay for the goods later – basically running a tab. Then in 1958 came “The Fresno Drop” – a national bank mailed thousands of unsolicited credit cards with a preapproved credit line to residents of Fresno CA to see what would happen. What happened is that the bank lost a bunch of money as people used the cards and didn’t bother to pay. The bank wised up in a hurry and started offering credit cards only to folks with good credit. And thus was born the credit card and credit score industries, first with Visa, then MasterCard, Discover, American Express and numerous other smaller issuers.
Now we have debit cards, which are like credit cards except that the funds for a purchase are withdrawn immediately from your account, instead of accumulating as a debt to be paid monthly or over time (with interest!). Debit cards have become the primary form of payment in the United States, and are popular because they’re like cash, and keep folks from spending money they don’t have. We could go on to prepaid cards, stored value cards, PayPal, Venmo, Apple Pay and other mobile payment tools, but let’s save those for another day. This is going to get weird enough as it is.
So, you go and buy something and you pull out your debit or credit card to pay. Do you swipe? Do you dip (if it’s a “Chip” or EMV-enabled card)? Do you sign? Do you enter a PIN? Do you do neither? Who decides all this? What does it matter?
It turns out it matters a great deal. It used to be that the card issuers (MasterCard, Visa, Discover, etc.) decided how payments would be processed, and they chose ways that earned them the most money. The in 2008 came “The Great Recession” and in response the Dodd Frank legislation that tried to address some of the excesses in the banking and payments industries, and the so-called Durbin Amendment that specifically addressed how and who controls the way electronic payments are processed. As a result, now it is the merchants and their card processors (the companies that program their payment terminals and hand off the transactions to the card issuers) who have all the power.
So far so good? Now it starts to get weirder. You have a debit card, you swipe it, and the terminal asks you if you want “debit” or “credit.” “Well, duh”, you think, “it’s a debit card,” so you push debit and off you go. But what would happen if you pushed “credit,” you wonder? Well if you did, lo and behold, everything would work fine. Except, maybe, instead of being prompted to enter your PIN, you might be asked to sign. Or maybe not. But wait, you think, this isn’t a credit card, I don’t have a credit account, I want the funds to come right out of my account like usual. Well, it would. Because it’s a debit card, even if you pick credit. Likewise, if you use a credit card and pick “debit”, it’s still a credit card and the purchase will show up on your credit card statement for you to pay (now or over time). Confusing, right?
What’s going on here? What’s happening is that if you have the option to pick “debit” or “credit”, you’re not telling the terminal whether you have a debit card or a credit card – it already knows that. What you’re telling the terminal is how you want the transaction routed, from the terminal, to the card issuer, to your bank or credit card company, to your account. Do you care? Not really! Who cares? The merchants! Because different routings cost them different fees and may affect how quickly they get the cash from your card issuer and, ultimately, you. But maybe you DO care, because some merchants and processors may not be programmed to accept certain combinations of cards and transaction types. So you might use a debit card that gets declined as a debit transaction, but processes just fine as a credit transaction. Why? Because the merchant wants it that way.
We shouldn’t be picking on the merchants, because they’re just as confused as we are. Most cashiers don’t have a clue about all this stuff, and many small shop owners don’t either. They just bought the package that their processor offered them. And now they’re being forced to upgrade their terminals to be chip-enabled, at great expense to themselves, by the credit card companies who are trying to reduce the cost of fraud. Larger national merchants are much more savvy about how this all works, and may literally be negotiating and renegotiating their rates and payment preferences with their processors and the card companies weekly, to minimize their costs. So, at a big box store, you’re likely not to be given any choice at all – you swipe (or dip) your card and you do what the machine tells you. Well actually you almost always have a choice, but the terminal may not make it easy for you to override the default option.
Wow. Uncle. I give up. I don’t care. Just tell me what I need to know.
OK, here you go—Pro Tips!
1. Your debit card is a debit card, no matter how a purchase gets routed. The only time it matters is if you want cash back, then it must be processed as a debit transaction. You might be able to get cash back on your credit card, but it’s going to cost you fees and interest. Only for emergencies! Either way, the merchant controls whether you can get cash back, and how much.
2. There are times when you might want to select “credit” even if you’re using a debit card. When you select “debit” a hold may be placed on funds in your account. Actually, this happens all the time, but usually the hold is for the amount of the transaction, until it “hard posts” to your account (and the hold drops off). One time this often matters is at gas stations, where they’ll put as much a $100 hold on your account, even though you might only be pumping $10 of gas. If you don’t have $100 in your account, no gas for you. Why? Because they know that between the time you pump your gas and the transaction hard posts (could be a couple of days) you might spend the balance in your account and the gas transaction will bounce. Why is this
usually only at gas stations? I don’t know. But select “credit” at gas stations and avoid the hold!
3. If you use your card and the transaction is declined, it could be for a variety of reasons. It could be blocked because antifraud software has identified something about this transaction that is suspicious. If you’ve signed up for alerts from our fraud detection software, you should get an email, text or phone call alerting you and asking you to allow (or not!!!) the purchase. It could be because the purchase will overdraft your account. You can sign up for our Courtesy Coverage program which will temporarily allow the overdraft and complete your purchase. Occasionally it could be because the merchant isn’t accepting the combination of your card type and transaction type. Try running the card as a different transaction (credit instead of debit, for example).
4. Be prepared and have a backup payment plan. Not all merchants accept all cards, and some merchants don’t accept cards at all—cash only, please. Do consider having a backup card, or carry a blank check, or keep a little cash in your pocket as a backup. Except I know of a merchant who doesn’t accept cash – plastic only!!!! So be resilient and have Plan B, just in case.
5. We don’t recommend carrying a chicken around for trade. Too messy. Paying with plastic is here to stay, and with a little knowledge and planning, you can avoid the occasional problem.