How do card readers work?
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How do card readers work?
Card readers are a vital piece of technology. For businesses, they are a simple, but powerful tool in a world where customers are tempted by the convenience of paying by their phones, watches, credit, and debit cards.
In this article we will explain how card readers work, what types of card readers merchants and hoteliers use, and the common payment methods customers can use for card readers.
What are card readers?
Card readers are used by businesses to help process credit and debit card transactions. They should not be confused with online banking card readers, which are used by customers of online banks to help them verify online transactions that they have made.
Card readers are a simple yet sophisticated piece of technology. Designed to read and communicate information from credit cards, debit cards and mobile wallets, they operate at lightning speed, making them a merchant’s best friend!
How do card readers work?
Although it happens in a matter of seconds, card readers follow a logical five step process:
Step 1. Payment authentication - Card readers obtain the card information via the magnetic stripe, the card’s chip or by tapping a contactless payment on the card reading device. And more commonly, customers can also pay via QR codes or mobile wallets.
Step 2. Payment verification - The payment request is automatically sent to the merchant’s bank (also known as the acquirer), which forwards it to the payment processor.
Step 3. Payment authorisation - The payment processor takes the request and, using the card network sends it to the card issuer. The card issuer will check that the cardholder’s details are correct, confirm that the cardholder has sufficient funds in their account to pay for the transaction and then assess the fraud risk before deciding whether to approve or decline the transaction.
Step 4. Payment confirmation – The card issuer approves or declines the transaction, sending its response via the payment processor.
Step 5. Payment completion – If the transaction is approved, the funds are withdrawn from the cardholder’s account and transferred into the merchant’s account. This transfer can take up to three days, depending on the type of account held by the merchant.
If you would like to know details:
- Understanding the credit card authorisation process
- What is a payment processor?
- What is a card acquirer?
- Credit card "Do Not Honor”: Meaning and main causes
Types of card readers
Businesses have a wide variety of card readers to choose from. What they have in common is the ability to help process credit and debit card transactions. How they differ is how they have been designed to be used. These are the most common types of credit and debit card readers:
- Countertop card readers – As the name suggests, countertop card readers are fixed to the business’s countertop. Most commonly found in the retail and hospitality industry, the customer must approach the countertop card readers to make the payment.
- Portable card readers – These are card readers designed to be used at a counter or elsewhere in the building. For that reason, they are popular with restaurants, which can take the portable card reader to the customer if they haven’t come to the counter to pay.
- Mobile card readers – Unlike portable card readers, mobile card readers are designed to be used on the move. The beauty about them is that they don’t limit the business to one location. For that reason, they are very popular with a wide range of users, including taxi drivers, delivery couriers, mobile caterers and market stalls. They process payments using GPRS technology and are connected to the Internet via a roaming SIM card.
- Virtual card readers – Virtual card readers are designed to turn the business’s computer into a payment card terminal. In doing so, they enable businesses to take credit and debit cards over the phone and process remote billing. Virtual card readers work by manually entering the cardholder’s data on a secure payment gateway. All you need for a virtual card reader to operate is a computer and an active internet connection.
- Point of sale apps - These apps have been created to help turn a business’s mobile phone into a payment terminal or card reader. What’s clever about point-of-sale apps is that they can operate without additional hardware. That’s because the app can read the cardholder’s information and then communicate it to the relevant parties in the payment acceptance process.
How online banking card readers work
Online banks use card readers as an extra layer of security beyond traditional online authentication. They should not be confused with credit or debit card readers, which, as discussed above, are used by businesses to help process credit and debit card transactions.
Online banking card readers are designed to be used whilst the cardholder is physically using their online bank’s website. While making an online banking transaction, the cardholder is instructed to insert their card into the reader and enter their account PIN. When they have done this, the card reader generates a unique code, which the cardholder is asked to enter onto the online banking website.
The card readers can only be used with smart cards because traditional cards don't have the necessary technology to support the card readers. Smart cards are also known as EMV cards because Europay, Mastercard® and Visa collaborated to create cards that operate to an EMV standard.
Common payment methods for card readers
Credit and debit card technology has advanced to the point where many cards can be read and used in multiple ways. These are the most common payment methods used by card readers:
- Magnetic stripe – Once the standard bearer for card technology, the magnetic stripe payment method has become outdated. It works when the cardholder swipes their card on a card reader. The card reader then prints a receipt so the cardholder can sign the receipt to authenticate the purchase.
- Chip & PIN – Chip & PIN payments were introduced because fraudsters had figured out how to forge a cardholder’s signature confidently. Chip & PIN cards have a chip embedded in the card to help authenticate the transaction. When the card is inserted into the card reader, it asks the cardholder to tap in a four-digit PIN, which the chip holds.
- Contactless payments – Contactless payments have taken the hassle of swiping your magnetic stripe or keying in your four-digit PIN. With contactless payments, all the cardholder needs do is tap their card on a card reader or hover it above the payment terminal for a second or two. This is sufficient for the “contactless” RFID technology to read the card data and begin the authentication and payment process.
- Digital wallets – You might argue that they have made it even easier for cardholders to pay using their card. Because now the cardholder doesn’t even need to get the credit or debit card from their purse or wallet. Instead, they need to have their mobile phone on hand. Examples include Apple Pay, Alipay and Google Pay. Digital wallets enable cardholders to store their card details in a virtual wallet held as an app on their mobile phone. Their no-hassle approach has made them popular for in-store and online payments. The cardholder’s details are kept safe using something called “tokenisation”.
Unified commerce. The Planet way
Customers and guests demand convenience. Merchants and hoteliers need solutions. We provide unified commerce. And we do it via a fully integrated product suite to give that oh so essential consistent customer and guest experience. Wherever and whenever your customers or guests want something, they can get it. Across every channel. And every touchpoint.
With Planet, businesses can receive payments anywhere, anyhow. Online or in-person. Cards or wallets. Our omnichannel order management system and property management system manages your needs in real time, and it is smart enough to fulfil your operational needs in the most cost-effective way possible.
FAQs
What types of things can a card reader do?
Although its principal purpose is to help process credit and debit card transactions, some card readers can print receipts, provide refunds, offer tipping options and function in multi-operator modes for employees and business owners.
How do Chip & PIN card readers work?
Although only the size of a pinhead, the ‘chip’ installed in credit and debit cards does a vital job, storing a record of the customer’s four-digit PIN. When the cardholder inserts their credit or debit card into the card reader, the chip is read, and the transaction is verified if the customer enters their matching PIN onto the card reader.
How do contactless readers work?
For a contactless payment to take place, the cardholder must tap or hover their finger on or just above the card reader. Contactless cards contain a chip the size of a pinhead that utilises a short-range wireless technology known as radio frequency identification (RFID).
How do RFID cards work?
RFID stands for radio frequency identification. It utilises a short-range wireless technology by embedding a chip within the card, which sends information to the card reader. As well as being used in credit and debit cards, it can also be found in security tags, smartwatches, security fobs and mobile wallets.
How do NFC cards work?
NFC, or Near-Field Communication, is a popular wireless technology that transfers data between two devices that are near one another. NFC is used with mobile wallet apps such as Apple Pay and Google Pay and across various industries, including healthcare, marketing, and loyalty programs.
How do Apple Pay and Google Pay readers work?
Apple Pay and Google Pay are apps that use Near-Field Communication (NFC). NFC is similar to the RFID technology used for processing contactless payments. As you would expect, NFC payment data is highly encrypted with multiple layers of security. First, the cardholder must add their credit or debit cards to their virtual wallet. Then, using a process called “tokenisation”, the cardholder’s details are exchanged with a “token” to mirror the actual card details. Mobile wallets are particularly popular because they can be used in-store or online.
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