The Demise of Magnetic Strips: Mastercard's Move to Chip-Based Cards and What it Means for the Payments Industry

In August 2021, Mastercard announced its plans to remove the magnetic strip from debit and credit cards. In October 2021, we discovered that the plan is to replace the cards with magnetic strips with chip-based ones. What does this mean for the payments industry?

First, let’s see how the magnetic strip-shaped the payments landscape. Before its introduction, processing card payments was a hassle. Back then, merchants had to record transactions by using Zip-Zap machines. These machines allowed merchant employees to manually imprint a card’s raised numbers onto a 3-sheeted paper. Given the way you had to operate such a machine, it’s no wonder that they were known as ‘Knuckle Busters’. One of the resulting sheets would go to the issuer, one to the card owner, and the merchant would keep the remaining one. Finally, if the transaction exceeded a specific limit, the merchant had to call an authorisation service to get it approved. All in all, it would have taken you 10 to 15 minutes to complete a card payment.

The magnetic strip was introduced in the ‘60s and brought along instant authorisation; it provided more security, and businesses found it easier to accept card payments. The magnetic strip boosted the credit card industry, allowing banks and merchants to benefit from a less expensive solution that fueled innovation.

Nowadays, the payment industry enjoys the benefits of contactless technology, so the magnetic strip's role has become increasingly irrelevant. Using smartphones to make payments is a growing trend, and if we compare a chip-based card to one with a magnetic strip, the former is more secure. According to Visa, cards with chips are 76% less likely to fall victim to counterfeit fraud. That’s because a chip is much more complicated (and expensive) to duplicate due to its advanced technology, unlike a magnetic strip. Also, with the rise of anti-fraud innovation, such as biometric cards that use a user’s fingertips to verify their identity, fraudsters will be kept at bay, at least more so than with antiquated credit or debit cards.

Starting with 2024, Mastercard’s newly issued cards won’t have to feature the magnetic strip anymore, and the company is set to remove it entirely by 2033. According to Fortune, Mastercard is confident that the extended timeframe will allow all its partners to move on to more advanced chip card processing. Mastercard says that card transactions using the chip technology take up 86% of face-to-face card payments, so the 2033 deadline seems feasible.

The pandemic acted as a catalyst for an already-present trend, contactless payments. The credit card industry noticed steady growth in the contactless transactions sector, as indicated by Q1 of 2021, when Mastercard recorded 1 billion more payments using contactless technology as opposed to Q1 of 2020. Also, in Q2 of 2021, out of all face-to-face checkout payments around the world, 45% of them were contactless. This indicates that the transition from the magnetic strip to contactless cards will be smooth, and the 2033 deadline will allow every industry player to ease into more advanced technology at their own pace.