How Things Work: credit cards

Many Americans enjoy the convenience of using credit cards, but the workings of the credit card system are often a mystery.

A typical credit card transaction is completed in just a couple seconds, but the process involves several devices, a communications network, and a specific set of standards.

The credit card was first created in the 1920s as a way to identify customers and keep track of items sold on credit. The original credit card was much less complicated than the modern credit card. It did not involve any automation or processing network, so each store maintained its own credit system.

In the 1970s, innovations including the magnetic stripe were added to create the credit card that is widely recognized today. The development of universal credit cards, or cards that can be used at many stores, was finally possible.

The universal credit card is based on the ability to share a common record between different stores. This is accomplished with the magnetic stripe. The magnetic stripe is the black stripe on the back of a credit card.

The stripe contains many small magnetic particles embedded in the plastic. Each particle is less than 20-millionths of an inch long. The orientation of each magnetic particle determines what data are stored.

There are three tracks of data in a magnetic stripe. Each track is approximately one-tenth of an inch wide. The first and second tracks of the stripe are encoded with information about the cardholder’s account, including the full name, credit card number, expiration date, and country code. The third track can be used to store additional information.

Not all credit cards store data in a magnetic stripe. Some newer technologies to supplement or replace the magnetic stripe have been introduced, but most are not yet in common use in the United States.
Smart-chip technologies allow additional information such as frequent shopper discounts to be stored on the credit card.

Contactless technologies allow credit cards to be used simply by placing the card close to a card reader. Contactless card readers have recently been introduced to many convenience stores.

Regardless of the method of storing data on a credit card, the card is not functional without a device to read and use the information.

Most retail stores use a device called a point-of-sale terminal. The point-of-sale terminal is typically a device with a card swipe reader and, optionally, a signature capture pad.

When a card is swiped through the terminal, the customer’s credit card information is transmitted to the acquirer, the bank that handles the credit card transaction. This is done through a dial-up modem phone connection or a dedicated network connection.

The acquirer’s comupters use the transmitted information to check the cardholder’s account to make sure that it is in good standing and has enough credit available for the purchase. The acquirer then sends an authorization response, indicating the approval status of the transaction, and if declined, a reason code.

There are also alternative credit card processing methods that do not require the physical credit card to be present, but all involve the same process of contacting the acquirer.

Merchants may process credit cards via a phone system that calls designated phone number and dials in required information for the charge, including the credit card number, expiration date, and amount to be charged.

Another method that is quickly gaining popularity is the virtual terminal. A virtual terminal allows the transaction to be completed over a website interface. These two methods are especially useful for businesses that do not see their customers in person, such as mail-order and e-commerce stores.

Credit cards are designed to be easy to use, so most of the process is completely transparent to the customer. However, occasional problems with the system do surface. Network downtimes and equipment failure can sometimes prevent credit card transactions from taking place.