What credit unions should know about fallback transactions

As more POS terminals are being upgraded to EMV chip-ready, and more credit unions are getting chip cards in the hands of their members, questions regarding fallback transactions are being generated.

What is a fallback transaction?

Simply stated, a fallback transaction occurs when a chip card is presented to a chip enabled terminal (“chip-on-chip”), but the transaction is conducted as a swipe, usually due to the terminal unable to read the chip on the card. This could be due to a defective or scratched chip, a terminal or network incorrectly configured or with a chip reader that is defective (all legitimate reasons for fallback), or a chip intentionally damaged so it cannot be read, on a counterfeit card encoded with magnetic data stolen from a chip card.

When a terminal is properly configured, the process flow would be:

1. The cardholder inserts the card (either because they initially knew to do so, or were directed by the terminal) but
2. In this case, the terminal is not able to communicate with the chip on the card.
3. After the terminal retries to read the chip (a pre-configured number of retries), the terminal will display a CHIP ERROR; USE MAG STRIPE message to the cardholder (sometimes reworded for cardholder display).
4. The cardholder swipes the card, and the transaction is sent to the issuer for authorization.

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