What is a Chip and Pin Transaction?

Over the last decade, credit and debit cards have become one of the more popular ways to make payments. In 2020 in the UK, card payments accounted for over half of all sales [1]. In the US, 80% of customers say they prefer to use their card over cash [2]. 

These statistics represent a significant change in how the public uses and thinks about payments. The old adage, “cash is king”, simply does not apply anymore, and it’s up to businesses to adapt to changing customer behaviours.

As the technology behind payment processing improves over time, chip cards have become the dominant way to pay. This blog will tell you everything you need to know about chip cards and chip and pin transactions. 

Different kinds of cards 

Since the first payment cards were issued by Barclays in 1967 [3], several different types of cards have been developed. These include gift cards used in place of a defined amount of money in a specific shop and fleet cards used to pay for fuel. We’re primarily concerned with the three most widely used chip cards that we’ll explore in a little more detail: 

• ATM cards - These were the first type of payment cards to be issued. They’re intended for use primarily in automated telling machines (ATMs) and allow customers to withdraw and deposit cash [4].
• Debit cards - With debit cards, customers can only use the money that they have deposited in the card’s associated bank account. Customers can also withdraw and deposit money from the specified account for free (depending on the ATM) [5].
• Credit cards - Unlike a debit card, credit cards allow customers to make purchases using a line of credit. They then pay off the bill at a later date. Credit cards are generally issued by a bank or credit union and usually incur extra charges if they’re used to withdraw cash [6]. 

As these payment methods have become more and more common, the technology behind them has become more and more sophisticated. Card payments were initially processed manually using the embossed information on the card. Magnetic strips and a customer signature were introduced in the 1970s and sped up processes at the point of sale (POS). EMV cards, also known as chip and pin cards, began to appear in the 1980s. 

Chip and pin cards

EMV cards, named for Europay, Mastercard, and Visa, store customer information on a specially designed microchip embedded directly inside the payment card. To verify transactions, customers insert their card into a PDQ machine and enter a unique pin that allows businesses to accept the payment. 

These transactions work by instantaneously transferring data between the customer’s bank and the business’ merchant account. These payments usually take 3 to 5 days to process, but this can be affected by the amount of money in the transaction [7].

Before the advent of chip and pin cards, it was much easier for criminals to commit fraud. During the period where customers had to sign for purchases, fraud was often as easy as stealing a card and copying the signature on the back [8]. Chip and pin cuts out that opportunity for fraud and keeps customer information secure.

Due to the fact that magnetic strip cards required the cardholder’s signature, businesses would be required to hold onto a large amount of physical records. With a chip and pin system, everything is handled electronically which means that records are kept manageable and are harder to destroy or damage. 

There are of course a few disadvantages of using a chip and pin card. If a cardholder is careless with their card, a criminal could physically see them enter their pin, steal the card, and then use it to make fraudulent purchases. Cardholders may also run into trouble with countries that haven’t yet widely adopted chip and pin card machines like the US. 

How does it work?

A chip and pin transaction may seem complicated but it’s actually very simple. In each card, there is a microchip containing all of the cardholder’s information. This chip acts as a tiny computer that stores and processes information. This means when a transaction is initiated, The chip jumps into action and exchanges the relevant payment information while keeping other data encrypted [9].

When the cardholder inserts their card into the card reader and enters their pin, the chip transmits the relevant information between the bank and the business. Once the bank verifies the information, it issues an approval code to the POS system [10]. 

Benefits of chip and pin

There are a number of benefits that chip and pin have over traditional magnetic stripe cards and the newer contactless cards. For one, the microchip in chip and pin cards are only activated when the card is inserted into the reader and the pin is typed in. This isn’t the case on contactless cards where the chip is always active. A criminal could potentially tap a contactless read against a card or wallet without the cardholder’s knowledge and make a fraudulent transaction [11]. 

Chip and pin cards are also much more expensive to produce and program than magnetic stripe cards. The equipment needed to read a magnetic stripe card is also relatively inexpensive. These two aspects of magnetic stripe cards make them a much more attractive target to fraudsters [12]. 

There is also the issue of convenience when it comes to contactless cards. In order to prevent fraud, many card providers impose a limit on transactions. Once the cardholder reaches this limit, they’re required to put their card into a reader and enter their pin. Some of the more security-minded providers will even require their cardholders to call their security team before they’re allowed to proceed. With a chip and pin, cardholders can make as many purchases as they want without having to confirm that it’s them using the card [13]. 

The best systems for chip and pin

Businesses in the retail and hospitality industries can benefit greatly from the speed and convenience of chip and pin transactions. At Epos Now, we provided POS systems that will revolutionise the way you do business.

We can provide a full suite of software and hardware like chip pin machines that streamline your processes and let you conduct business the way you want to. 

Get in touch today and see how we can help.