We use debit and credit cards every day, but do we really know how they work?
Take a moment and think about how many times per week you use your debit or credit card. Your answer will depend a lot on how old you are, as several studies have shown that younger people and the millennial generation are much more comfortable using plastic for small purchases under $10 or even $5. But regardless of your age, we’re guessing you swipe a card at least five times a week, and probably a lot more than that.
The convenience is unbeatable – for debit cards, the money withdrawn is nearly instantly debited from your linked checking account, saving tons of time over using the antiquated check and saving the hassle of dealing with change from using cash. For credit cards, the same convenience applies but instead of taking funds from your checking account, your debits are tallied up and added to your credit balance.
All of this is pretty basic knowledge and most of you already know all this. But for something you use as much as credit and debit cards, have you thought much about HOW they actually work? What goes on when your card is actually swiped? What’s the technology involved in both the card and the machine? And what’s the deal in movies from the 80s and earlier where they had to manually make a carbon copy of your credit card on a piece of triplicate-style paper?
Let’s take a look and see if we can’t answer the first two questions (we’ll save the third for a later date, perhaps a history of credit cards piece). We’ll assume for the purpose of this article that everyone is familiar with the absolute, bare-bones basics of a credit or debit card – it’s a thin piece of plastic that’s just over 3” x 2”, it has your account number and expiration date on the front of card along with your name, etc.
The magnetic strip on the back is where the technology behind how cards actually work is where most people’s knowledge of the subject begins to wane. That strip is known as a magnetic stripe, or “magstripe”, and as the name might suggest, is composed of lots of tiny bar magnets, running up and down. The magnets themselves are incredibly small, measuring a microscopic 20 millionths of an inch wide.
Being that small, lots of them can fit on a single three inch stripe, which leads to lots and lots of potential possibilities – the likelihood of ever having the same exact magstripe as another account is pretty much impossible. Being magnets, they can either be charged, or magnetized, in the north or south pole direction. This layout of north/south magnetized bars is how a magstripe is written when a new card is issued, and how the reader knows the card that’s being swiped is yours. (It’s also why if your cards accidentally get too close to magnets, even the small ones on your fridge or the hidden ones in your stereo’s subwoofer, they can get demagnetized and fail to work.)
But how do the swiping machines themselves know a combination of charged bars is John Q. Cardholder’s Visa or MasterCard? There are actually three distinct tracks on the magstripe itself, each measuring 1/10 of an inch, which tell the machine exactly what kind of card it’s scanning. Without delving too much into the programming jargon (recording density, bits per inch, character configuration, parity bit, control characters, etc.), we’ll provide a basic overview. Track 1 can tell the machine up to 19 alphanumeric characters, Track 2 can give 40, and Track 3 an additional 107.
Most banks here in the U.S. use only Tracks 1 and 2 to give all the information the machine needs – account number, primary account holder, etc. Some banks use Track 3 for additional security measures, such as encrypted PIN numbers and country codes, but it’s not quite standard yet.
Once the machine has all your information from the card’s magstripe, it is now ready to contact the financial institution in question – either your bank for a debit card or the credit card holder for a credit card – to try and authorize the transaction. The card swiping machine, also known as an Electronic Data Capture (EDC) machine, makes an automated call through a modem to an acquirer. An acquirer is a company or organization that acts as a go-between between the merchant (the place of business you’re swiping your card) and the financial institution, and offers a guarantee of payment from the institution once the swipe goes through.
What’s in a successful swipe, you might ask? Well the EDC machine already has all of your information from the magstripe, and they have the merchant ID number (each store that can process card transactions is issued a unique numerical ID) based on where the automated call originated from. All they have left to do is make sure that you have enough cash left in your checking account (debit card) or a high enough remaining amount on your balance (credit card), and do a quick check for any suspicious activity related to your recent usage (to mitigate fraud/theft), and then you’re good to go!
As you might realize now, there’s actually a lot that goes on with a simple swipe of your card, and a lot of people and moving parts involved. It can be a bit of a shock for first-time merchants when they are dealing with the costs of processing credit and debit cards, but again – there’s a lot involved. If you’re looking for a way to reduce your merchant costs associated with processing plastic, Valued Merchant Services is here to help! We offer a guarantee that we can beat your current processing rates – if not, we’ll give you $500. Head to www.valuedmerchants.com for more information.