As times change, technologies change, and we develop things to help make our lives easier and more convenient. One such example is the introduction of the debit card. This handy little piece of plastic eliminates the need to carry cash but, like anything else in life, it has its pros and cons. We will look at how debit cards work and some myths and facts about them as well.

Debit cards are primarily tied to your checing account for purchasing. You can also access funds at the ATM with your debit card as well. There are multiple parts in a debit card transaction, and we’ll break down how the process works. When someone swipes a debit card through a merchant’s terminal, the terminal reads the magnetic stripe (or chip) in the card and transmits the data to a card processing network, this is called authorization. There are several card processing networks commonly found on the emblem on your card (Visa, MasterCard, star network, maestro, etc.).  The network ensures the pieces of transaction data are correctly formatted. Then, it performs a fraud analysis and forwards the information to the bank that issued the debit card. The issuer then validates that the card hasn’t been reported as stolen or lost, confirms whether funds are available in the cardholder’s account and then notifies the merchant, again through the network, whether the transaction has been approved.

Once authorized, the card transaction will need to be sent through the card processing network to be sent through to their bank. This might take several tries throughout the day, once sent through the transactions are recompiled and sent to the issuers. Once this is done the issuer posts the transaction to the customer’s account. That’s what is called clearing the transaction. Once cleared, the network will calculate how much the issuer owes the merchant and vice versa and payment is made. This could be done on the same day, next day or several days. Once the merchant is paid by the acquiring financial institution and the network is paid the transaction is settled.

Your 16-digit card number on your debit card is crucial in the transaction process. Typically, the 16 digits are comprised of a 6-digit bank verification number (to identify your issuing bank) to help verify the account being debited. The back of the card carries a magnetic stripe, signature panel or a code or a chip. Sometimes the issuer of the card will put a hold onto the funds on the card being used until the transaction is authorized and the transaction settles. To illustrate I have two examples of this: An authorization to purchase gasoline up to a certain dollar amount might be adjusted after the fuel is pumped into the tank, and an authorization to pay a certain dollar amount for a meal at a restaurant might be adjusted after the diner adds a tip to the total. This is what causes transactions to sometimes “disappear and reappear” on your transaction history on your accounts.

Visa and MasterCard tend to process signature-based transactions, which typically use a so-called two-message process in which authorization and settlement are performed separately. The smaller networks usually handle PIN-based purchases, which occur via a single message that incorporates both authorization and settlement. Signature transactions are more widely accepted by different merchants while pin transactions are typically found at major retailers, gas stations and supermarkets. But as times go on the distinction between pin and signature transactions gets more intertwined with more places being more “swipe and go” and pin-based charges not needing a pin or a signature transaction not needing a signature.

Oftentimes there is confusion about debit card transactions on an account. When you look at your statement, the transactions down with a debit card may show up as POS transactions, with the merchant listed on the account. If you see an ACH transaction, this means that the money was directly debited from your account and that you did not use your debit card to complete your transaction. Understanding this can help you if you are trying to find out if someone accessed your account without your permission. It can also help you identify spending if something is not labeled correctly. For example, your local fast-food restaurants may be doing business under another name.

You can overdraw your account with a debit card. Some banks allow you to overdraw your account to a certain dollar amount and simply charge you fees for each transaction that they pay into the negative. Additionally, if you have checks clear later that night, you can find yourself overdrawn while using your debit card. It is important to keep a running balance on the account so that you know how much money you have available to you. Some charges may drop off the hold before they clear your account. It makes the money available again, which means that you can overdraw your account while using a debit card. Additionally, a check may not have cleared, which allows you to overdraw. Tracking your purchases yourself on paper or with an app is the best way to protect your money.

One of the biggest precautions you need to take with your debit card is to make sure that it or the information on it is not stolen. If your card is physically stolen, you need to call the bank immediately and cancel the card. Criminals might hack a website and steal the card information and then use it to make purchases online. Your bank may have sent you a new debit card at some point because there was a data breach at a merchant. If you find unauthorized transactions in your account, you need to call the bank immediately to find out what happened.

Another way that criminals are getting the information is through card skimming (one of the different types of fraud I discussed in my previous post on fraud.  The person can either swipe your card through the machine themselves (this happens at restaurants or other places where they take your card from you momentarily) or they can attach a skimmer to a machine where you use your card (like an ATM, vending machine, or RedBox). The skimmers are very small and blend in well. They can be difficult to spot. However, if one of these looks off to you, especially where you swipe the card, you should likely use a different ATM or vending machine. It is important to check your account regularly and watch out for unauthorized transactions, because the sooner you spot the problem, the easier it will be to resolve.

Debit cards are handy tools that can be used to may your day to day business as paper-free as possible. There are pros and cons to utilizing one and now with the knowledge of how these cards work, you can now operate with a better insight as to how these cards work and what all goes into each transaction. That is all I have for today, until the next time, invest wisely my friends.