How does a card reader work?

The rise in card and phone ‘tap’ payments has been huge in recent years.

As businesses have adapted to offer more versatile card payment solutions, credit and debit cards now represent 85% of money spent in 2023 - but how does a card reader work, and what benefits do these devices bring to small businesses?

Let’s take a look.

How does a card reader work?

Card readers - also called card machines or PDQ machines - are devices that offer businesses a simple and quick method for processing sales. They can support both Chip & PIN and contactless payments.

How they work is pretty straightforward. You insert your card, enter a PIN or simply tap it and that’s that - purchase approved. In the background though, there’s a lot more going on.

How Chip & PIN card readers work?

1) Your customer inserts their card into the card reader.

2) Using the keypad, they enter a 4-digit PIN.

3) The card reader registers the embedded data that’s contained within the card’s chip. It connects to the card issuer, who verifies the card.

4) The transaction is processed, approved if the customer has the correct funds, and securely transferred from the customer's account into your business’s merchant account.

5) A ‘settlement period’ is activated. The bank checks for fraud or suspicious activity. If content, the funds are released from your merchant account and transferred into your business bank account.

What’s the settlement period?

This is a predetermined time where you’ll wait for funds to clear. You can typically expect a wait of up to 3-5 working days, though this can vary depending on the provider. At Clear Business, we know how important cash flow can be to a small business owner. That’s why our card payment service provides next-day settlement¹ to speed up the process.

How contactless card readers work is even simpler

1) Your customer taps their card on - or hovers it over - the card reader.

2) The terminal processes the transaction.

3) If the customer has the correct funds, the terminal beeps, notifying both parties that the transaction is approved.

For a more detailed breakdown, click the link to our guide: How Does Contactless Payment Work.

And what about mobile wallet payments?

Similar to the above, mobile payments - Google Pay, Apple Pay, and Samsung Pay - use the Near-Field Communication (NFC) technology in the digital wallets to connect with the card reader. In a survey conducted between April 2023 and March 2024, some 26 percent of UK respondents stated that they had paid with their smartphone for everyday purchases in the past 12 months.

What is the maximum spend for contactless payments?

In the UK, the limit for a single contactless card transaction is set at £100 (as of May 2024). Anything over, and you’ll have to insert the card into the Chip & PIN.

Customers wanting to spend more could also opt for multiple transactions. The limit here has risen from £130 to £300. However, banks may also set their own limits.

For mobile transactions like Apple Pay and Google Pay, there is currently no upper limit. However, the retailer or card issuer may issue their own limit to comply with their own security and consumer policies.

What technology do contactless card readers use?

Contactless card readers work by using sophisticated wireless technology.

For physical card payments, the card reader will lean on RFID - short for radio frequency identification. For mobile payments, it’ll use NFC (near-field communication).

Main types of card readers available

The type of card reader you’ll need will depend on your business type. Here at Clear Business, we can take you through the benefits and specs of each to make sure you get the right kind.