Processing a payment only takes a few seconds to occur, but the technology behind a card terminal takes a little longer to explain. Several things happen in the 5-10 seconds that pass while you’re waiting for your transaction to approve. So, how do card readers work? How does that little chip communicate with the machine? And how does it know that it’s really you using the card?
Step 1: Dip, Swipe, or Tap
In retail locations, the customer reads the total of his or her purchase on the terminal’s screen. Up to date point of sale, equipment should be able to accept chip or magnetic swipe cards, Apple Pay via a watch or phone, and Google Wallet. It’s all the same as the terminal, there are just different ways of collecting the individual payment code, then sending it on its way to approval.
Step 2: The Middle Man
Once the transaction is sent to the payment processor, it is communicated to the appropriate Card Association’s network. This could be Visa, MasterCard, Discover, etc. We call the payment processor the middle man because they are essentially the messenger of the information (the transaction).
Step 3: Authorization
Now, the bank or card issuer has to determine if there are enough funds in the customer’s account to cover the charge. During this step, some banks act in different ways. Some may cover a $50 purchase even if the cardholder only has $35 to their name, then tack on an overdraft fee. Others may just decline the transaction there. It could also be declined if the transaction is deemed fraudulent. Using Address Verification, your issuing bank could stop a fraudster from using a card in your name.
Step 4: Transfer Funds
If all goes well, the acquiring bank sends an approval code via the payment processor (middle man). It is time to transfer funds from the customer’s bank account or credit card to the merchant’s business bank account. The merchant may not receive the funds the next day, or even for several days depending on their batch times. The time it takes for a group of transactions to be deposited into a bank account is known as batch time, and this determines how long the merchant might have to wait.
Do You Know Enough About How Do Card Readers Work?
Above is a simplified version of the answer to, “how do card readers work?” If you have additional questions we’d love to answer them! Don’t be shy, request a 30-minute phone consultation with one of our representatives. Worried about how much card readers cost? Check out our pricing page to get your hands on some of our affordable, PCI compliant technology.
