As a merchant with either an online eCommerce store, a physical brick-and-mortar location or both, one of your most important pieces of equipment is your credit card reader. It’s probably a piece of equipment you take for granted, not thinking about it unless it stops working for some reason. Otherwise, you simply use it to process numerous transactions throughout the day. But, have you ever wondered how do credit card readers work?
Whether it’s a single terminal or a larger part of a feature-rich POS system, your credit card reader is a sophisticated piece of equipment that performs numerous functions for each transaction. Today’s credit card readers are quite adept at operating and transmitting data from a variety of payment methods. It will be beneficial for you to gain a deeper understanding of exactly how these simple yet advanced machines work.
How Do Credit Card Readers Work?
The role of a credit card reader is to collect a customer’s credit card information and then transmit the data to the issuing bank or credit card issuer. The credit card reader performs several additional steps and completes the entire sequence within a few seconds.
The card’s information is provided to the credit card reader via the magnetic stripe, a chip or even via contactless means if the reader is equipped to do so.
Following is a step-by-step breakdown of all the actions the credit card reader performs from the beginning of the transaction to the end. Afterward, you should have a very good idea of how do credit card readers work.
The Credit Card Reader Authenticates the Information
When a customer begins a purchase transaction, he or she provides the credit card reader with their card. As mentioned above, this can be done either by swiping or inserting the card or via contactless means.
The Credit Card Reader Verifies the Payment
Once the reader has the card data, it transmits the information to the merchant’s payment processing service or bank. The payment provider then contacts the issuer of the credit card to verify the information and authorize the payment.
Payment Authorization
The card issuer verifies that all the credit card data is correct. If so, the card issuer then determines if there are adequate funds available to complete the transaction. If there aren’t, the payment will be declined.
Payment Confirmation
Once the transaction is approved by the credit card issuer the confirmation is sent back to the credit card reader. The credit card reader alerts the merchant that the payment has been approved.
Completion of the Transaction
The appropriate funds are then withdrawn from the cardholder’s account and transferred to the merchant’s bank account.
The Evolution of Credit Card Readers
Older credit card readers worked primarily by reading the card information of the magstripe — the black magnetic strip across the back of the card. This type of technology is rather outdated, which is why you see the majority of credit cards today with chips. The chips are also more secure than the magnetic strip, which is more vulnerable to fraud. In addition to the chip, customers have the option to pay via a contactless option.
So, how do credit card readers work when the contactless option is used? The process is still the same. The only difference is that the credit card information is transmitted to the credit card reader via a short-wave wireless technology. The microchip that is inserted in the card contains this technology, referred to as radio frequency identification (RFID). The cardholder simply has to wave the card above the credit card reader and the data is transmitted.
When contactless payment isn’t available, the credit card reader instead reads the data from the small microchip embedded on the credit card. Despite the appearance of a small chip on the card, the actual microchip is only the size of a pinhead. Whether the chip is inserted or used in a contactless fashion, the purpose of the chip is to improve security. When the data from the chip is transmitted, it is dynamically encrypted. This significantly reduces the risk of credit card fraud.
In Conclusion
While you now know the answer to the question “How do credit card readers work?” there are still other important things to consider about your credit card reader. For starters, if your credit card reader hasn’t been updated in some time, it could be prone to fraud. You’ll want to update to a newer, secure reader to not only improve security but also to provide more payment options for your customers. Consider combining a sophisticated credit card reader with a payment processing solution that helps your business thrive.
About NMA
NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or eCommerce, NMA will create the best processing experience for your company. For more information, visit us at www.nationalmerchants.com or call 866 509 7199.