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How does a card reader work and how does it process payments?

In our tech-driven world, it is becoming increasingly clear that an ever-growing number of consumers are opting for making purchases using their cards. This means merchants need to be prepared to offer this type of payment method, but because there are Chip&PIN, magnetic stripe, contactless payments, and payments with mobile wallets, it becomes crucial for a merchant to understand how to operate with such systems.

In this blog post, we answer the question “how does a card reader work?”, ultimately aiming to help you understand the basic workings of this crucial and sophisticated piece of technology in today’s business landscape.  

How card readers work in 5 steps – a general overview

If you’ve ever accepted payments with a card reader before, you’ll know that the transaction is approved almost instantly, in just a few seconds. It’s a rather logical process that involves communication between several actors.

So, how do card readers work? First, they read the information from the customer’s card – they can do this via the card’s chip, the magnetic stripe, or by tapping a contactless payment on the card reading device. But what is the communication process that takes place behind the scenes?

Let’s break the process down into 5 simple steps:

Step 1. Payment authentication

The customer presents their card so that the card reader can “read” the information contained in the physical card itself. Alternatively, customers can make payments via QR codes or mobile wallets. 

Step 2. Payment verification 

The merchant’s processing provider/bank receives the request and contacts the customer’s card issuer/provider to verify the card and proceed to authorisation.

Step 3. Payment authorisation

The customer’s card issuer will check that the cardholder’s details are correct and whether there are sufficient funds in the cardholder’s account and then either approve or decline the transaction.

Step 4. Payment confirmation

In the event that the card issuer approves the operation, they send a response to the card reader, which transmits information that they have approved the transaction. The process is called payment confirmation.

Step 5. Payment completion

The funds are withdrawn from the customer’s/cardholder’s account and are then transferred into the merchant’s account. The usual industry standard for fund settlement into the merchant’s account is 2-3 days, although some providers, like myPOS, settle funds instantly, thus eliminating liquidity challenges and more.

How do contactless readers work?

The cardholder taps or hovers their contactless card to make contactless payments on or above the card reader. Contactless payments function on short-range wireless technology which sends information to the card payment machine.

You can find this wireless technology in the card through a microchip incorporated in it. It is also known as RFID (radio frequency identification and it is not limited to security tags, smartwatches, security fobs, mobile wallets, discussed in more detail below, and others.

How do Chip&PIN card readers work?

The ‘chip’ installed in debit and credit cards is approximately the size of a pinhead. Small as it may be, it stores a record of the customer’s four-digit PIN number. When a customer inserts their card into the card reader, the chip is read and the transaction is verified when the customer enters their matching PIN either onto the keypad or on the device’s touchscreen.

Chip&PIN card readers were introduced on the market over a decade ago, replacing the more traditional sign and swipe method – magstripe or magnetic stripe, which was more prone to fraudulent transactions. 

How do Apple Pay and Google Pay readers work?

Apple Pay and Google Payare apps that use Near-Field Communication (NFC), similar to the RFID technology that is used to process contactless payments. NFC payment data is highly encrypted with multiple layers of security to ensure better security of a customer’s account details.

As a starting point, app users need to add their debit/credit cards to their virtual wallets. Then, through a process of “tokenisation”, the card details are exchanged with a “token” to mirror the real/existing card details.

The purpose of tokenisation is increased safety and security in the event of a lost or stolen device or lost/stolen card data. You can make payments with these mobile wallets either in-store or online. 

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A card reader is a sophisticated piece of technology that “reads” card information or information from mobile wallets and then communicates this information to the relevant parties. The way in which this communication process works is practically the same whether you’re paying by debit or credit card, Chip&PIN, contactless, or through a mobile wallet – with a few differences, of course.

This communication process is almost instantaneous – it takes just a few seconds for the cardholder and payment information to be transferred from the cardholder’s bank to the merchant’s acquiring bank/payment services provider.

And that, in a nutshell, answers the question of “how does a card reader work?”. This simplicity, ease, and convenience offered by card readers make them a brilliant choice for merchants who wish to accept card or digital payments.

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