What Are Magstripe Payments?

If you’ve ever made a payment by swiping your credit or debit card through credit card readers or card terminals, you’ve used magstripe payments.

Although this payment solution has dominated the industry for years, it’s slowly being phased out as more reliable, secure, and convenient alternatives that gain popularity. 

In the following sections, we explore magstripe payments and how they originated. We also dive deep into why other technologies are expected to replace them soon and how your business can adapt to these new trends in the payments world.

Where did magnetic stripes come from?

Magnetic stripes were first introduced in the early 1960s, which enabled issuing banks to encode card data onto the magnetic tape laminated on the back of credit and debit cards. 

But what inspired the rise of magstripe payments?

To answer this question, it’s essential to go back in history to understand the nature of shopping and payments.

Initially, credit cards required the account information of customers carrying a physical card to be recorded manually. 

To speed up the shopping experience, flatbed imprinting machines were later introduced to record the cardholder’s name, account number, and other essential information. These machines used carbon paper packets called zip-zaps. 

However, this method didn’t allow clerks to determine whether the shopper’s credit or debit cards were verified and authorised for the purchase.

The magnetic stripe was created to solve this challenge and transform payment processing. It was designed to merge a plastic identity card with a magnetised tape for CIA (Central Intelligence Agency) officials. 

This technology made the evolution of electronic payment terminals and chip cards possible, providing higher security and real-time authorisation. In addition, any business, no matter its size, could accept payments with a card. 

What are magstripe payments?

Overall, magstripe payments represent payments made via a magnetic stripe on the back of a credit or debit card.

As we’ll explore later in this article, traditional magstripe payments are considered less secure than chip-enabled transactions.

Magstripe payments have been leading for many years and are still popular, especially in regions where technological updates and innovations are adopted at a slower rate.

However, payment methods that provide better security and more convenience are recently creating new trends in the payment industry. For example, newly issued credit and debit cards that feature both magnetic stripes and embedded chips are growing in popularity. 

These chips enable contactless payments by just waving a card near NFC-enabled POS terminals. Global leading payment service providers (PSPS) actively support such technologies, paving the way for mass acceptance and integration. 

This leads to enabled contactless payments initiated either by card or mobile devices, naturally enhancing the customer experience and minimising transaction times. 

What is a magnetic stripe card?

A magnetic stripe card features a magstripe – a black stripe located on the back of payment cards.

The stripe on a credit or debit card relies on magnetic particles based on iron to exchange information between the credit card terminal and the strip. Magstripe cards, in most cases, are 5 cm to 7 cm in size and store embedded information. 

Credit card magnetic stripes are made with three horizontally placed tracks. Each track goes across the entire width of the card and takes a significant portion of the stripe. These three tracks record different data types and are essential for the card to work. 

For example, they record the name, account number expiration date, service code, card verification code, and more. 

It’s important to note that magnetic stripes must be kept in a well-maintained condition. Damaging them can impact the card’s ability to function properly.

How do magnetic stripe cards work?

A magnetic stripe card goes through several stages to work.

The first stage is dedicated to swiping via magnetic stripes through a terminal, which processes the cardholder’s financial data on the magstripe.

Next, the terminal requests authorisation from the acquiring bank, which the payment processing company has selected to route payments. 

The terminal transmits an authorisation request to the issuing bank in the following stage. It then synchronises the verification from the issuing bank and the acquiring bank. 

Finally, the transaction is finalised, and the customer can sign a receipt to complete the sale.

Security vulnerabilities in magstripe technology

Today, Mastercard is phasing out magnetic stripes. This is predominantly due to significant security risks associated with the technology.

A magnetic stripe card could fall prey to hackers and malicious attackers, putting at risk cardholders and businesses. 

Cards with magnetic stripes are not considered safe payment options as they don’t have guaranteed mechanisms to protect sensitive information, compromising payment security. Every time a card is swiped to initiate a purchase, it enters the seller’s diverse transaction base. 

The customer’s card information (cardholder’s name, card verification value, account number, expiration date, and more) is stored without any form of encryption.

In other words, card information remains unprotected and can be taken advantage of for fraudulent activities. 

To make things even more challenging, reporting fraud is merely impossible as merchants and credit card processors can’t identify how the breach occurred. 

Decline of magstripe usage and the rise of chip technology

As the payment industry advances and consumer needs change, more secure technologies like chip and pin and contactless payments dominate the scenes. 

The global Europay, MasterCard, and Visa chip standard, first introduced in the 1990s, inspired improvement upon traditional credit cards. With EMV cards, transaction chips store cardholder data instead of recording it on a magnetic strip, maximising security.

According to 2024 updates, many regions won’t require the magnetic stripe on newly issued payment cards. 

The appeal of new payment methods cannot go unnoticed. As more consumers favour EMV chip transactions, magnetic stripes are slowly declining in use. Like chip payments, which are considered the heirs of magnetic stripes, NFC-enabled contactless payments through cards or mobile devices are taking over. 

Tap functionality is considered an equally safe payment solution to chip cards. This is mainly because tap functionality follows many of the same principles of EMV technology. 

Transition strategies from magstripe to EMV

The EMV chip standard ensures that cardholder data is recorded extremely securely for each transaction with the help of generating time-sensitive authentication codes. Information is strategically stored on integrated circuit chips alongside magnetic stripes. 

This method is much safer, especially regarding threats from skimming devices. 

According to MasterCard, “by 2029, no new MasterCard credit or debit cards will be issued with a magnetic stripe,” although its prepaid cards in the U.S. and Canada “are currently exempt from this change.” 

This naturally calls for upgrades and strategic changes from Magstripe to EMV.

To ensure a smooth transition and a successful reorganisation, there are a few tips and tricks to consider:

• Upgrade payment terminals – To successfully process EMV transactions, you’ll need to upgrade your payment terminals to be EMV-compliant. To achieve this, it’s key to invest in POS systems that can process EMV chip cards and support contactless payments. Make sure your new terminals are NFC-enabled and support mobile payments.
• Payment software updates – In addition to making hardware changes, you’ll also need to consider software updates. Ensure that your point-of-sale software can process EMV data and is updated with the most recent security standards. Partner with a reliable payment service provider to apply all essential software updates and guarantee compatibility with your hardware.
• Put training programs in place for your staff – When transitioning from magstripe to EMV, the most crucial factor to consider is your staff. Implement training and educational programs to ensure employees understand the differences between magstripe and EMV technology. Bring them up to date with the different ways to handle EMV transactions, the benefits this form of payment offers, security features, and more. This will enable them to communicate better with shoppers and help them get used to the new processes.

The strategies you can adopt to shift from magstripe payments to EMV will entirely depend on the nature of your business and your specific requirements.

However, these tips shape the basics of enjoying a smooth and seamless transition. 

Conclusion

Overall, magstripe payments were a great way to solve some of the core challenges of making quick and easy payments in the past. 

At the same time, as consumer needs change and the payment landscape evolves thanks to rising technology, new methods are expected to dominate. 

We hope that this article will help you understand magstripe payments in detail and acknowledge the importance of gradually shifting to EMV chip payments.

Frequently Asked Questions

How secure are magstrie payments compared to EMV chip payments?

EMV chip payments are considered much safer alternatives to magnetic stripe payments. This is because information on a magnetic stripe is static, making it vulnerable to fraud. On the other hand, EMV chips work with dynamic data for each transaction. This makes EMV technology more secure, making it difficult for fraudsters to copy card information.

Can you accept magstripe cards if you’ve upgraded to EMV technology?

In most cases, EMV-enabled terminals are created to support both magstripe and EMV chip cards.

What is the main reason why companies are shifting towards EMV payments?

One of the biggest reasons for the shift towards EMV payments is the reliability and security of EMV chip cards. This solution enables better customer protection and ensures that card data is safe, preventing unauthorised transactions thanks to dynamic authentication.