Skip to content
Know.itKnow.it
Create an animated lesson
On request

This article is free to read. Creating a lesson uses your daily or stored credits; review the language and settings before starting.

How do chip cards work?

TechnologyLesson on requestFree to read

Quick answer

A chip card contains a small secure computer that holds a secret key. For each purchase, the terminal asks the chip to create a one-time cryptographic code, which the bank verifies against its own copy of the key. Because the code changes every time, a copied card number cannot be reused to make a fake card.

A chip card works by running a tiny computer inside the card that generates a unique one-time code for every transaction, so a copied card number cannot be reused. The terminal sends the transaction data to the chip, the chip signs it with a secret key, and the bank verifies that signature before approving payment.

Step by step

  1. The card is inserted into the terminal or held near it, and the terminal sends power and a request to the chip.
  2. The chip and terminal agree on the transaction details, such as amount and currency, and the chip generates a unique cryptogram.
  3. The terminal forwards the cryptogram, card data and transaction details to the bank or payment network.
  4. The bank verifies the cryptogram using the secret key it shares with the card, confirming the card is genuine.
  5. The bank checks the account balance or credit limit and returns an approval or decline to the terminal.
  6. The terminal displays the result and the chip session ends, with the next transaction generating a completely new code.

Key things to understand

  1. The card's embedded chip is a secure microcontroller with its own processor and memory, storing cryptographic keys that never leave the card.
  2. When inserted or tapped, the terminal and chip exchange data and the chip generates a dynamic cryptogram unique to that transaction.
  3. The terminal passes this cryptogram to the bank, which independently verifies it using the matching key held in its systems.
  4. Because each transaction produces a different code, a stolen card number alone is useless for making a counterfeit card.
  5. Contactless payments use the same chip with near-field communication, sending the cryptogram over a few centimetres of radio link.

Labelled diagram

  1. Card inserted

    Terminal powers the chip and starts a secure session.

  2. Chip signs

    Chip creates a one-time cryptogram using its secret key.

  3. Data sent

    Terminal forwards cryptogram and transaction details to the bank.

  4. Bank verifies

    Bank checks the cryptogram against its copy of the key.

  5. Approval

    Bank returns approve or decline, and the terminal displays it.

How a chip card approves a payment

Real-world examples

  • In the UK, nearly all debit and credit cards issued since the mid-2000s use chip-and-PIN, and inserting the card is standard at supermarket tills.
  • In India, RuPay and other chip cards are widely used for both insert and contactless payments at metro stations and small shops.
  • In the United States, banks mailed millions of chip cards after 2015, and many terminals now accept tap-to-pay as well as insert.
  • If a traveller's card number is photographed at a restaurant, a thief may misuse it online but cannot make a working counterfeit card, because in-store chip payments need the chip's cryptogram.

Common mistake

✗ Myth: A chip card is just a stripe card with a chip glued on for show.

✓ Fact: The chip is an active computer that performs cryptography for every transaction, while the stripe is a passive storage strip. Even when both are present, the chip path is what makes cloning impractical.

People also ask

How does a chip card stop fraud?
The chip creates a new cryptographic code for each transaction using a secret key stored inside the card. A fraudster who copies the card number gets only one code, which the bank will reject if reused. This makes counterfeiting much harder than with magnetic stripe cards, where the same fixed data is copied and replayed.
What happens when you insert a chip card?
The terminal sends power and a request to the chip, and the chip responds with a one-time cryptogram tied to that transaction. The terminal passes this to the bank, which verifies it and checks the account. If the cryptogram matches and funds are available, the payment is approved.
Why do chip cards use a secret key?
The secret key is a long number stored inside the chip and never transmitted. The bank keeps a matching copy. Because the chip can prove it knows the key without revealing it, anyone intercepting the transaction cannot learn the key or create valid future codes.
What is the difference between a chip card and a magnetic stripe card?
A magnetic stripe stores fixed data that any reader can copy, so a cloned stripe card can be reused. A chip generates a fresh cryptographic code for each transaction, making simple copying ineffective. That is why many countries have replaced stripe-only cards with chip cards.
Why do some chip transactions still ask for a PIN?
The chip proves the card is genuine, but it cannot prove who is holding it. A PIN, signature or biometric check adds verification that the person is the authorised cardholder. Card networks combine both checks, which is why a stolen chip card is hard to use without the PIN.
Is contactless payment less secure than inserting the chip?
Both use the same chip and the same one-time cryptogram, so the core security is identical. Contactless simply sends the data over radio instead of metal contacts. Banks may set lower tap limits or ask for a PIN after several taps to limit losses if a card is lost.
Can a chip card be cloned or skimmed?
Cloning the chip itself is extremely difficult because the secret key is locked inside tamper-resistant hardware. Attackers instead try to intercept data or trick the terminal, which is why banks monitor unusual patterns. If a card is lost or a terminal looks modified, contact the bank and see a professional for advice.

Part of the guide: How the Internet Works →