Fallback Transaction

A fallback transaction is a card-present payment in which a chip card is processed using a weaker method than its chip because the chip transaction could not be completed. Most commonly, the terminal tries to read the EMV chip, fails, and then prompts the cashier to swipe the magnetic stripe instead. In some cases the card number is keyed in manually. The transaction is then sent for authorisation with an indicator showing that it is a fallback, so that the issuer can take the reduced security into account.

Fallback exists so that customers can still pay when a chip is damaged or a terminal's reader fails. However, magnetic stripe data is static and easily copied, so fallback weakens the protection that an EMV transaction provides. A related idea, the chip transaction, describes the normal path that fallback replaces. Criminals deliberately damage chips on counterfeit cards to force fallback, which is why card schemes and issuers watch fallback rates closely.

• Damaged or dirty chips. Worn, scratched or broken chips may not communicate with the terminal.
• Terminal faults. Chip readers can fail or be misconfigured, or the terminal software may not support a card's application.
• Incorrect use. The card may be inserted wrongly or removed too early, causing an error that is treated as a chip failure.
• Deliberate fraud. Counterfeit cards are often made with a stripe copied from a real card and a chip that is missing, fake or intentionally disabled.

Under EMV rules, a terminal should attempt a chip read first. If the chip cannot be read and the card's service code shows it is a chip card, the terminal may allow a magnetic stripe read and mark the authorisation as a fallback. The point-of-service entry mode field in the authorisation message indicates how the card data was captured, and a specific value is used for fallback. The issuer sees that a chip card was swiped and can decide whether to approve, decline or require further checks. Some issuers decline most fallback transactions, while others approve them subject to limits and risk scoring. Many terminals require the operator to try the chip a set number of times before fallback is allowed.

Liability for counterfeit fraud follows the EMV liability shift. If a merchant has a chip-capable terminal and correctly follows fallback procedures, and the issuer approves a fallback transaction that turns out to be counterfeit, the issuer usually bears the loss. If the merchant processes a chip card by stripe without a genuine chip failure, for example because staff routinely swipe instead of inserting, the merchant may be liable. Card schemes monitor acquirers and merchants with high fallback rates, since these can indicate faulty terminals, poor training or fraud, and they may require corrective action or impose fees. Excessive fallback can also count against a merchant in fraud monitoring.

Fallback is a known weak point. In regions that have adopted EMV, counterfeit fraud largely moved to card-not-present transactions or to places where magnetic stripe is still accepted, but fallback offers a route for counterfeit cards to be used locally. Data from card skimming can be written onto new stripes, and fraudsters may target merchants known to allow swipes easily. Issuers counter this with real-time fraud scoring, by checking the card verification values encoded on the stripe, and by watching for patterns such as many fallback attempts on the same card at different merchants.

A contactless payment that fails may prompt the terminal to ask for the card to be inserted, which is a normal step-up to a contact chip transaction rather than a security fallback. Problems arise only when the process then falls back to the stripe. Mobile wallets and wearables do not have a stripe, so fallback to stripe does not apply to them; a failed tap simply needs to be retried or another card used.

Merchants reduce fallback by maintaining and updating terminals, training staff to insert chip cards rather than swipe them, and investigating unusual fallback rates at particular locations. Issuers replace cards with damaged chips promptly, often sending a new card after a fallback is detected. As more cards and terminals become contactless and some networks plan to phase out magnetic stripes on new cards, opportunities for fallback are expected to decline further, though stripe acceptance remains in some markets and for some card types for now. Other forms of degraded processing, such as stand-in processing when an issuer is unavailable, are separate concepts and are handled under different rules.