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What is a fallback transaction?

The payments industry is observing an extremely high rate of fallback transactions coming from newly deployed EMV enabled devices. A fallback transaction normally occurs when a chip card, presented at a chip terminal, cannot be read due to a technical issue with the chip which results in the technology “falling back” to a magnetic stripe transaction. This situation is not expected to occur frequently since the chips on the cards rarely fail. In some situations, a fraudster may create a counterfeit card with an intentionally damaged chip in order to invoke this scenario. For this reason, fallback transactions are deemed risky by the payments industry. Since the issuer holds liability on fallback transactions, they may choose to decline them when they are sent for authorization.According to the payment networks, a fallback rate of over 2% at one particular merchant or merchant chain is indicative of a problem. The problem may be procedural or related to incorrectly configured POS terminals. Fallback rates over 50% and, in some cases, 100% have been observed in the U.S. since the October liability shift.A combination of POS entry mode, card service code and terminal entry capability (TEC) is used by the issuer to determine if a transaction is fallback or not.