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Simply put, credit card readers take your customer’s payment information, securely communicate the transaction data, and flow the data from the card to the cardholder’s bank and back to you to finish the sale.
Let’s look at the journey the data takes through a card processor, from the customer’s card to final purchase.
How credit card processing works
Here’s what happens behind the scenes once a customer wants to make a purchase from your business and scans or dips their credit card, smartphone, or contactless card to pay.
Payment authorization. When the customer swipes, dips, or scans their payment method, the data from their card goes to the payment gateway. The payment gateway securely passes the encrypted data between the merchant’s bank and the customer’s bank. The customer’s bank verifies that the customer has enough money to complete the transaction. If the customer has enough money in their account, the bank puts a hold on those funds and marks the transaction as pending.
Capture. The credit card company moves funds to the merchant’s bank account. Often, multiple payments are sent at the same time, a process known as batching.
Settlement. Once the funds have fully processed they can be deposited in the merchant’s account. This process may take a few days, depending on your bank and the payment gateway you choose.
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Types of credit card readers
Here we’ll look at the different types of credit card readers and how they work.
A magstripe reader reads the magnetic stripe on credit cards. Credit card companies are phasing out cards that only have a magnetic stripe in favor of EMV chip cards or contactless payments.
Shopify’s Tap & Chip Card Reader that accepts chip and contactless payments.
Magnetic stripe cards are being replaced because they’re more prone to credit card fraud. (A scammer who has a card number can easily duplicate that card.) Chip cards and contactless payments can’t be easily duplicated.
Chip or EMV readers
These readers allow your customers to securely use their EMV chip cards.
What’s EMV? EMV is a global standard developed and managed by major credit card companies. EMV technology enables secure payments in face-to-face and remote environments.
With EMV, a card is inserted or dipped instead of swiped. These cards are more secure than traditional magstripe cards. Your customer can use their PIN or sign for the transaction using this type of card.
Contactless card readers
Some credit cards have RFID chips. These chips allow customers to make contactless payments by waving their card near the reader. Let’s take a look at the technology that makes these payments work.
NFC. NFC stands for “near field communication.” This technology is integrated into contactless card readers and transmits information a short distance from an RFID chip card.
RFID. RFID stands for radio frequency identification. This technology uses radio waves to transmit data over short distances. Customers with this type of chip card can quickly complete their purchase by waving or tapping the card on or near your card reader. (Learn more about RFID in 5 examples of innovative uses for RFID technology in retail).
Tokenization. Payment tokenization secures payments by taking sensitive banking information and replacing it with non-sensitive information (a token) before processing the payment. With tokenization, criminals who access payment details don’t have the encryption key to read the data.
Digital wallets. Third-party digital wallets, like Apple Pay, Google Pay, and Amazon Pay, are becoming increasingly popular as a form of contactless payment. These wallets allow you to digitally store various payments in a secure environment and transmit payment through a card reader or a web portal.
