Credit Card Processing

EMV Fallback: Fees and Definitions

by Ben Dwyer

EMV fallback refers to a transaction where a customer uses an EMV (chip) card in a chip-capable terminal, but the transaction doesn’t go through as a chip transaction. Instead it “falls back” on magnetic strip technology.

There are a few situations where this can happen, which we’ll take a look at in this article. While occasional fallback transactions are okay, too many can bring fines and other penalties. Additionally, magnetic stripe transactions are not as secure as chip transactions, so you’re opening yourself up to greater liability if you don’t properly utilize chip terminals.

EMV Fallback Definition

As noted in the introduction, the definition of EMV fallback is a transaction that could have been an EMV (chip) transaction, but instead “falls back” to processing as a magnetic stripe transaction, or a keyed transaction.

It can happen because of problems with the chip card itself, problems with the chip machine, or both. In those cases, the transaction doesn’t benefit from EMV chip protections (such as encryption) even though it’s a chip card.

Fallback only applies to “card-present” transactions where the card is swiped or dipped into a credit card machine. It does not apply to “card-not-present” transactions because those transactions aren’t processed through a machine that accepts swipes or dips and aren’t utilizing the chip.

Chip to Magstripe to Keyed

“Fallback” has a hierarchy, so technically, there are two fallback levels for EMV chip transactions. They’re organized from most secure to least secure. Of course, chip cards are the most secure, so they’re the top of the transaction hierarchy.

The first fallback level is the next most secure, and it happens when a would-be chip card transaction reverts to a magstripe transaction. The second fallback level is the least secure, and involves keying in the card details. When a chip card can’t be processed either as a chip card transaction or a magnetic stripe transaction, a cashier can key it in.

If an EMV chip card doesn’t work, the next step should be to use the magstripe reader. Don’t skip right to keying in a card unless absolutely necessary. In addition to being the least secure, keyed transactions often incur higher processing fees.

Is there a benefit to EMV fallback?

Yes, in the sense that it prevents you from inconveniencing a customer. If a chip card isn’t working for some reason and it’s not your machine’s fault, it’s easier to accept the card by running it as a magstripe transaction rather than asking for another method of payment.

However, that’s also where fallback fraud comes in.

EMV Fallback Fraud

The switch to chip cards has made it harder for criminals to engage in fraud in person. Previously, fraudsters could skim card information from magnetic stripes (or purchase it online for other fraudsters) and “clone” a card. They could then swipe the cloned card through a machine in order to make unauthorized purchases.

EMV chip cards, however, can’t be easily skimmed (though, unfortunately, fraudsters are working on it) or cloned. But if a fraudster can bypass the chip reader and instead run the card through the magstripe reader, they can use a cloned card the same as they always have. Fraudsters are counting on you to want to make the sale and therefore allow their magstripe transaction.

EMV “shimmer” devices – that is, skimmers for EMV chip cards – can pull card information fro a chip card, but are not as common as skimmers.

Fraud Methods

In order to make the chip card not work, criminals may tamper with the chip itself or with the machine, if they have uninterrupted access to it. They may scratch or damage the chip or replace it with a fake chip. Damaging the reader itself is more difficult, as they would need access to the machine to tamper with the reader.

The problem is that it’s difficult to determine whether a customer is attempting fraud through the fallback option or if they’re simply a customer with a defective chip card. After all, most people have the experience of a card not reading correctly at some point in time.

Some banks have implemented limits on the size of transactions that can “fall back” to magstripe in order to cut down on higher volume fraud, but that doesn’t eliminate all instances.

Processor Warnings

Unless you’re the only cashier at your business, you likely won’t know that you’ve had a fallback transaction unless there’s a problem (such as a chargeback for fraud) or your processor informs you of excessive fallback transactions. Processors might only notify you if you have an excessive number of such transactions. In some cases, they’ll notify you because they themselves received notification from a card brand that there are excessive fallbacks occurring.

If you run a business with cashiers, you may want to ask them to tell you or a manager if a lot of customers need to use the magnetic strip instead of the chip. That will give you a chance to inspect the machine or take other measures to correct any possible problems.

Non-Fraud Causes of Fallback

There are legitimate situations (not fraud) that may cause a chip card to fall back to magstripe. Chip readers that are dirty or damaged may not properly read a chip card. Occasionally, a terminal may send information with a transaction that indicates it’s a chip machine but it isn’t actually able to accept chip cards.

If your machine is wrongly sending information that it’s chip capable when it isn’t, your processor will need to update the terminal indicators so that it provides the correct information.

Another possibility is disabled EMV chip prompts. In that case, the chip-capable machine will indicate that all transactions are fallback. If you’ve disabled the prompts for chip cards, consider adjusting that. If you need help, contact your processor.

Visa provides a fallback transaction guide to help minimize the issues that can arise from fallback transactions.

EMV Fallback Fees

Unfortunately, it’s difficult to get specifics on what the card brands charge for fallbacks and when those fees apply. Visa has stated that it may charge non-compliance fees to processors that serve businesses with excessive fallback transactions, but we haven’t been able to confirm what counts as “excessive” or what those non-compliance fees are.

It’s safe to assume that if a processor receives a non-compliance fee for a business that has multiple fallback transactions, the processor will pass that fee to the business. However, there’s no guarantee that they won’t “pad” the fee. Additionally, processors can impose their own fees separate from the card brands’ charges.

Note that fallback fees can ‘stack’ on top of other EMV fees, such as EMV non-enabled fees, which some processors charge to businesses that don’t properly utilize EMV chip terminals.

In addition to the added security that chip-capable terminals bring, they may help you avoid these types of fees, saving you money in the long run.

Are chip cards really safer?

Yes, for in-person transactions. Chip cards encrypt sensitive card data at the time of the transaction, making it much more difficult to steal that information.

Chip cards have no added benefit during online transactions. As such, it’s important to utilize proper anti-fraud and security tools when running an online business. However, EMV fallback will not apply to online transactions, as the card is neither swiped (magstripe) or dipped (chip) which is what fallback refers to.

Remember, the best way to protect yourself is to use the most secure solutions. When taking cards in person, work to ensure that your chip-capable equipment is in good working order and that staff is trained to let you know of any problems with chip transactions.

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