How Smart Cards Work

January 27, 2020  |  David Smith

An independent guest blogger wrote this blog.

In this modern age, there’s been a significant improvement in the digitization of traditional payment methods. We live in a technologically advanced era, and as such, advancements in payment infrastructures makes life easier, transactions faster, swifter, and smoother.

Almost all countries in the world are adopting the cashless economy policy. Smart cards are generally utilized by these countries to implement the cashless economy because they aid the seamless transaction of trade and settlement of other financial instruments.

What is a smart card?

A smart card is a type of pocket-sized device which looks like a credit card but has an embedded Integrated Circuit (IC) that can process data and allow the user to perform any transaction. The IC chip on the Smart card can be a microprocessor with memory capacity or a simple memory circuit that processes, manipulates exchange, and stores data.

Smart cards usually have up to 346 kilobytes of ROM, 8 kilobytes of RAM, a 16-bit microprocessor, and 256 kilobytes of programmable ROM. They are mainly plastic, and the microprocessor cards consist of volatile memory and microprocessor components.

How does the smart card work?

A smart card reader connected to a host computer, cloud computer, or any controlling terminal collects the information stored on the microprocessor chip of the smart card. Then, it sends such information received from the smart card back to the controlling terminal for immediate processing.

The smart card connects to the smart card reader using a unique Radio Frequency ID (RFID) or through a Carrier Sensing Collision Detection (CSCD) system protocol. RFID tags find use in a wide range of applications such as - tracking goods through the supply chain, tracking assets, controlling access into buildings, among other similar applications.

The CSCD protocols sense the carrier frequency of the smart card to match its speed. Two-way communication is used when collisions are detected, and the retransmission is based on a priority of detection.

Smart cards cannot provide locations using GPS services. This is because the smart card does not have a power source to support continuous operations. Tracking happens by conducting audit trails to pinpoint where an individual used their card.

The smart card chip comes in contact with the card reader either directly or indirectly and establishes an electronic interface. This then enables transactions such as payments via Point of Sale to take place. However, some smart cards do not need to come in contact with the reader. They connect using a wireless medium. These types of smart cards are called contactless cards, while those that need contact are known as contact smart cards. Contactless smart cards are increasing in demand due to their ease of use and flexibility.

What are the uses of smart cards?

  • Secured storage -  Smart card technology provides a secured means of storing data. Users' data is stored securely on the card and not on a central database, and is only accessible with the user giving full consent.
  • E-Commerce - Instead of filling out long forms, smart cards are useful for storing user shopping data and credit card details which are all accessible with a mouse click.
  • Personal finance - Users can use a smart card to conduct business transactions throughout the globe without hassle.
  • Encryption - Smart card technology provides a broad set of encryption capabilities which includes secure key storage, hashing and digital signing.

Types of smart cards

We can classify the smart cards based on:

  1. Their Connection to the Smart card reader
  2. Their configuration

Types of smart cards based on connection to the smart card reader

  • Contact smart card - This is the most common type of smart card; you’ll find them as ATM cards, sim cards and most credit cards. It requires contact with the smart card reader for it to be operational.
  • Contactless smart card - The chip on the smart card communicates with the reader through RFID induction technology. It can also use Near Field Communication (NFC) technology that sets up a wireless field between the card and the reader or wherever it will be used. It usually receives power from the smart card reader through an electromagnetic signal.
  • Hybrid smart card - These Smart cards have the capabilities and functionality of both the contact and contactless smart card.

Types of smart cards based on their configuration

  • Memory-based smart card - This smart card is used temporarily due to its low capabilities; they have little memory spaces. You can only use its memory once. Memory card types of smart cards can only read, write and move to a particular location, but they have a limitation as far as data manipulation and processing are concerned.
  • Microprocessor-based smart cards - These types of smart cards work like traditional computer microprocessors. Compared to memory-based cards, they can hold high data volumes that are accessible by a fixed or dynamic Operating System (OS). Data in microprocessor-based smart cards can be manipulated, processed and re-used.


Smart cards are now becoming an integral part of our lives. They provide secured and encrypted data storage points for users. Internet security challenges as it relates to financial security have been improved with smart card technology.

Smart cards work in straightforward ways, which can either be through contact with a smart card reader or through RFID technology, which enables contactless transactions.

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