Electrically powered card readers and payment terminals process transactions by following a series of steps involving communication between the terminal, the payment card, the payment network, and the issuing bank. Here's a general overview of how the process works:
Card Insertion or Swiping: The customer inserts their payment card (credit, debit, or prepaid) into the card reader or swipes it through the magnetic stripe reader. Some modern terminals also support contactless payments using NFC (Near Field Communication) technology, where the customer simply taps their card or mobile device near the terminal.
Card Authentication: The terminal reads the information stored on the card's magnetic stripe or chip. The terminal checks the card's validity and authenticity using encryption and security protocols. This step ensures that the card is not counterfeit and has not been tampered with.
Data Encryption: If the card has a chip, the terminal generates a unique transaction code (cryptogram) based on the transaction details. This code is used to prevent replay attacks and protect sensitive data during transmission.
Transaction Initiation: The terminal connects to the payment network or gateway using an internet connection (wired or wireless). The payment network acts as an intermediary between the merchant's bank (acquiring bank) and the customer's bank (issuing bank). The terminal sends the transaction details, including the payment amount, merchant information, and the generated transaction code.
Payment Network Routing: The payment network routes the transaction to the appropriate issuing bank, where the customer's account is held. This bank determines whether the transaction should be approved or declined based on factors like available funds, transaction history, and risk assessment.
Issuing Bank Authorization: The issuing bank receives the transaction request, processes it, and decides whether to approve or decline the transaction. If approved, the issuing bank generates an authorization code and sends it back to the payment network.
Payment Network Response: The payment network relays the authorization code to the terminal. If the transaction is declined, the terminal displays an error message to the customer.
Transaction Completion: Once the terminal receives the authorization code, it prompts the customer to complete the transaction. The customer may be asked to sign the receipt, enter a PIN (Personal Identification Number), or provide other forms of verification, depending on the type of transaction and card used.
Funds Settlement: After the customer completes the transaction, the merchant's bank (acquiring bank) initiates the process of settling funds with the issuing bank. This involves transferring the payment amount from the customer's account to the merchant's account.
Receipt and Confirmation: The terminal prints a receipt for the customer, detailing the transaction information and providing proof of payment. The transaction is now complete, and both the customer and the merchant have records of the transaction.
It's important to note that the above steps are a simplified overview, and the actual process can involve various additional security measures, protocols, and network interactions to ensure the security and integrity of the transaction data.