How do card readers work? Advantages of using card readers

Isn’t it surprising how card readers work with just a few buttons and a ping sound? In mere seconds, this small device can access any amount from a bank account using a rectangular piece of plastic. Additionally, the advantage of using card readers across various businesses is equally impressive.

A card reader is a device that helps customers to purchase things using online or offline debit or credit cards. As simple as the definition sounds, the card reading process is not simple at all. 

In this guide, we will highlight the definition of 3 types of card readers, how they work, and what benefits they offer to a seller and a customer. 

How do card readers work? 

No matter what type of card reader a seller uses, every card reader works in the same way. 

• A client taps, dips, holds, or swipes his card in the card reader. 
• The card reader reads the content of the card and requests the merchant’s bank to process a payment. 
• The merchant’s bank forwards the request to the client’s bank via a payment processor (like PayPal, Stripe, or Square). 
• The client’s bank checks for the client’s details, available funds, and fraud risks and sends its response (approval or decline) to the merchant’s bank via the processor. 
• If approved, the funds will be transacted from the client’s bank to the merchant’s bank. 

This process may vary a little depending on the card reader type. In the next sections, we will talk about the card readers that use magstripe, NFC, or EMV technology.  

1. Contactless card reader 

Contactless card reader requires no swiping or pinning of the card and less contact with the cashier. Just holding the card over the card reader for a few seconds is needed to make a payment. 

It uses physical cards with RFID (Radio Frequency Identification) and virtual cards with NFC (near-field communication) technology. Mobile wallets like Google Pay, Apple Pay, Alipay, and Samsung Pay use contactless card readers. 

When the customer holds his card physically over the card terminal, it creates a short-range wireless communication between the card and the terminal. As a result, the terminal reads the available amount on the card and processes the payment. 

For mobile wallets, the transaction process is a bit different. 

• At first, an individual adds his card (credit or debit) to a virtual wallet. 
• Next, the virtual wallet takes note of the card info and sends it to the card provider. 
• The card provider exchanges the info with a token and an encryption key and sends it to the wallet. When paying, the customer has to use the encryption key and the token. 
• Each time the individual makes a payment using the wallet, the encryption key remains the same but the token changes. 
• Dynamic tokenization and complex encryption prevent fraudsters from hacking the card. 

2. Magstripe card reader 

The word magstripe stands for magnetic stripe which stays at the back of a credit card and debit card. Long before the chip-and-pin or contactless card readers were evolved, magstripe readers handled transactions. 

To pay through a magstripe card reader – 

• The customer swipes his magstripe card on the card terminal first. 
• The terminal receives the customer’s bank account information from the card’s magnetic head. 
• Later, the terminal sends an authorization request to the merchant’s bank.  
• Again, the card reader sends an authorization request to the bank, this time it is the customer’s. 
• The card reader bridges the communication between the merchant’s bank and the customer’s bank to make the transaction. 
• After completing the transaction, the terminal generates a receipt. The customer signs it to finalize the purchase. 

Despite transacting within a few seconds, the magstripe card reader lost its popularity due to a lack of security. Unlike an NFC card, the magstripe card’s data always remains static. On the other hand, the magstripe card cloning software is super affordable. Using it, fraudsters can easily lift and clone the customer’s card data from the terminal. 

3. Chip-and-pin card reader 

A chip-and-pin card reader only accepts credit and debit cards with embedded microprocessor chips. It is also known as an EMV card reader because it was initially designed by Europay, Mastercard, and Visa. Later, other card issuers like American Express, JCB, Discover, and UnionPay joined the previous trio and upgraded the EMV software. 

The chip in the EMV card is mostly square and contains the user’s bank data. ATM booths and POS terminals use EMV card readers. Below are the steps of how an EMV card reader works – 

• The card owner dips his EMV card vertically in a portable EMV terminal or inserts it in a fixed ATM machine. While inserting, the microprocessor chip remains facing up. 
• After inserting, the terminal asks for the PIN from the card owner. 
• The owner enters the pin and makes way for creating a unique code for the transaction.
• Next, the card reader receives the unique code and verifies if the pin is correct or not. If correct, the reader then proceeds to the transaction. 
• A communication begins between the card owner’s bank, the payment processor company and the merchant’s bank to exchange payment data. 
• If the cardholder has enough funds in his bank account, the required amount goes to the merchant’s bank. If not, the transaction gets declined. 
• Once the payment is completed, the card reader sends the card back to its holder. 

The unique code that the technology creates changes for each transaction. As a result, the chip data remains safe.   

However, the problem is, that the chip-and-pin card reader works slower than the magstripe card reader. Moreover, as the EMV system heavily relies on the internet, no internet means no transaction.

Which type of card reader is the safest? 

Contactless card readers are the safest to use. Because, neither RFID and NFC cards are cloneable, nor the card machine is slow. Also, it can work without the internet, using Bluetooth. Even if a thief steals an RFID or NFC card, he won’t succeed when the card terminal asks for the encryption code.  

Advantages of using card readers 

1. Card readers are affordable, easy to use, and can work on both real and virtual cards.  
2. They save from the hussle of counting notes manually. 
3. Except for the card owner, they won’t allow anyone random to access the card data. 
4. They copy, exchange, and secure an individual’s bank details as highly as possible. 
5. Card readers are naturally fast. When connected to a POS system, they become faster, make payments easier, and reduce long payment queues. 
6. As they transact fast, they help a merchant or seller to reach more customers, resulting in huge profits. 
7. Lightweight card readers with a long battery life reduce the necessity of buying a new one frequently.    
8. Portable card readers can serve customers anywhere anytime over the wifi, mobile data, or even Bluetooth. 
9. Card readers help in shaping the future cashless society. 

Conclusion

This guide answers how card readers work and the advantages of using card readers. A card reader not only makes dynamic payments but also develops a cashless society. Though card readers come with some downsides, it is a powerful tool to rule the business world. Therefore, a merchant should choose a card reader wisely for his store. Not only this, he must use the machine correctly.