How Does Credit Card Chip Technology Work | Credit Card Processing

Credit card readers work to extract information from a customer’s credit or debit card, transmit it to the payment processor, and in turn collect the information from the customer’s bank. If the card reader detects available funds, the transaction is approved.

Simply put, credit card readers take your customer’s payment information, communicate transaction data securely, and flow the data from card to cardholder’s bank and back to you to conclude the sale.

Let’s take a look at the journey of data through a card processor, from the customer’s card to the final purchase.

How credit card processing works

What happens behind the scenes when a customer wants to make a purchase from your business and scans or dips their credit card, smartphone or contactless card to make payment.

  1. payment authority. When the customer swipes, dips or scans his payment method, his card data is passed on to the payment gateway. The payment gateway securely passes encrypted data between the merchant’s bank and the customer’s bank. The customer’s bank verifies that the customer has sufficient funds to complete the transaction. If the customer has sufficient funds in his account, the bank freezes those funds and marks the transaction as pending.
  2. Capture. The credit card company transfers the funds to the merchant’s bank account. Often, multiple payments are sent out at the same time, a process known as batching.
  3. a settlement. Once the funds are fully processed they can be credited to the merchant’s account. This process may take a few days depending on your bank and the payment gateway you have chosen.


If you recently and unexpectedly received a new credit or debit card in the mail, you may be wondering why. Sadly, this has nothing to do with the more favorable interest rate or the exciting new reward program. Instead, it’s a security upgrade that replaces our old-fashioned cards with some modern technology at the end.

Thanks to what Microchip calls “chip-and-PIN” cards, these new credit and debit cards promise to make your retail transactions far more secure than the magnetic stripe-based cards you’re used to. “Effectively what’s happening is that we’re moving from a static environment to a dynamic environment,” said Mastercard of the product distribution for the company’s chip-and-PIN cards (also known as EMV cards). Senior Vice President Carolyn Balfani says.

For Americans, the change to chip-and-PIN has been long overdue. As of last year, 83% of Western European consumers had chip cards, while only 7% of state buyers had chip cards. France, the first country to adopt the new card, did so in the 1980s. But this is the year the U.S. Begins to go all-in. According to information provided by VISA, industry analysts estimate that 70% of the country’s credit cards and 41% of its debit cards will be upgraded to chip technology by the end of this year.

Initially, new chip and pin cards will still have magnetic stripes. That’s because not all retailers are ready to accept chip cards, so the older technology will last a little longer. But making purchases via magnetic swipe means that data like your credit card number

expiration date and more is carried over the phone lines at your bank for processing. 

Chip card transactions are more secure as they work differently. When you make a purchase with your chip card, the payment terminal checks whether your card is genuine. Next, instead of sending your account information, new types of payment terminals generate a one-time use code (also known as a cryptogram) that is transmitted to your bank to authorize your purchase. Cryptograms usually include transaction amount, date, time, terminal ID and other information. They also keep all that data encrypted, which helps keep it away from fraudsters.

Some chip cards also come with tap-to-pay technology, which means you don’t need to insert or swipe them to make purchases. These contactless cards, which have little icons that look like radio waves, work like Apple Pay or Android Pay, except instead of tapping your smartphone, you wave your card online education essay. Beyond tapping versus inserting, these contactless card payments work in much the same way as other chip-and-PIN transactions.

But seeing as how not every retailer is ready for the new chip card yet, when it comes time to pay, should you swipe, dip, or tap? “Technology is going to guide the consumer,” Balfani says. This means you can still swipe your card like you do today, and if a payment terminal is capable of doing chip transactions, you’ll get a prompt at the terminal to insert your card. You should nudge, as your payment will be far more secure.

“Virtually everything else about the transition will be similar to what we experience today,” Balfani says. So once you have your card information in the payment terminal, sometimes you will be asked if your card is credit or debit, sometimes you will be asked for a signature, sometimes it will require a PIN, and sometimes – If the sale is something modest like a pack of glue – you will be asked for nothing further.

Over time, you’ll see less and less magnetic stripe registers around. In fact, the U.S. Merchants are required to accept chip cards by October, or else they may be held liable for paying for any fraudulent purchases made at their establishments that previously had card-issuing banks. Still, it may take some time for retailers, especially smaller retailers, to accept the cost of the upgrade. But for shoppers, nothing changes – you’ll still have an opportunity to dispute the fraud charges. And with this new technology, there should be less fraud anyway.

Author: mayank

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