How do Card Readers work?

Today we live in a largely cashless society and card readers play a key role in providing a smooth and swift customer experience.

At this rate, it’ll be no surprise if the next generation asks their parents, “what is chip and PIN?”

When it comes to in-store payment methods, customers are usually given the option of either a credit card reader or a traditional credit PDQ machines with chip and PIN and contactless functionality.

In some instances, customers may be required to pay a minimum card payment if a business wants to eradicate small value transactions

Card readers are a relatively new payment solution – they’re small, pocket-friendly and work round the clock.

A card reader is essentially a slimmer, better-looking alternative to a card machine. They both process card payments in the same way.

In this article, we’ll help you understand how a range of different card readers work and how your payments are processed. We’ll also touch on how contactless readers work, as well as giving you an insight into the technology behind card reader payments.


How do credit card readers work?

Credit card readers are the Houdini’s of the payment processing industry – one minute your money is there and a few seconds later it’s been zapped into a tiny little contraption.

Credit card readers work by examining a customer’s credit card information and transferring the transaction data to both the banks and the credit card networks.

The credit card payment process follows a few stages that we’ve underlined below:


Stage 1 – Payment Authentication

Seconds after the customer taps (contactless) or inserts (chip & PIN) their debit or credit card, the card reader processes the cardholder’s details using the data incorporated into the cards chip (or QR code for mobile payments).

Straight after the card payment has been made, the retailer’s merchant bank will receive the transaction request.


Stage 2 – Payment Verification

Once the card transaction request has been received, the merchant bank will contact the customer’s card provider (e.g Visa, Mastercard, Barclays) to verify the card and obtain payment authorisation from the customer’s bank.


Stage 3 – Payment Authorisation

The debit/credit card provider will then authorise the transaction by confirming the customers’ card details are correct and there are sufficient funds in the customer’s bank account.


Stage 4 – Payment Confirmation

As soon as the payment has been authorised by the customer’s bank, a confirmation is sent back to the card reader notifying the merchant account that the transaction has been green-lighted.

Despite the payment authorising in just a few seconds, it usually takes around 2-3 days for the customer’s bank to send the payment to an acquiring bank. An acquiring bank processes credit/debit card payments on behalf of the merchant.

If you’d like to know more about processing credit/debit card payments, check out our guide: How does credit card processing work.


How do contactless readers work?

The vast majority of us rely on contactless readers every day, but how does contactless work in the grand scheme of payment processing?

Most card networks now offer contactless cards, including EMV (Europay, Visa, Mastercard) and American Express. If you’d like to put two big guns of the payment industry against each other, our Visa vs Mastercard article is a great comparison piece.

To purchase something via contactless payment, customers hold their card within a close radius of the card reader so the card reader can communicate with the small microchip (mirroring the process above).

The microchip incorporated into the card is capable of emitting short-range radio waves that send the customer’s card information to the contactless payment machine.

The technology is called radio frequency identification or RFID and is used in a bunch of other products like security tags, smartwatches, security fobs and so on. RFID is also used by Apple Pay, Android Pay and Samsung Pay devices.

The only downside to contactless payments is the risk associated with not having a 4-digit PIN code. If you were to lose your card, there is no way to verify that it is you using the card which is why there is a £45 transaction limit (at the timing of writing).


contactless payments


How do Apple Pay and Android Pay readers work?

As we touched on earlier, Apple Pay and Android Pay incorporate the same RFID technology that is used to process contactless payments.

Apple Pay and Android Pay are both examples of what we call near field communication or NFC payment apps. NFC is the technical, less attractive name for contactless payments.

NFC payment data is heavily encrypted with multiple layers of security to ensure a customers’ account details are safe and protected.

To initiate NFC payments for services like Apple Pay and Android Pay, customers hover their phone over the contactless reader while pressing their fingerprint on the home button at the same time.

As two of the most popular contactless payment systems, we’ve decided to take a closer look at how both Apple and Android Pay function:


Apple Pay

First things first, Apple Pay only works via an Apple device. Don’t start trying to crack the system with your new Huawei.

Next step in setting up Apple Pay is to take a photo of your credit/debit card within the Apple Pay app and add your stored details to your Apple Wallet.

Through a process called ‘Tokenization’, Apple transmits the card information received from your picture and exchanges it with a ‘token’ that mirrors your real-life card or a series of numbers.

The token that is sent to you by Apple does not display your actual credit/debit card info, so you don’t need to worry about any fraudsters or hackers infiltrating your device.

The fact that contactless payment systems like Apple Pay insist on using fingerprint technology to initiate payment emphasises the top-level security on offer.


Android Pay

Android Pay follows an almost identical process to Apple Pay for Android device users.

As an alternative digital wallet service for mobile phones and tablets, Android Pay allows customers to store their details on their device to use when they’re in the supermarket or at the gym.

The NFC payment method uses RFID to process the transaction speedily.


How do POS Apps Connect?

In order for Point of sale (POS) apps to connect, they must communicate with the merchant acquirer which requires an internet connection.

Merchants will commonly connect their mobile device to WiFi because the connection is stable and fast but they could also use GPRS or 3G if WiFi isn’t available.

The mobile device and POS app need to be connected to the internet but WiFi is just one connection option. Merchants could also connect to the internet via GPRS or 3G.


Do card readers need WiFi?

The short answer is no your card reader doesn’t need WiFi.

All your debit/credit card reader actually does is capture a customer’s credit card or debit card details and transmit the data to the POS app.

The POS then sends the data on to the merchant acquirer and it does require an internet connection (although not necessarily WiFi) to complete the transaction.

An internet connection can be acquired through a mobile device or tablet that is 3G, 4G or 5G enabled via a Bluetooth connection to the relevant apps. Receipts can also be distributed without a WiFi connection by using a Bluetooth receipt printer.


card readers wifi


How much data do card readers require?

If you don’t have access to WiFi and are relying on 4G, 3G or GPRS for your internet connection, you might be wondering how much a data card reader uses, especially because data costs are not included in any monthly fees.

There are a few different opinions on this but the general consensus seems to be the same — card readers don’t use much data. Here’s what I found from some of the best card readers around such as SumUp, iZettle and Square.

  • SumUp: “Depending on your usage patterns a data volume of around 300MB per month should be sufficient.” [Source]
  • iZettle: “Accepting payments with the iZettle Go app only takes a few kilobytes of data.” [Source]
  • Square: “Each transaction typically uses less than 10kb. If your customer provides a signature, no more than 50kb will be used for the transaction.” [Source]

I think it’s safe to say that even those with a very small data allowance should be able to process payments without too much concern for their data allowance.



Card readers are more important than ever given the current climate we find ourselves in, so it’s crucial for businesses to understand how they work to get ahead of the game.

It doesn’t matter whether you’re a first-time business owner or seasoned professional, payment methods, systems and processes are going to keep evolving

If your business is looking to evolve, it might be worth having a look at some of the best card machines for small business or even some of the more modern card reader apps.

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