How It Works: The Technology of Payment Systems

How It Works: The Technology of Payment Systems

By Ryan Carlson

My favorite TV shows are the ones that teach how things work – the ones that explain the technology behind a piece of equipment. It is easy to take for granted all that goes into making appliances such as toasters work, or understanding how your local carwash processes your credit card when you go to wash your car. Most wash operators realize why it is important to accept types of payment other than cash, but rarely do they understand how cashless payment actually works.

The world of cashless payment is not incredibly exciting to those of us that are consumers, because it’s something we just use without thinking. I expect to be able to use my bank card anywhere I would like to spend my money. When I go to a gas station or carwash that does not take my card, I drive away. When I find a station or wash that will let me spend my money in the most convenient way possible, I never ponder how the transaction actually happens. As a consumer I know the following: The card goes in the reader; money leaves my bank account; I wash my car. Beyond that, everything that happens in the background is a mystery to most consumers.

As a business owner, however, you should know a few things about how cashless payment works. Knowing how credit cards are processed at your wash is just as important as knowing how the pumps work in the back room, because without either of those components, you could be losing business.

Every payment system has some type of reader that your customers will interact with while they’re making a payment. If a cashless payment system was a living thing, the readers would be the eyes and ears of the system. Readers only gather information and pass it on to the brain for processing. There are several kinds of reader technologies available on the market today.

Magnetic-stripe readers: Possibly the most common reader is a standard card reader that has a built-in magnetic read-head. This head reads the information on the magnetic stripe on the back of a customer’s credit card and passes it on for processing. Each credit card has two tracks of data on it. Depending on what kind of processing your system uses, the reader may pass on one or both of the data tracks to get authorized. These readers come in many different flavors, such as the insertion-style readers that you see at gas station pumps and vending machines. There are also surface-mount readers that have you swipe your card through a vertical slot. The surface-mount reader is used for many access-control applications, as well as many of the credit card systems available in the carwashing industry today. There is no benefit of one reader style over the other, aside from cost considerations and space limitations, since they are both derived from the same technology.

Smart-card readers: Smart-card readers are wide-spread and very popular in Europe and Asia. This reader technology has been on the verge of breaking out for nearly the last decade here in the United States, but has met a lot of resistance from business owners who are unwilling to foot the expense to switch over to this new technology. The hesitation to switch over to smart card processing comes from the fact that so many existing businesses already have hardware in place to accept standard magnetic-stripe cards. The benefits of switching to smart card, for the average business owner, are not compelling enough to make an investment for new hardware.

A smart-card reader is very similar to a basic magnetic-stripe reader, except that it also has the ability to read information and write it on a small SIM chip imbedded in a plastic card or key. Each smart-card reader has a sensor that can transmit data to and from the SIM chip.

The primary use of smart-card technology in the United States is reducing credit-card counterfeiting fraud by making it difficult for criminals to steal identities and duplicate a consumer’s credit card. A well known identity theft scam is when a small-time crook that works at a restaurant or retail establishment takes your card out of your sight to “go run your card in back.” The crooks have a magnetic-stripe card reader attached to a computer that copies all of the track data and stores it for later use. The smart card will have additional information on the chip that is encrypted, and will make these scams much more difficult to pull off. It will only be a matter of time before the United States makes its move to smart-card readers. However, there are currently no indications that we will see this change anytime soon, since it is going to be up to the credit card companies to create compelling incentives for business owners to make the switch and pay for new card-acceptance hardware and software.

Smart-card technology also allows for gift card programs. The system will write a stored value on a SIM chip that is then deducted for purchases made throughout a carwash, for example. The primary concern many vendors have with the stored-value chips used in smartcard applications is what happens when a SIM chip is lost or stolen. There is very little that can be done for a customer that loses his or her card with the SIM chip on it, since proof of the balance was lost with the imbedded chip itself. Imagine if the balance in your bank account was stored on a SIM chip rather than maintained by your bank in a centralized system. Having that card lost or stolen would be a giant headache to any consumer, which would lead to frustration and a hesitation to use the bank card at all.

Barcode readers: Barcode readers have been in use in the carwashing industry for many years. Barcode readers are used in both prepaid gift applications as well as tickets at full-service washes. The major advantage to a barcode-based system is that it’s very inexpensive to create promotional cards and mailers. Business owners can print labels off of their laser printers and affix them to cards, post-cards and even car windows.

Barcode-reader technology is a bit different from magnetic-stripe cards and smart cards. Barcode readers have electronic eyes that read dark ink on white substrate and convert high and low reflectance into 1s and 0s. Barcodes are read by optical scanners that pass the information on to the controlling hardware for processing. There are many applications that still make use of barcode technologies today in the carwashing industry.

It’s a common misconception that card readers process cards or even activate wash equipment. Card readers are nothing more than devices that read specific numerical formats and pass the data on to some form of system for authorization to activate the wash equipment. If the readers are the eyes and ears, then something must act as the brain to which data is passed down the wire. The brain can then validate the data and do something with it.

Dial-up systems: The most common form of cashless authorization technology on the market is dial-up credit card batch processing. This is where the reader sends data to a “black box,” which is connected to a phone line. The system dials up to a batch-processing center to validate the information it received from the reader. The actual transaction is rarely processed at this time, because the batch processor is only verifying that the information captured by the reader matches known data-formats. This is to ensure that consumers can’t swipe any random magnetic-stripe card and purchase a wash. The batch-processor just makes sure that the card swiped resembles the data of a valid credit or debit card. Dial-up processing is known as a “good faith transaction.” It’s not until the accumulated batch of card transactions of the day, week or month are processed by the merchant that money is actually deducted from accounts. At this point, funds are transferred and some cards are declined.

We now live in a consumer society that, as of 2006, spends more money electronically and by credit card than we do with cash or check. Credit card fraud is one of the top consumer-victim crimes, as credit card processing has skyrocketed in the past three years – one of the many costs of doing business in our card-carrying consumer economy.

Computerized authorization: The fastest growing trend in the carwashing industry is the prevalence of computerized systems. What could once be done with large circuit panels and closets of controllers is now done with software. It’s cheaper to develop, faster to get to market and easier to support. Early computerized authorization systems make use of dial-up technologies, but with some software enhancements, in order to save on counter-top space and reduce hardware costs. The modern computerized authorization systems now make use of broadband Internet connections to process the entire credit card transaction in a matter of seconds. Within three seconds of swiping a credit card, the authorization system directly connects with the merchant processor, validates the card, checks for sufficient funds and immediately declines the service if the account doesn’t have enough money or the card has been reported stolen. Have you ever gone into a fast-food restaurant where they accept your credit card in a matter of seconds? All of the big fast-food chains have moved to a broadband computerized authorization system – it saves them money on every transaction by reducing the instances of credit card fraud. At the same time, it reduces the risk to the bank, as it authorizes before any services, food or products are provided. This means lower rates for the business and faster throughput for the customer.

Logic boards: There are basic prepaid gift programs that use smart-card technology and thus do not need a computer, phone line, or Internet connection. This is because all of the authorization happens right in the carwash bay or service counter. Many small-business operations make use of a simple smart-card system to manage their wash loyalty program. As long as business owners are comfortable with the inherent limitations of smart-card or chip technology, it can be a great way to manage small commercial fleets and offer customers a prepaid loyalty program without getting into credit card acceptance or needing computerized systems to manage the operation of the system.

Controller technology: In one ear, out the other

We’ve discussed the eyes, ears and brain of the operation, and we’re left with the muscles: controllers. When a reader sends data for authorization, an “accepted” signal is sent to a controller. Controllers are the meat and potatoes of what makes cashless payment systems work in a business such as a carwash. The ability to turn a wash on or off, trigger a specific wash package, or activate a vacuum or vending machine is all done by controllers. Every cashless system has some form of basic controller technology to interface with bays, vacuums, vending machines and automatic-entry stations.

Input/Output: Controllers have the ability to take input from devices such as card readers and pass the information along for authorization. A successful authorization signal means that a controller will then send a signal to “flex a muscle” and activate something (trigger a pump, open a door, turn on a light, etc.). Controllers are nothing without a system to tell them what to do. Many carwash operators are very familiar with the various controllers used throughout their wash, and the technology has not changed in the past 30 years – even though the size and power requirements may have changed as improvements have been made in controller technology. Just as cars still have wheels, engines, axles and steering wheels, the concept hasn’t changed; it has just been refined.

My advice to carwash owners that currently do not have cashless acceptance capabilities is to ask a lot of questions before buying. The technology behind your cashless payment system is just as important as the technology behind the equipment that washes the vehicles. Far too many new operators cut costs from their payment acceptance solutions when things go over budget. It just doesn’t make sense to limit your business by reducing the number of ways you can take your customers’ money.