How Card Issuers and Merchants Maneuvered One Year of Mastercard’s Magstripe Phase Out

 

Coming up on one year from the official announcement, retailers and card issuers rejoiced at Mastercard’s announcement that by 2024, issuers will no longer be required to use magnetic stripes on their credit and debit cards. In response to growing security concerns for storing customer credit card information on a magnetic stripe, EMV chip-based cards have cemented themselves as the new standard for storing sensitive account information and facilitating consumer transactions. Even before the rise of the magnetic stripe, engineers had long foreseen chip-powered cards as the future; only now is a post-magstripe world coming to fruition as credit card companies permanently phase out the dated technology.

After nearly 12 months of adjusting to this coming Mastercard shift and the start of a more focused industry-wide transition, how far along are retailers and card issuers?

“This switch from magstripe to fully EMV comes at an interesting time because merchants are already on that road to starting to upgrade everything, and that’s really where the challenge would be seen early on,” said Cedric Lourie, Vice President of Digital Development for leading payment solutions company FreedomPay.

By the time Mastercard’s August 2021 announcement came, it was merely the official beginning of the end for the magstripe. The shift had already been underway for some time, coming into focus during the EMV liability shift of 2015, where issuers or merchants who didn’t support EMV became saddled with the liability for counterfeit card transactions.

For better or for worse, the switch from magstripe to EMV was also accelerated due to pandemic-era pressures which pushed retailers to rethink their tech stacks as they adapted to contactless payments, acute omnichannel fulfillment, and logistics oversight needs. In turn, card issuers and payment solutions providers had to respond to the consumer needs of the moment by scaling existing solutions to meet functionality and sales demand.

These pressures turned into a whole payments ecosystem strategically deploying solutions that kept both short- and long-term payment methods in mind, which included considerations around payment systems that could manage the old (magstripes), the rising standard (EMV chips), and the future (tap and biometric payments).

“We’re going to see a sprinkling of both where you have that common, ubiquitous-type functionality and EMV because it’s easy to use, but you’re also going to see a lot of innovation when it comes to identifying a consumer in a more secure way that’s at a lower risk of fraudulence,” Lourie said.

The payments ecosystem at large has already accepted the utility of EMV chip-based cards, even if they’re acknowledged to be a slightly slower experience than the magstripe. According to EMVCo, as of Q4 2021, EMV chips are used for a little over 90% of face-to-face card transactions globally. The U.S. is behind on this EMV transition and has been since as early as 2015. In the same EMVCo survey, the U.S. logged only around 82% of card-present transactions; on the other side of that coin, the European region averages its EMV usage at around 98.5% of card-present transactions.

But even though EMVs have already gained mass consumer, merchant and solutions-provider acceptance, this phase of transition away from the magstripe is bogged down by trying to retain functionality for both edge and legacy audiences.

“You have this payment ecosystem where it’s a combination of emerging technologies and very future facing players, but you still have a very large assortment of what we’d consider legacy platforms out there that weren’t that ready to adopt these types of functionalities as common,” Lourie said.

Mastercard’s official transition away from the magstripe couldn’t come at a better time as consumers are becoming more willing to experiment with new payment options. Nearly two-thirds of respondents in Mastercard’s 2021 New Payments Index global survey said they tried a new payment method they would not have tried under normal circumstances. That number shot up to 93% in 2022. Considering EMV chips are already the globally dominant card-based payment method, these future-focused numbers only confirm that standardizing the chip and ditching the stripe is a top priority for the payments industry.

One of the most recent pulse checks on credit card technology sentiment, a Phoenix Consumer Monitor survey for Mastercard from December 2020, showed only 11% of consumers still preferred swiping their card for checkout. However, even as credit card companies standardize EMV technology for an audience that clearly prefers it, they must remain conscious of the core functionality that the magstripe has offered for the best part of the last 60 years.

The swipe experience has been a consistently quick one for consumers who increasingly want to spend as little time in the checkout line as possible; for card issuers, magstripe cards are cheaper than EMVs and future-facing technologies. These aren’t reason enough to push back against the EMV transition, but customer experience and issuing cost should remain front of mind as priorities during this shift away from the magstripe.

This is especially true for the merchant, whose customer base is now more attuned to the value of experience-led retail and frictionless checkout. With more options for online ordering convenience, brick & mortar retailers are less immune to the consequences of a bad shopping experience as brand loyalty trends downward.

“The easy answer here that isn’t always the most practical is to be on the latest versions, the most up to date type of technologies, and essentially always being educated on what’s coming out and what’s going to help you create that most optimal consumer experience so you don’t have those experiences where you get those failures, because that is the negative consumer experience every merchant tries to avoid,” Lourie said.

Protecting against said failures is still a consideration, even for EMV cards. As early as 2016, researchers made EMV’s potential backdoors for fraud and technology failure evident, often having to do with overconfidence in the payment hardware’s resistance to tampering.

However, compared to the Secret Service’s reported $8 billion annual loss from swipe-related card skimming, these potential EMV deficiencies have largely won the opportunity cost battle. Studies conducted in the early days of EMV’s adoption already showed the security improvements that came with chip-based payments; between 2015 and 2018, Visa reported an almost 75% decline in credit card fraud due to the adoption of EMV chip cards.

“For [the credit card companies], they want the security because they want to veer as far away from fraudulent transactions as they can,” Lourie said.

Transaction safety is still one of the biggest motivators for speeding up the adoption of EMV technology. Magnetic stripe cards are easy and inexpensive to clone, their reliance on a signature for identification over a PIN makes them easy to defraud, and they have a less sophisticated encryption process. EMV chip cards, all-in-all, raise the transaction safety floor.

One of the biggest challenges still inhibiting mass transition away from the magstripe is a lack of awareness on how to identify the safest payment solutions and scale deployments for hundreds of payment locations. The answer for merchants lies in developing the right partnerships with solutions providers, thought that’s always easier said than done considering the wide array of providers, technologies, and sales channels to keep in mind. Lourie said this will likely motivate credit card companies to lead the charge on helping merchants establish the right relationships to make this transition as seamless and cost-effective as possible.

“We are going to see a lot more partnerships with others in the payment ecosystem, from the card brands in order to really start to fuel that adoption of those cards and get that turnover to get those magstripe cards out of the market,” Lourie said.

Brick-and-mortar stores continue to invest in new point of sales systems as part of larger transformations to their physical space. But to avoid having to make consistently large investments down the road in constantly-evolving payment systems, it is essential to form partnerships with “a player that sits in the middle and has arms in various parts of technology,” said Lourie. Whether that’s a solid grasp of the current EMV consumer standard or of coming biometric-enabled cards, the goal is to work with payments partners that act as “either an aggregator or just a facilitator” of an all-in-one solution.

To complete the final leap towards chip-based technology and achieve Mastercard’s projections of complete adaptation by 2033, ironically, it is the legacy players like Mastercard who need to be the most proactive in harnessing the connective power of intermediaries to accelerate the adoption process of chip-based tech. In the meantime, Lourie advises merchants to consider a holistic approach away from the magstripe and how standardizing EMV payments, as well as preparing for future payment solutions, impacts their whole business model.

“How do I tie together all these different parts of my business, so that I can ensure a consistent consumer experience, that there’s security everywhere not just in certain parts of my environment, and then how do I tie everything together so that I can really start to drive some interesting functionality down the road,” Lourie said.

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