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Merchant services: How does a credit card reader work?
As “Fintech”, and the new technologies and services it brings keep redefining payments, even credit card readers are starting to look dated – well, most of them. There is a now a clear distinction in the market for credit card terminals between the “legacy” devices (countertop, portable and... mobile) and the “fully mobile” devices. If the difference doesn’t seem so obvious for the customer, there is a world of changes in technology that makes the new systems much more versatile and ready for “click-and-mortar” commerce.
Among all these types, what’s the best credit card reader for your business? In order to grasp the significance of these changes, and to ultimately know what card machine fits what needs, it is necessary to understand how legacy machines work, and why mobile credit card readers work differently.
Understanding credit card readers
Credit card readers, or PDQ machines, are the financial point of contact between the merchant’s business and its customers. Different types of readers are now competing on the market, based either on accepted payment methods, or more significantly, based on the software model used.
What is a credit card reader?
A credit card reader, or chip-and-PIN machine, or credit card machine, or bank card reader, is the physical device that customers use to make payment with their credit or debit (despite the name) cards. Sometimes, the card reader is said to be only the actual card-reading module of the credit card terminal.
Although the common image is the in-shop credit card machine, the device can also be used to take payments remotely.
In either case, the device connects with the customer’s bank account, provides authorisation for the transaction, then connects to the merchant account provider to actually complete the payment.
These devices are usually provided by merchant banks, as part of a hardware, software and service package allowing merchants to accept credit card payments.
Types of credit card readers
There are different kinds of credit card machines and distinctions can be made either on the hardware or on the software.
Taking the hardware aspect into account first, several types can be found:
- Tabletop card readers, which are physically connected to the cash register or, in more modern terms, the Point of sale system. They usually have a separate dialpad to enter the credit card pin number, a reader in which the card is inserted, and sometimes a separate printer too;
- Remote or wireless credit card machines, which are usually standalone, battery-powered machines combining all these parts into a single device. This device connects with the Point of Sale position wirelessly, by Bluetooth or Wi-Fi (portable machine) or by GPRS, 3G, 4G thanks to a built-in modem (this last type of machine is also sometimes called “mobile card reader” as it effectively allows mobile payments).
Either of these types may or may not accept several debit or credit card payment methods:
- “Swipe” payments, by only reading the magnetic stripes on the side of the card (older technology) – customers usually have to sign the receipt to authenticate payment,
- Actual chip-and-PIN payment, by reading the chip on the card – payment is authenticated by keying in a pin,
- Contactless payment, with a radio receiver on the side or at the back of the credit card machine – payment is authenticated automatically by data exchange with the card itself.
And finally, there are the types of credit cards these machines can accept (Visa, Mastercard, Amex, JCB, CCB...). This last aspect is not defined by hardware but by software.
And that’s where a second categorization can be introduced:
- It’s very hard to find traditional credit card readers for sale. They are almost always rented out by the shop operator’s bank, as part of a fully-inclusive package, with specific software and banking services, which can only be used with this merchant’s bank.
- Since the late 2000’s, new players have entered the market from the software side, in order to supply technology, and soon enough, all financial services, also called “merchant services”, enabling online payments for e-commerce. As e-commerce grew, and these new companies with it, “click and mortar” commerce started to represent a market and these suppliers started providing their own chip-and-pin machines which can be used in high street shops. Their most distinctive feature is that almost all of them develop solutions, including software, banking service and hardware, which makes accepting payments possible using mobile phones or tablets. Their credit card machines are therefore also called mobile credit card readers, although they represent something totally different from traditional Bluetooth or 3G, 4G card machines: the former work on phones, the latter work on phone lines. The former are connected with ad-hoc financial services companies, the latter with traditional high street banks.
How credit card machines work
Benefits brought by the new generation of mobile credit card readers derive from how they work, as opposed to how traditional credit card processing works.
Credit card processing
Basic credit card processing stages need to be understood first.
The credit card machine is just the physical end, the interface of a whole point of sale system.
Whatever the type of credit card terminal used, the point of sale system must include:
- A Merchant account. Merchant accounts are basically bank accounts solely reserved for credit card transactions, on the merchant’s (shop owner) side.
Finding a merchant account is the first, and hardest, step in taking credit card payments. Finding one as early as possible, in case of any problems which will lead to delays, should therefore be a priority. Merchants don’t want to have everything else set up, including customers who want to pay, but have no merchant account to authorise payment. This account can be with a bank or payment service provider, and rates and set up fees can differ... enormously, depending on the financial services provider, but also depending on the merchant’s profile. Figures such as projected sales per month and turnover will have to be added to the application documents. Traditionally, shop owners go to their bank to ask for a merchant account, and (when their application is accepted), get out with the full credit card package – at a very high price.
- Point of Sale terminal. The point of sale terminal or point of sale system, or PoS, is the terminal which will record the sales taking place in the shop, no matter the payment method used. It’s in fact just a modern cash register. In case electronic payments, card payments need to be accepted, it will be called an ePoS, or Electronic Point of Sale System.
- This is where the software part comes in, as it is required by the Point of Sale terminal to compute and register sales, give out pre-accounting reports, connect with accounting software, marketing software, customer experience software, online sales software, and most importantly in the case of credit card payments, with payment gateways.
- Payment gateways. These are what virtually stands between the point of sale, the merchant account and the shopper’s account. They transmit transaction data securely and make the authentication possible,
- A data connection. In 2019, and even though it wasn’t always the case, credit cards are online money. In order for the transaction to be authenticated and authorised, an internet or phone connection is needed,
- A credit card reader. As explained earlier, this device will act like the physical interface through which the transaction is made.
- A printer for receipts. Traditional credit card machines will usually have an inbuilt receipt printer, but a modern ePoS with a mobile credit card device will more often rely on a standalone printer. Dot matrix printer, inkjet printers or more expensive (but faster) thermal printers... many technologies are available.
So how is a credit card payment processed?
- Merchant enters transaction information on the ePoS or directly on the credit card Machine,
- Customer keys in pin, swipes card or uses contactless payment,
- Credit card machine connects with payment gateway, which in turn connects with the credit card companies and merchant account, authorizes the transaction, and transmits the authorization to the ePoS,
- Ticket is printed: voilà!
Mobile card reader specifics
While these basics remain verified, mobile card readers make the experience very different on many points:
- As mentioned earlier, the new “Fintech” companies and credit card machine suppliers are originally software companies. In modern ePoS systems, the software side has therefore become so important, that the hardware is now largely incidental. Modern mobile payment card readers therefore work with a software or application which can be used on any mobile phone or tablet PC.
- This effectively allows both mobile payments and payments by mobile. As the payment system is installed on a phone, the credit card machine doesn’t need to be connected to an external modem to allow payments online. Transactions can take place anywhere, without any need for extra hardware: in fact, the credit card machine is just like a small dongle plugged into the phone, or like a pocket calculator with a numeric pad and display, barely bigger than the card itself, which connects with the phone or tablet wirelessly. These readers also accept modern payments by mobile, that is, with systems such as Apple Pay, Samsung Pay or Google Pay.
- As traditional banks moved from service to hardware to software, many of these new players took the completely opposite path, providing software, then also hardware with the pin and chip machines, then service with merchant accounts. Sometimes, they even cover the payment gateway side. So many of them now offer a whole package, at much more competitive prices than traditional high street banks, with different pricing plan types: more often than not, for example, the credit card terminal (the “dongle” or “pocket calculator” which connects to the mobile phone or tablet), is actually sold to the merchant, at a very low price. Commissions also tend to be cheaper than those applied by high street banks. The only drawback is the delay to move funds from the “virtual” merchant account and the merchant’s actual bank account, operated by a third-party, usually a high street bank.
Differences between debit and credit cards
All card payment terminals will accept debit as well as credit cards (debit and credit card readers are the same device), but the interchange fees charged are worked out slightly differently. With a credit card, you will be charged on a pre-determined percentage of the card transaction, but a debit card will usually be charged at a flat fee per transaction, no matter how much was spent. And each card (Visa, MasterCard, American Express etc.) will have different fee structures.
The UK Cards Association offer a wealth of information to both retailers and consumers about all types of card payment and The Office of Fair Trading (the independent government body who regulate economic services in the UK) can advise businesses with any concerns or issues with merchant accounts or credit cards.
For all these reasons, new players on the credit card machine market are well worth a look - and even a quote request in credit card reader using services such as Companeo -, especially for small business owners.
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