Magnetic Stripes on Credit Cards are Going Away, Here’s What Merchants Need to Know

Forget about swiping, the new standard is the tap

By: Zena Tsarfin, Content & Marketing Manager

Have you tried to swipe your credit card only to get an error message asking you to insert or tap your card instead? This now common occurrence began in 2021 when Mastercard announced that it would be phasing out the magnetic stripe format on credit and debit cards it issues over the next decade to provide better security and fraud prevention.

What does this change mean for businesses accepting credit cards? First, look out for notifications from card brands requiring you cease accepting MSD contactless payments. Then make sure you aren’t being charged a fee for every outdated card you accept a payment from—beginning in April 2023, Visa will begin doing just that!

Though the stripes contain a myriad of sensitive information including the cardholder’s name, card number, and verification numbers, they offer no encryption. Over the years, this vulnerability has resulted in billions of dollars’ worth of chargebacks (when cardholders are refunded payment based on charge disputes) and fraud, including the large-scale spread of “skimming” card scams. Meanwhile, sophisticated hackers have found endless ways to exploit outdated magstripe cards, even infecting corporations’ credit card terminals with viruses that allow them to have access to millions of customers’ data. This contributes to higher processing fees for you as a merchant as the credit card company assumes greater risk in accepting magnetic stripe cards. And it can add thousands of dollars in lost revenue to your business.

If your curiosity about the magnetic stripe is piqued, the technology has an interesting history. An advent largely credited to IBM, the magnetic stripe has been a fixture of credit card transactions as far back as the 1960s. The technology therein—encoding issuing bank data onto a magnetized line along the back of plastic cards—allowed business owners to conduct financial exchanges quickly and with fewer steps. (Who remembers the labor intensive, old flatbed imprinting machines of yesteryear that predated them?) This single advancement catapulted the use of credit cards as everyday tender for all types of monetary transactions and changed our relationship with spending forever.

But no history would be complete without talking about the usurper: the EMV chip. The 1990s bore a new advancement for credit card security with its rollout, (the name being an acronym for the companies that developed the system: Europay, Mastercard, and Visa). By utilizing a small chip that generates time-sensitive authentication codes for every transaction made, a layer of encrypted security was introduced that initially helped bring down in-person counterfeiting by more than 76%.

By 2033, the antiquated magnetic stripe will have seen its last sunset with the United States expected to go completely magstripe-free by 2027. And while other security measures such as biometric markers including fingerprints and face recognition have been tested across the world, replacing hundreds of thousands of POS machines in the United States will be slow going.

Chances are, Visa’s surcharge isn’t the first that merchants will experience. According to Kelly Sweeney, Director of Operations at Merchant Advocate, an independent firm that audits merchant statements for clients, that practice has already begun. “A lot of [credit card] processors have already been billing businesses for not using an EMV device, as a non-EMV fee or a non-EMV assessment fee, so they’re penalizing them for not upgrading their devices. Well now, guess what? On top of getting a non-EMV fee from your processor, now you’re also going to get an additional fee from that specific card brand because you’re not following their guidelines on best practices.”

Though Mastercard has not rolled out plans to follow suit with their own fees just yet, the directives of credit card brands change rapidly. “If Visa is doing it, you know Mastercard, Discover, possibly American Express, are all going to do the same thing,” Sweeney warns. “The question is when.”

If you’re not sure how to check if your machines are updated to satisfy these requirements, you’re not alone. Credit card processing statements are coded in ways that can mystify even the best accountants making it difficult to ascertain if you are in compliance. That’s why it helps to have an advisor such as Merchant Advocate, who can help decipher your statements and advise you on any POS or other changes needed for compliance, as well as negotiate your rates and monitor merchant service accounts monthly. They work in real time to find overcharges and other errors, helping you to keep your profits.