What Is a Card Reader?

A card reader is a device that can decode the information contained in a credit or debit card’s magnetic strip or microchip.

In finance, the term “card reader” refers to the technologies used to detect the account number, cardholder information, and authorization code contained on a credit card. This information is contained either in the magnetic strip of the card, or in the microchip embedded in chip-enabled cards.

Although historically card reading technologies relied on physical copies being made and stored by the vendor, today’s card readers are able to scan and process this information electronically at nearly instantaneous speeds.

Key Takeaways

  • Card readers are the devices used to read the cardholder and account information contained on a credit or debit card.
  • Today’s card readers are Internet connected and are able to complete transactions electronically within seconds.
  • Older models of card readers required customers or merchants to physically copy the information from their card, slowing down the transaction process.

How Card Readers Work

Card readers are an essential component of the modern payment processing system. They have become ubiquitous in recent years, commonly used in retail stores’ point-of-sale (POS) terminals as well as the automated teller machines (ATMs) offered by banks. By using card readers, merchants are able to accept credit and debit card purchases from customers and can greatly increase the speed of transactions.

Today’s payment cards contain the cardholder’s personal information in either a magnetic strip, or a microchip, or both. This information includes the cardholder’s full name, as well as their account number, card expiration date, and validation code. Modern card readers can quickly decode this information from the card and then pass it on to the other parties in the payment network in order to obtain authorization for the transaction.

For example, the information obtained by the card reader must be passed on to the customer’s issuing bank, which is the bank through which they obtained their credit card or debit card. The issuing bank is responsible for determining whether the customer has sufficient credit or cash to complete the transaction. At the same time, the issuing bank will also check to see if the card in question has been deemed ineligible for future transactions, such as due to being associated with fraud. Assuming that there are no issues with the cardholder’s account, the issuing bank will transmit its approval to the POS system, and the transaction will be authorized.

Although the underlying process is actually fairly complex, today’s computer systems make it possible to complete these transactions in a matter of seconds. In the past, however, merchants would need to rely on physical copies in order to extract the necessary information from customers’ cards. One popular device was known as the “knuckle buster” because customers would often scrape their knuckles on the device while attempting to make a copy. Today, these kinds of devices are generally only used as a backup option in the event that the electronic systems should fail.

Real World Example of a Card Reader

Emma is purchasing lunch at a small cafe near her office. As payment, she uses her credit card, which she received from XYZ Bank.

To accept her payment, the barista scans Emma’s card through an electronic card reader that forms part of the cafe’s POS machine. By reading the information on the card’s magnetic strip, the card reader is able to quickly extract Emma’s name and account number, as well as the expiration date and validation code of her card.

By using the cafe’s Internet connection, the POS terminal then sends this information to XYZ Bank—the issuing bank for Emma’s credit card—and receives confirmation that she has sufficient funds to complete the transaction. The transaction is then approved.

If not for modern card readers, Emma or the barista would have had to physically copy the information from her card, and this information would have had to be stored by the cafe. Instead, the whole transaction was able to be completed within just a few seconds.

Today, some merchants keep manual imprinters on hand as a backup option for accepting credit cards when electronic payment systems fail.