Every day, credit card machines facilitate seamless transactions with a simple tap, insert, or swipe. These devices may appear like magic, but have you ever looked into the inner workings behind these devices? We invite you to embark on a journey to understand the process and functionality behind credit card machines.
A credit card machine, also known as a point-of-sale (POS) terminal, card reader, payment terminal, or
credit card terminal, is a device used by businesses to facilitate electronic payments made with credit
and debit cards. These machines are designed to read the data stored on the magnetic stripe or EMV chip
of a card and securely process transactions.
You will hear the term EMV a lot in payments. EMV stands for “Europay, Mastercard, and Visa”, the three companies that created the standard. It is basically a security standard that all payment companies use.
Credit card machines play a crucial role in modern commerce by allowing customers to make purchases, and they are used in various settings, including retail stores, restaurants, and other transaction situations. Credit card machines offer features for authorization, payment processing, and transaction management, ensuring the secure and efficient transfer of funds between customers and businesses.
Credit card machines serve as the backbone of payment processing for businesses of all sizes. These devices enable the smooth execution of sales transactions, captures essential transaction data, and empowers businesses to manage the complexities of refunds, voids, and daily settlement. Here are some of the key functions that credit card machines enable.
Credit card machine processing involves three pivotal stages: authorization, capture, and settlement. Each of these stages plays a crucial role in the payment journey:
Every credit card machine needs a merchant account set up for it to work. Behind the scenes of a
transaction, there are numerous players involved, described in the chart below like the cardholder’s
bank, Visa, and the payment processor. The merchant account serves as a financial intermediary, allowing
businesses to accept various payment methods such as credit cards or mobile payments.
This enables the smooth transfer of funds from the customer’s account to the merchant’s account, ensuring a secure and efficient transaction process.
It’s important to note that the specific flow and timelines can vary depending on the payment processor, acquiring bank, and the merchant’s agreement with their service providers. Additionally, online transactions may involve additional security measures, such as 3D Secure authentication, to mitigate fraud risks.
EMV, a global standard under the guardianship of industry giants such as American Express, Discover,
JCB, Mastercard, UnionPay, and Visa, represents the zenith of chip card technology. While Australia
transitioned to EMV back in 2013, some regions, notably the United States, are still in the throes of
the shift from magstripe to chip technology.
Chip cards are celebrated for their robust security. The dynamic encryption of data on these cards presents a formidable barrier to fraudsters attempting to access and misuse cardholder information. Notably, EMV technology has succeeded in substantially reducing global fraud rates. Early adopters who abandoned magstripe cards in favor of EMV technology reported significant declines in fraudulent activities. You can read more about fraud statistics.
Equipped with an embedded computer chip housing bank details, EMV cards boast ever-changing payment information. When inserted into a reader, a complex, encrypted conversation occurs, culminating in the generation of a unique code with each insertion. This data is then securely transmitted to the acquiring bank, shielding the transaction from potential threats.
Contactless (NFC) payments are renowned for their speed and efficiency, making them ideal for bustling
checkout scenarios. These transactions, while rapid, maintain the same level of security as chip cards,
underpinned by encryption and dynamic data.
NFC, often referred to as “contactless” or “tap-and-go” payments, leverages “near field communication” technology. Similar to chip cards, NFC data undergoes encryption and dynamic modification, ensuring that each transaction carries unique data. Prominent examples of NFC payments include contactless cards and mobile wallets like Apple Pay, Android Pay, and Samsung Pay.
For NFC payments, customers simply tap their cards or place their mobile wallet-enabled devices, such as smartphones, over the credit card machine, initiating lightning-fast transactions.
With tap-and-go cards, the transaction process closely resembles that of EMV transactions. However, when using mobile wallets like Apple Pay, an additional layer of security emerges. Apple Pay employs a technology known as tokenization, safeguarding banking information. During setup, a photograph of the credit card is captured within the Apple Pay app. Apple then exchanges this information with a “token,” which is transmitted to the phone. This unique token does not contain the actual credit card details, rendering them inaccessible to fraudsters. Moreover, a distinct token is generated for each transaction, providing an extra layer of protection.
Magstripe card readers, also known as magnetic stripe card readers, are devices designed to read the
data stored on the magnetic stripe of credit, debit, or identification cards. These magnetic stripes are
typically found on the back of these cards and contain important information about the cardholder’s
The data on the magnetic stripe is stored using magnetic particles. This stripe consists of three tracks, each containing different types of information. Track 1 is typically used for the cardholder’s name and account number, Track 2 contains the primary account number (PAN), and Track 3, which is less common, stores additional data.
Although magstripe card readers have been widely used for decades, they are being phased out in favor of more secure technologies, such as EMV chip cards and contactless payments (e.g., NFC technology). These newer technologies offer enhanced security features and help reduce the risk of card skimming and fraud associated with magstripe cards.
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