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CHARACTERISTICS OF A SUCCESSFUL PAYMENT METHOD: SECURITY
Fallback Transactions Fallback transactions occur when there is an issue with the chip at the terminal in a card-present transaction and the user has to fallback to using either the magstripe or manual entry of the card information. This can be considered a fraudster workaround to EMV chip cards, which are very challenging to counterfeit because of their use of encryption technology and unique cryptograms associated with transactions. While not very common, there are ways the fallback option for cardholders leaves room for bad actors. For example, fraudsters can “break” the EMV chip on a fake credit card so the card reader doesn’t accept the chip and hope the merchant accepts magstripe and then will swipe the card with reprogrammed card credentials they bought or stole – this could be categorized as Visa Chargeback Reason Code 10.3 fraud. Fallback transactions can be risky for merchants because they can fly under the radar, but disabling magstripe transactions or preventing consumers from accessing the fallback option can also risk merchants losing legitimate sales, too. There are many non-fraud reasons why a chip may malfunction, including exposure to liquids and other substances. 19 Given this situation happens to innocent users with a damaged chip, the fallback option is not necessarily the issue. If merchants can provide the correct data proving they followed the technical requirements regarding the fallback transactions to the network, they are potentially not held liable. However, there is a fallback threshold which merchants must consider. A U.S. Payments Forum publication on EMV Implementation states, “According to the payment networks, a fallback rate of over 2% at one particular merchant or merchant chain is indicative of a problem. The problem may be procedural or related to incorrectly configured POS terminals.” 20 Additionally, Mastercard has announced its intention to end magnetic stripe on its cards by 2030, which may help reduce fallback transaction fraud. 21 However, this will not prevent manual entry of card details so at this stage its impact on overall fraud is unknown.
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