The payment card has come a long way since Frank McNamara forgot to bring his wallet while dining in a New York City restaurant. His wife ended up paying the bill, but the experience stuck with him. A year later, in 1950, he dined at the same restaurant and paid his bill with a cardboard card that would become a Diner’s Club Card, the first charge (credit) card.
Today, consumers use their EMV chip-and-pin and magnetic stripe payment cards without thinking much about them—using them to make payments has become so commonplace. But there are differences between the two technologies; the largest is that one is more secure than the other. And, with fraud on the rise, particularly during the pandemic, that matters to any business owner or operator who accepts card payments in their store.
A brief history of the magnetic stripe and EMV chip
The mighty mag stripe
The black stripe on the back of cards may seem quite simple, but the technology behind it is actually intricate. It’s made up of miniscule iron-based magnetic particles that are bound together by magnetic material. The invention hails back to the Denmark invention in 1900 of magnetic recording on steel tape to make audio recordings. Sixty years later, IBM was able to apply magnetic tape to plastic cards (under contract for the U.S. government). The technology eventually led to the wide adoption and use of credit and debit cards, and, according to Credit Cards.com, that was transformative for retail and banking industries.
Europay, Mastercard and Visa develop the EMV card
The chip looks a little more innovative than the mag stripe—and it has the technology to back it up. It’s an integrated circuit chip that stores data and is made up of electronic circuits placed on a very small piece of semiconductor material that usually functions as silicon. The concept of using an integrated circuit dates back to 1949 with a German invention, but it wasn’t until 1994 that they were used in credit cards (now EMV credit cards). Today, the little chip in credit and debit cards, named EMV for the credit card companies that founded the standard, are widely adopted throughout the world.
What is EMV compliance and why do credit card companies require it?
One of the largest differences between the two technologies is that EMV is more secure than the magnetic stripe. That’s because every time a consumer uses their EMV card, the information that’s encrypted in the chip changes, making it much harder for thieves to steal consumer’s account and personal information.
But that’s not the case for the magnetic stripes; that technology doesn’t have the capability to change information. That means cards with the mag-stripe have become easy targets for thieves to steal account and personal information to create cards they can use for fraudulent transactions or sell. And that’s why major credit card companies introduced EMV compliance.
To help reduce fraud, credit card companies recognized they needed to do something at the point where fraud most often occurs (in stores) and that’s at the POS. So, as of October 1, 2015, there’s been a liability shift, and any business with a POS system must accept EMV payments or they become liable for the cost of fraudulent card use and chargebacks, instead of the card issuers. While the rate of EMV compliance has been steady around the world, it’s been slower in the U.S. And, recognizing that c-stores face more conversion challenges, they still have until early 2021 to become compliant.
That’s a big change. Is fraud really that rampant?
Fraud was already on the rise before COVID-19. According to Investopedia, in 2018 globally there were $28 billion credit card fraudulent transactions alone—with the expectation that the number would increase over the next five years. And that was before the pandemic. As reported by GlobeNewsWire, 86 percent of global online shoppers have fallen prey to identity theft and fraud during 2020. So, there’s no doubt that fraud needs to be taken seriously, and because it’s so hard to catch the electronic thieves, finding ways to stop them without catching them is paramount.
Unfortunately for consumers, there are many ways their identity, financial and personal information can be stolen and used. But, for on-premise shopping, skimming remains the largest card-carrying threat. The fraud is nearly a decade old, but it’s evolved quite a bit.
Today, “skimmers” can take small devices that look exactly like payment terminals so consumers unwittingly swipe their cards with their information quickly picked up by the skimming device. In one day, a skimming device can collect dozens of consumer’s credit or debit card information (including the pin number) to make counterfeit cards. Then the thieves can either sell the cards or use them. Either way, the price of it, without an EMV card reader, falls to the business owner if they don’t have a way to accept EMV payments on their POS.
So, what does that mean for the magnetic stripe—is it going away?
The magnetic stripe is considered one of the most important technology inventions over the last few decades. While thieves, particularly using skimming devices, have made mag-stipes vulnerable to fraud, they’re likely to stick around because they’re still needed. For example, mag-stipes provide back-up for EMV payments when there’s a problem with a chip or a chip reader. For now, the two payment-enabling technologies work together.
"As the Points Guy reported, RL Prasad, senior vice president of payment systems risk at Visa recently said “We don’t see magnetic stripe completely going away. While we have seen adoption rates above 90% in certain parts of the world [for chip cards], we believe magnetic stripes will continue to be in use for some time.”
During the pandemic, EMV cards became even more important
As the world adjusts to the pandemic, contactless payments have become another big part of the payment world—and EMV cards are helping. Because they work with Near Field Communications (NFC), EMV cards enable contactless payments. NFC is the technology that allows two devices to communicate with each other, like consumers phone and a POS system.
While they aren’t the only avenue for NFC, which also works with mobile payments, digital wallets and QR codes, EMV cards were positioned to become conduits for contactless payment, increasing their demand among consumers.
Is there a payments winner or loser for EMVs and the mag-stripe?
No. Both have enabled a tremendous amount of convenience for consumers and businesses alike. But, moving forward, especially as fraud continues to rise (and shows no signs of stopping), accepting EMV cards, and being EMV compliant, is important for any business owner. And when there’s a glitch, for whatever reason, in EMV payments, the mag-stripe will be there to back it up.
