HIGHLIGHTS
As fraudsters increasingly up the ante with their tactics, it is more important than ever for financial institutions to take proactive prevention measures.

For financial institutions (FIs), fallback transactions can be double-edged swords. Allowing fallback transactions means increasing the risk of fraud, while blocking them means legitimate transactions cannot go through.

Fallback transactions occur when consumers insert EMV chip cards at chip-enabled terminals but cannot complete the transactions as chip transactions. Instead, the transactions go through as magnetic stripe swipes. These transactions may occur due to:

  • Damaged chips
  • Counterfeit cards with intentionally damaged chips
  • Dirty or damaged point-of-sale terminals
  • Merchant error or incomplete chip card migration

Today, roughly 10 percent of fallbacks are fraudulent. In the future, however, this number may increase as more fraudsters exploit this transaction type. To help protect themselves from fraudulent fallback transactions, FIs should:

  • Set velocity limits – Consumer purchasing patterns can help FIs establish limits on the number of fallback transactions allowed during specific periods of time.
     
  • Establish dollar amount limits – An FI’s portfolio is a good starting place for determining transaction amount limits based on average spend and fallbacks.
     
  • Continually evaluate valid vs. fraud fallbacks – While about 90 percent of fallback transactions are legitimate, FIs should still periodically review their methods for weeding out fraud.
     
  • Identify merchants with valid fallbacks – Card processors like TMG work on an FI’s behalf to identify merchants still migrating to chip technology and likely to have legitimate fallbacks.
     
  • Determine more restrictive international limits – Areas further into the chip card migration than the U.S., such as Europe and Canada, have a more robust chip card presence. FIs should not expect to see many legitimate fallback transactions come from those countries.

The continuing shift to EMV chip technology has the power to drive fallback transactions down even further. Beyond that, FIs implementing any of the best practices above are likely to see positive results.