Before we look at how a modern day chip and PIN machine works, let’s first see how they came into existence. Chips are integrated circuits also known as IC or microchips. Robert Nyce developed the first iteration of a chip in 1959. He found that using semiconductors in the form of silicon allowed for conductive properties, as seen in metals such as copper but also insular properties. The conductive properties are often determined by their exposure to light or heat. Within the chip, you have other components such as transistors (amplify or switch electrical energy), resistors (used for electrical resistance) and diodes, which conduct current at a low resistance. The very first user of this innovative technology was actually the US Air force.
With the technology of silicon smart chips, came the idea of inserting these chips into plastic cards. This development was led by two German engineers, namely Helmut Grottrup and Jurgen Dethloff in the late 1980s. As we saw with charging devices, users didn’t want different chips for different terminals and different merchants. Big corporations such as Europay, MasterCard and Visa standardized the format of chips and conveniently called this an EMV chip. They offered far greater security and capability than their magstripe predecessor. Now companies like American Express, Discover and Financial have joined EMV to create EMVco. This is precise technology that is used in over 80% of transactions today.
Now that we’ve arrived at today’s standard of EMVco chips or simply chips, what actually happens when you insert a debit or credit card into card machine? The first step is for the terminal to access the data on the chip, like a key to a door; the user enters their PIN (Personal Identification Number). With terminal access granted to the chip, both components then work in unison to create a unique, encrypted code, called a token or cryptogram, better known today as a unique transaction ID. Unlike swiping your card, chips transmit as little data as possible in order to validate the transaction. Additionally, the data it transmits is heavily encrypted, making it near impossible to duplicate. To decrypt the information provided from the chip, the card terminal sends this to the customer’s bank over the internet; the bank validates the transaction ID and tells the merchant there are funds available and that the purchase can be approved.
Chip & Pin is far safer than the old and slow magstripe technology used in PDQ machines. Every transaction ID is completely unique and is only useful for that individual transaction, rendering it useless for future transactions. Also, when using chip and pin, the credit or debit card never leaves the user’s sight making ‘skimming’ and rapid card copying a thing of the past.
For each transaction, funds are held in a merchant bank. This is different from a business or personal bank account and acts like an escrow. Once the customer’s bank balance has been checked, the funds move from the merchant bank to your bank account in usually 3 – 5 business days.