A step-by-step guide to how card readers work

As card readers become increasingly important for businesses, it’s worth understanding exactly how they work.

More of your customers want to pay by card, but you’re not sure where to start with getting a card reader. This guide is for you.

How do card machines work?

Card readers work by extracting information from a customer’s debit or credit card, either when the card is inserted into the machine or tapped against the terminal if it’s a contactless payment.

The “payment processor” (the intermediary between the merchant and the customer’s bank) then receives the information and contacts the customer’s card issuer to verify the card transaction. The card issuer checks for sufficient funds in the cardholder’s account and will approve or decline the transaction.

If it’s approved, the card issuer puts a hold on those funds, and the transaction is marked as pending. Over the next few days, the funds are moved to the merchant’s bank account, processed and deposited into the account.

How does the payment process work?

Below is a step-by-step breakdown of how the payment process works in full:

Step 1. Payment authentication

First, the customer presents their card so the card machine can read the information contained in it.

Step 2. Payment verification

Next, the merchant’s processing provider or bank receives the request and contacts the customer’s card issuer to verify the card.

Step 3. Payment authorisation

The card issuer checks that the cardholder’s details are correct and whether sufficient funds are in the cardholder’s account. The transaction is then either approved or declined.

Step 4. Payment confirmation

If the transaction is approved, the card issuer sends a response to the card reader, and the payment is confirmed. The issuer puts a hold on those funds, and the transaction is marked as pending.

Step 5. Payment completion

The funds are withdrawn from the cardholder’s account, processed and then deposited into the merchant’s account.

When does the business get the payment from a card reader?

It usually takes 1 to 3 days for a business to receive its payment. However, some providers settle funds instantly – just check whether this will incur any additional fees.

Different ways to take payments and how they work

Card readers can take payments in a number of ways – we’ve explained below how they all work.

Contactless

If a customer’s card is contactless, all they need to do is tap or hold it on the card reader to make their payment. Customers can pay for items up to £100 without the need to enter their PIN (personal identification number).

Contactless payments use Radio Frequency Identification (RFID) technology, and the card contains a chip and radio antenna. It means that a card can be just a few centimetres away from the card reader, and this recognises the signal, communicates with the card and processes the payment.

Mobile wallet

Mobile wallet payments such as Apple Pay, Google Pay and Samsung Pay work in a similar way to contactless payments. However, rather than using RFID technology, they use Near Field Communication (NFC). This means customers can hold their phone or smartwatch near the card reader, and it will communicate with the device to process the payment.

Mobile wallets use complex encryption and “tokenisation” to process specific transactions and keep bank data safe. Tokenisation is an additional safety measure that adds an extra layer of security to card data.

Chip and PIN

Debit and credit cards contain a small chip that stores a record of the customer’s 4-digit PIN. The chip is read when the card is inserted into a card reader, and the customer then needs to enter the matching PIN onto the card reader’s keypad or touchscreen. The chip interacts with the card reader to start and verify the payment process.

Magnetic stripe

If a customer pays with a magnetic stripe card, the magnetic stripe is swiped at the side of the device. This stripe contains data such as the card account number, cardholder name, expiration date and card verification code.

When the card passes through the card reader, a magnetic current is introduced to the stripe, and the information then interacts with the card reader. If the customer has sufficient funds and no holds on the account, the transaction is then processed.

Magnetic stripe cards are at a much higher risk of fraud, as thieves can use devices to skim and copy the data in the stripe. That’s why they are being replaced by chip and PIN technology. However, as magnetic stripe cards are still available, many retailers still process transactions with both technologies.

Bottom line

Card readers are clever devices that can handle a range of different payment methods, whether your customers want to opt for contactless or mobile payments, enter their card and PIN or stick to old-fashioned (but less secure) magnetic stripe payments. When choosing one, the key thing to remember is that the fees vary widely.

Finder survey: Payment preferences

If you were going to buy an expensive item (£100+), what method of payment would you be most likely to use?

Response% of responses
There is no method of payment I would be most likely to use8.80%
Physical debit card25.10%
Physical credit card20.80%
Other20.60%
Debit card via Apple/Google Pay on phone/watch10.35%
Credit card via Apple/Google Pay on phone/watch7.25%
Cash0.55%
Buy now, pay later (e.g. Klarna & Clearpay)6.55%
Source: Finder survey by Censuswide of 2,000 UK shoppers
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.

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