Chip authentication readers use a two-factor chip authentication method, which consists of ‘something you know’, such as your PIN number or password, and ‘something you own’ such as your existing chip-enabled bankcard or a special authentication card. When you insert your card into the handheld device and enter your PIN number, the reader generates a unique eight-digit code.
This code number comprises a secret seed value that is permuted every time you enter your PIN number, or it is altered at specific time intervals. The host server recognises this number when you use it to log in to your online banking account. The reader is not physically connected to your computer and a new code has to be generated every time that you log in to your account.