The world of payment technology is constantly changing, and one major shift is the move from magnetic stripe to chip-based payments. It’s important to understand why this transition is happening and how it can affect your business. Upgrading your POS terminals to accept chip-and-PIN transactions and contactless payments is crucial for smooth and secure transactions. By doing so, you can stay ahead of the game in the ever-evolving payment landscape.
What is Magnetic Swipe?
Magnetic stripes, sometimes referred to as magstripes, contain encoded information that identifies its user. The data is stored in iron particles coated in a plastic film, and when you swipe your debit or credit card, the card reader decodes and reads this information. This technology is also utilized in the creation of hotel room keys, driver’s licenses, and other applications.
Magnetic swipes are an integral part of credit and debit cards. According to Investopedia, they consist of three tracks, stacked horizontally, that extend across the entire width of the card and occupy a portion of the magnetic stripe. Each track can store different information, including your name, account number, card’s expiration date, verification code, and service code. When customers purchase using their card, this information is processed, and the transaction is completed.
Why Magnetic Stripe Is Being Phased Out
As payment preferences evolve and technology advances, there’s been a shift from magnetic swipe to chip cards. Nowadays, chip cards are equipped with microprocessors that provide better security and often have small antennas that make contactless transactions possible. To take security even further, some chip cards combine fingerprints with chips to ensure the cardholder’s identity.
Change In Consumers’ Habits
Mastercard recorded over 1 billion more contactless transactions in the first quarter of 2021 than in the same period in the previous year. In the second quarter, 45% of the company’s in-person checkouts globally were contactless.
According to a December survey conducted by the Phoenix Consumer Monitor for Mastercard, more than 50% of Americans prefer using a chip card payment at a terminal over any other payment method. Security is the primary driving factor behind this preference. Contactless payments, whether made with a card or a digital wallet, were the second most preferred method. Only 11% of respondents preferred to use the magnetic swipe, and that number dropped to 9% when considering only those cardholders who have experience using contactless payments.
The reason for the change is that the current technology is outdated despite being good. Nowadays, chip systems have replaced the old card technology, which is more secure and widely adopted globally. The future of credit transactions lies in chip and contactless payments. As per The Verge, contactless payments, which include distant transactions like Apple Pay, increased by 1 billion in Q1 of 2021 as compared to the previous year. This rise in the use of contactless payments is a direct result of the global COVID-19 pandemic.
How Technology Advancements Enhance Payment Security
Since the late 1990s, chip cards have become the preferred way to make payments, with the introduction of the EMV standard. According to EMVCo, in 2022, 93% of card transactions worldwide used EMV chips.
To ensure that the genuine card is used for every transaction, the chip generates a unique transaction code that is verified by the issuing bank. This technology increases the security of a cardholder’s data.
Using EMV cards provides enhanced security for cardholders by utilizing microprocessors to protect their information. Additionally, these cards often include small antennae that enable contactless transactions, which have become increasingly popular during the pandemic due to concerns about sharing cards with others.
EMV technology continues to evolve and become more secure. Recently, Mastercard developed new quantum-resistant specifications for contactless payments. This development will protect cardholders and merchants from fraud for decades to come. The new specifications will not require physical changes to the digital wallets, contactless cards, or point-of-sale terminals. They will maintain the same half-second, tap-and-go experience as today.
Customers can make payments without physical contact by tapping their card or phone near the POS terminal. This technology, known as radio frequency identification (RFID), enables communication between the card reader and the device used to make the payment. Although contactless payments have been available in the U.S. for several years, their use has increased significantly since the pandemic began. Additionally, mobile payments are considered more secure than chip cards due to the added biometric component.
When a customer makes a payment using their mobile phone, they need to confirm their identity by scanning their face or providing their fingerprint. Mastercard is developing a Biometric Card, which uses chip technology in conjunction with the customer’s fingerprint to verify their identity.
When making a payment, the customer can insert or tap their card on the payment terminal. As this happens, the sensor captures a digital image of the customer’s thumb. This image is then compared with the one stored on the card. If there’s a match, the transaction is authenticated and approved. These new technologies have made transactions safer, and they are now commonly used for payments.
When is Magnetic Swipe expected to be fully phased out?
Starting in 2024, most markets will no longer require newly issued Mastercard credit and debit cards to have a magnetic stripe due to the decline in payments powered by magnetic swipes after the rise of chip-based payments. By 2029, new Mastercard credit or debit cards will not be issued with magnetic stripes at all. Additionally, banks in the U.S. will no longer be required to issue chip cards with magnetic stripes beginning in 2027. It is worth noting that prepaid cards in the U.S. and Canada are currently exempt from this change.
How Will This Change the Payments Landscape for Merchants, Payment Service Providers, And Customers?
If you own a business and have at least one payment terminal, it is essential to accept EMV payments, or else your business will be held liable for fraudulent card use and chargebacks that occur at your premises. Therefore, it’s critical to be proactive and ensure your business is EMC-compliant to avoid potential financial losses.
EMV chip cards are now widely used in the United States and around the globe. In 2022, these chip-enabled credit cards constituted 93% of credit card transactions worldwide and 87% of transactions in the U.S. It is worth noting that many business owners had already integrated EMV card readers into their operations before Mastercard’s announcement. If your business has not yet done so, it’s crucial to consider upgrading your POS terminal and card readers.