As restrictions lessen and travel between countries becomes more common, understanding the payment differences between countries will be important. Not only will this help you confidently complete transactions but, as a business operator, you will know how debit payments are taken at your own payment terminals.
This blog will outline the differences between payment options for American and Canadian retailers and customers.
The evolution of payments and the introduction of debit
The evolution of debit is fascinating. It began in the early days of banks—around 2000 BCE—and by the 1800s, the concept of banking and the use of saving accounts were spreading to the masses.
Tokenization is a good example of this payment evolution. While today we think of tokenization as digital payment methods or blockchain, the first tokenization was a check. The currency (gold and other metals) was abstracted, and a token (check) was used to allow funds to be transferred.
Banking and payment methods continued to evolve. The first credit card was introduced in 1946 and by the 1960s all the major players were in the game. Debit was introduced in the latter half of the ‘60s alongside the introduction of ATMs—automated teller machines.
Credit and debit: What's the difference?
It’s important to understand that credit and debit are fundamentally different from each other. Credit allows someone to access a pre-approved monthly amount of funds and is completed as two unique calls:
- Authorization, where the funds are “held”
- Settlement, traditionally occurring a few days later, where the funds are settled
Debit, on the other hand, means accessing the cardholder’s earned funds in real-time. Debit sends the two calls simultaneously:
- Authorization and settlement, all done at the time of the sale
What problem is debit solving?
Debit gives customers a way to access their own funds—in the original rollout, a debit card worked only at an ATM, and a customer would have to physically withdraw funds in order to make a payment. For retailers, it was expensive to have an ATM set up outside of their locations and because of available credit payment technology, offering that method of payment was simply easier. Not only that, but also having an ATM outside of every retailer didn't (and still doesn't) make sense to do. By integrating the debit payment method into the payment processing network, retailers were able to offer more choice to consumers, without the ATM out front.
Adoption and implementation of debit
In the US, the adoption and implementation of debit were driven by the card brands. In Canada, the adoption of debit was driven by the banks. This resulted in two different schemes:
- In the US, the card brands each implemented a way of processing the real-time “ATM” style transactions over networks owned by the card brands, with a few consolidated bank-driven attempts as well, such as DNA and NYCE.
- In Canada, a non-profit organization, founded by the major banks, created Interac. Interac is the single debit method that is accepted across Canada and it is used by all Canadian banks.
Having credit and debit on the same card
If you're operating in the US, you likely have been faced, at the payment terminal, with a choice: Visa Debit or US Debit.
This is because in the US the card is already running on a network owned by the card brand, so it is normal to see credit as a stand-alone card, but debit as a “credit/debit” hybrid card.
In Canada, a cardholder typically has a unique credit card and unique debit card, however, within the last five to 10 years, some hybrid credit-and-debit cards have been making an appearance. The hybrid cards still use the Interac function whenever possible, so will denote "Visa Interac" or "MasterCard Interac" on the front, rather than only having the card brand listed.
The impact of hybrid cards in the US marketplace
Any time a credit or debit configuration is loaded on a card, it is called an “application.” If a card has both credit and debit loaded (this is a hybrid card), it has multiple applications. What happens when this cardholder inserts their card with multiple applications? How does the terminal know which application to use?
There are three common ways that a terminal will "decide" which application to use, and you have likely already encountered this process as a retailer or customer—maybe unknowingly.
1. Application selection
This is the most straightforward method because no filtering or decision is needed to be done by the payment terminal—the cardholder is presented with all available options, which makes it the most complicated to understand. Because there are no naming standards for these payment methods, this payment method often appears as a list on the terminal that says:
- Visa Debit
- US Debit
While a retailer may be familiar with these terms, they can be unclear to a customer. In order to create a smooth, frictionless (and frustration-less) payment experience, retail associates found creative ways to explain this choice. Associates noticed that saying "one option is credit and one option is debit" wasn't helpful, because, as you can see, both options say "debit" in the name. Associates noticed that saying "one option will ask for a signature, one will ask for your PIN" was a clear differentiator for the paying customer.
However, a wrench thrown into this associate-driven solution is that PIN verification has been increasingly adopted by card brands for credit transactions as well, because of its advanced security. Historically PIN was debit-only, but now that both the credit and debit applications might prompt the customer to enter their PIN, this can mean even more confusion when trying to differentiate between a debit and credit payment.
2. Application Prioritization
Application prioritization is a set of instructions configured within the point-of-sale terminal. This method essentially has the terminal saying "I have ranked every possible payment application and if I ever see a card that has more than one, I will only display the highest-ranking application."
Retailers tend to default to debit as the highest-ranked application because processing rates tend to be cheaper for debit. But, remember PIN? A cardholder may have a hybrid card with both a credit-and-signature application and a debit-and-PIN application. If the cardholder has only been using the credit function at other merchants, they may not even know the PIN and may be confused or unable to complete the transaction if only debit is made available.
3. Application filtering
Application filtering says “I have all the applications sorted by whether they are credit or debit.” During a transaction, a choice is made either in the point-of-sale solution, by the associate, or on the terminal by the customer. This choice denotes whether they want to process the transaction as credit or debit and the terminal will then only display the matching application.
The customer can complete the transaction based on the processing method they want and not based on what kind of verification they want or whether they understand the application names on the screen.
This method of payment is increasingly popular as terminals become smarter. Devices now allow options like Unified Payment Method, which can be configured with the iQmetrix point of sale to say “Credit/Debit." This presents the cardholder with the choice. If the choice is made by the cardholder on the terminal, the associate does not need to specify which card brand is being used, as the data will be returned to the terminal as the transaction completes.
US hybrid cards in Canada
A US hybrid card that is used in Canada will default to the credit application because Canadian infrastructure expects only the Interac application for debit. However, a US hybrid card can still be used as a debit through a Canadian ATM.
When using a Canadian hybrid card, the settlement for both credit and debit is instant to the account. PIN is also already normalized in Canada, so there is little barrier when it comes to customers completing a PIN-verified transaction. Both of these things mean that there is no difference in payment experiences for a customer, regardless of what method of payment they choose. The application choice is handled by the card—any transaction which can support Interac such as a card-present or ATM will use the Interac application—while other platforms like e-commerce will use the credit application.
Why is understanding debit important?
As we see new payment methods entering the ecosystem—those that are driven by companies like Apple, Google, and a continuing growing roster of new players—the abstraction from the current ecosystem suggests there will be more standardization of payment methods and technologies. This will be regardless of which country you process the payment method in. However, understanding the differences in both the evolution and ecosystem for credit and debit will help you understand the cardholder experience and how your business can work to improve it today.
If you're interested in supporting customers and their many payment methods, learn more about the robust iQmetrix fleet of payment software solutions.