What you Need to Know about EMV

What’s the difference between a Chip Card and a Magnetic Stripe Card?

You probably know that chip cards offer much better fraud protection and help prevent chargebacks than the (now) antiquated magnetic stripe cards, but what are the specific differences between the two? And how does that affect the decisions your business should make?

These are important questions to have answers to when designing your payment processing solutions model, and knowing the differences will help you make better business decisions.

Let’s dig in.

What is a magnetic stripe card?

Magnetic stripe cards are just classic credit cards (also known as swipe cards), the ones we’re all familiar with. The actual stripe is on the backside of the card, and it uses modified iron-based magnetic particles to communicate data between the strip and the receiving credit card terminal.

Magnetic stripe cards simply serve as static storage devices to be read by the terminal. The terminal then performs a card swipe, PIN encryption, and signature capture function.

The actual transaction flow looks like this:

  1. Card is swiped.
  2. The terminal sends an authorization request (which includes the customer’s card data) to the acquiring bank (whichever bank the company receiving the payment uses).
  3. The terminal sends an authorization request to the issuing bank (Visa, Mastercard, etc.).
  4. The terminal facilitates an authorization response from the issuing bank to the acquiring bank.
  5. The terminal facilitates an authorization response from the acquiring bank to the terminal
  6. Assuming the authorization responses weren’t turned down for any reason, the transaction completes.

Simple enough, right?

The problem is, there’s no system in place to individualize these magnetic stripe transactions. They’re all bulked together, meaning if someone can steal your credit card information during a transaction, then they can use that for future transactions.

That’s been a big issue, but that’s exactly what chip cards solved.

What is a chip card?

Excluding the way we interact with a terminal, the chip cards act and look just like magnetic stripe cards, but behind the scenes it is much more intricate and protective.

They’re sometimes referred to as EMV chip cards as well, with EMV denoting the developers of the chip: Europay, Mastercard, and Visa.

EMV chip cards use an actual computer chip placed on the top part of a credit card to communicate with terminals. These chips allow a much more intricate and secure transaction process to occur.

Let’s look at a typical chip card flow:

  1. Card is inserted into terminal
  2. Terminal makes contact with the chip inside the card using pins.
  3. Chip is activated, terminal verifies the issuer from the chip on card.
  4. Chip verifies PIN details
  5. Terminal signs transaction with public key provided from chip.
  6. Information is sent to bank for official authorization.
  7. Transaction is completed.

We won’t go into detail on each of those steps, but what you need to know is that chip cards do a much better job at protecting user data by use of individualized “tokens”.

Each transaction is a unique code that cannot be used again, so even if a fraudster captures someone’s credit card data at a terminal, they couldn’t use it for future transactions. Each swipe is only good for one transaction.

EMV also enables greater confidence for offline transactions, as details can be verified from the Chip embedded on the card without contacting the issuer.

This also makes it easier for credit card algorithms to spot and identify fraudulent activity.

If you’re thinking being EMV compliant and supporting chips is a no brainer, then you would be correct, and it’s more important now than ever to upgrade your business to be EMV compliant.

Why chip cards are better for your business

Upgrading is easy and cost-effective.

EMV-certified terminals start as low as $200 as discussed in this article, and depending on your setup, your existing hardware can become EMV-certified with a custom integration.

Reduce chargebacks

If you have better transaction security, you’ll deal with less fraud and fewer chargebacks. A few years ago, credit card network rules were updated to place more financial risk on merchants without chip cards for lost or stolen transactions. If you’re late to switching to EMV, you’re at risk of seeing chargebacks continue to increase and will lose cases at a much higher rate.

Don’t underestimate how quickly those costs can add up!

Build customer trust

Switching to chip cards is more than just saving money and reducing chargebacks, it’s about protecting your customers. As mentioned, EMV equipped transactions are unique, ensuring that charges are never duplicated or faked. Plus, less fraud means fewer headaches from disputes and better service for your customers!

Learn more about our EMV integrations.

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