When I slidey debit card, how does the card reader know if there is money on it?
I understand nowadays that the card reader probably just asks over the Internet how much money the account has, but debit cards are older than the Internet, so what did they do back then?
In: Technology
Same thing over telephone lines. And it’s also why Credit Cards were invented first – because the banks would charge you at the end of the month, instead of halting the transaction to check your balance.
There are (and were) “offline” debit cards. The short answer is: there was no way to know. It functions similar to writing a check. If you did not have enough money in your account, you would overdrawn your account into the negative and would be assessed an overdraft penalty.
The Internet in its current form, private citizens using computers and phones to view Web sites, goes back to the 90s, and other forms of it are older than that. Banking computers were using phones to talk to each other in the 70s. Debit cards aren’t too much older than that.
It’s important to understand that debit cards in today’s world are treated differently than debit cards in the pre-internet world. It wasn’t like today, where debit cards are essentially as good as cash. They’re treated that way today because of the internet, and the fact that they can be verified. In the pre-internet world, businesses couldn’t verify you had the funds, similar to how checks work today.
Before the Internet, credit cards were rarely used for small expenses and when you bought something expensive, the store would call the bank/CC company on the phone to check the balance.
There were often minimum amounts to use the card. I remember $25 minimum. It varied quite a bit over time.
You should view the documentary film “Night at the Roxbury” for more info about merchant/credit card relationships. Emilio Estevez narrates!
They used dialup networking that was available commercially since 50s. There were no ISPs but you could buy a modem, setup a computer that would answer incoming calls and transmit data. ATMs and point of sale systems dialed directly to a bank computer.
Before the internet, and before telephone processing, credit cards were charged using a machine that made an imprint of the card on a three-layer carbon paper receipt. The merchant would write the charge amount on the receipt, then load the card into something literally called a card imprinter.
The merchant would then take the carbon receipt out and the customer would sign it to authorize the charge. The three layers carbon copy receipt would be separated. One to the customer, one for the merchant, and one was mailed to the bank for processing. The bank had staff that would key the charges into their systems.
It was all very cumbersome and very expensive. Credit cards were very different back then. Only a limited number of stores even accepted them, and you couldn’t just use them to buy a soda. Many large stores had their own internal charge card programs, and they only accepted their own cards.
As an interesting aside, store charge accounts are more or less the origin of the concept of a credit card. Regular customers at local stores had “charge accounts” as early as the late 1800s. Department stores formalized the programs and started issuing cards.
As charge cards became more widespread, and charge amounts ballooned, merchants would call a phone number on the back of a customer’s card in order to authorize a signifcant charge. This was the introduction of the idea of “pre-authorization” and “authorization”, which is still part of the charge process today.
It wasn’t until modems became a thing that the mag stripe took off. Visa introduced the first POS in 1979, and that’s when things really started to change. Merchants could swipe a card, wait a few moments, and get an authorization for any amount, and no expensive call center employees were required. The modems could connect directly from the POS terminal at the merchant to regional banking computing centers.
From here, it feels like a rocket ship ride to the modern, internet connected CC terminal machine.
The history of the credit card is fascinating, and you should definitely do some Google searches and do some reading.
Debit cards and credit cards are relatively new. It was far more common to pay via check. In fact, debit cards until recently were called check cards by many banks.
OK, so we need to talk about how far back you’re talking about.
The concept of the “debit card” didn’t exist when I was growing up. I remember getting issued my first one somewhere around the year 2000, which was well after the internet became a thing.
We had ATM cards, but they all used their own networks (similar to the Visa / Mastercard / American Express / Diner’s Club / Discover networks for credit cards). They pretty much only worked at ATMs, and weren’t integrated into Point of Sale systems. They also only worked at ATMs that were part of their network – and there were a bunch of networks.
When you used the ATM, it would dial up the network’s central computer via a modem and a phone line, and it would query the network to see if you had enough cash to let you withdraw. The network would then contact your bank’s computers to see if you had the cash in your account, and if it did, the bank would tell the network, which would then tell the ATM to give you the money.
Today, a debit card actually has two modes: one that uses the credit card network, and one that uses the old ATM network. If you look at the back of your card, you probably show two network symbols – a Visa symbol, and one of the big 3 ATM networks (STAR, NYCE, or Pulse).
If you use your PIN, then it processes with the ATM network, and if you sign, it uses the credit card network. Vendors prefer than you use the PIN, because the fees to them are lower than if you sign.
The actual process of querying the network that then queries your account is pretty much identical to how it worked back in the pre-internet days. It’s just a series of servers between the place that has your card and the bank’s central computer asking one another if you have enough money to allow the transaction to go through.
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