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How Do Card Readers Work?

Stephen Hart

Stephen Hart

Founder - Cardswitcher

Former - Chief Financial Officer @ Worldpay

We have been evolving into a cashless society over the past decade or so. Providing your customers with a streamlined method of paying with plastic (or e-plastic) is critical to the success of your business.

We’ve previously ranked the best card readers and explained the different types of payment cards that are available (and that you should be accepting). But how does a card reader work exactly?




How do credit card readers work?

Card readers are the Houdini’s of the payment processing industry. One minute the money is in your customers account, the next it’s abracadabra’d into your account via your card reader.

Card readers operate by examining a customer's card information and transferring transaction data to both the banks and the credit/debit card networks.

From authentication to confirmation, the card payment process follows a series of steps from start to finish, which we’ve explained below:

Step 1: Payment Authentication

Immediately after the customer has paid via chip & PIN, contactless or e-Wallet (Apple Pay or Google Pay), the card reader processes or “reads” their details that are held within the chip or QR code (e-payments only).

Once the card payment has been made, your (the retailer) merchant account will receive a transaction request.

Step 2: Payment Verification

Once the merchant account receives the transaction request, the merchant bank will contact the customer’s bank/card issuer to verify the card and process to authorisation.

Step 3: Payment Authorisation

The customer's card issuer (e.g. Barclays) will then authorise the transaction by confirming the customer’s card details are correct and that there are sufficient funds in the account, resulting in the transaction being approved or declined.

Step 4: Payment Confirmation

If the transaction is approved, the card issuer sends a response to the card reader, which then transmits information that the transaction has been successful - kaching!

The transaction is often approved within a matter of seconds, but can take 2-3 days for the funds to leave the customers account and be deposited into the merchant account.

Also, it must be noted that throughout the card transaction process, any data shared between card issuer and merchant account is encrypted and protected.




How do contactless payments work?

Not only are we becoming a cashless society, but we’re becoming a contactless one too.. In fact, the contactless limit was recently increased from £30 to £45, and then more than doubled to £100 due to its popularity.

We’ve written a more in-depth post on how contactless payments work so we’ll give a brief overview here:

  • Customer taps their contactless card against the reader.
  • The reader communicates with the small RFID microchip contained within the card via Near Field Communication software.
  • The card reader transfers the transaction details to the card
  • The card then sends the payment details back and the merchant’s payment processor will process the payment.


How do mobile wallet payments work?

Mobile wallet payments (e-wallet payments), like Apple Pay and Android Pay are growing in popularity. They save you and your customers time, so it’s useful to add these to the roster of understanding how card readers work.

A digital or e-wallet is an electronic device (typically a smartphone or smart watch) that stores all of your card payment information in one place. Much like a regular wallet, you can store multiple cards from multiple providers, giving you the ability to make both in person and online purchases with various accounts.

They work almost identically to contactless, the mobile device communicates with the card reader via NFC (Near Field Communication) and is authorised by the customer via a pin code, fingerprint or facial recognition on the device.

Mobile wallets are also one of the safest, and most protected methods of payment as they often use fingerprint or facial recognition to authenticate the user, making them less susceptible to fraud or theft in comparison to a stolen purse or wallet.


How does chip and PIN work?

Credit and debit cards are fitted with a chip about the size of a 5 pence coin, and they store the four-digit PIN code that customers input when they pay with chip and PIN.

When a customer opts to pay with chip and PIN, they will insert their card into the card reader, the chip is read and the transaction authorised upon the customer inputting the correct PIN number.

Chip and PIN is still regarded as one of the safest payment methods, in comparison to contactless or e-Wallets (even though both are still encrypted and safe).


paying by card


How secure are card readers?

As a retailer or customer, you can be rest assured that your data will be protected. Card reader providers must be compliant with the industry standard PCI-DSS (Payment Card Industry Data Security Standard), which is the highest level of data security for data transfer and storage within the card processing industry.

Therefore when purchasing a card reader for your business, ensure you opt for a provider who is PCI compliant (they will disclose this).

Alongside this highest level of security, card readers protect customer and retailer data via encryption, ensuring it is never compromised or shared with third parties.

Additionally, to ensure you and your customers are completely confident with paying via card reader you can learn more about how to keep your personal information and data safe, and use trusted and certified brands like Visa, Mastercard and AMEX.


Do card readers need Wi-Fi?

No - your chosen card reader will not require Wi-Fi to operate and accept payments from customers.

Your customers' payments will be processed via the Internet, but you can use a mobile network or wired internet connection, meaning you don’t need wifi.


card reader


Which card reader is best for my business?

To help you out, we have a comprehensive list of the best card readers available. We explore their uses, their charges and which businesses they are best suited to.

Our aim at CardSwitcher is to help make your decision making process easier - we compare prices for card processing and offer up all the information you need to make the best decision for your business. Compare your card processing fees now!

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Written by:
Stephen Hart

Stephen Hart

Founder - Cardswitcher

Former - Chief Financial Officer @ Worldpay

Stephen writes mainly about the payments industry, but also brings to the table industry-specific knowledge of CRM software, business loans, fulfilment, and invoice finance. When not exasperating his editor with bad puns, he can be found relaxing in a sunny corner, with a beer and a battered copy of Dostoevsky.