If the incoming transaction lists that the terminal is chip&pin capable, so you'd simply automatically reject a magstripe transaction with a code that should result in POS showing "please insert card in the chip reader";
If the incoming transaction lists that the terminal is not chip&pin capable, the merchant has chosen to be liable for all fraud cases themselves, so it can't cause a loss for you and your customers. It is an inconvenience, but as all the fraud in the country concentrates on the (fewer and fewer) merchants accepting these transactions, it causes an increasing financial pressure on them to switch.
Not all of it - the chip has a dynamic CVV that differs from the one on the magstripe. This only works if the bank isn't checking CVVs.
Source please? Because if you're right, my bank lied to me when they said they couldn't see whether I paid by chip or by magstripe.
Source: 25 years of EFT development on Bank transaction systems.
It kinda seems like the magnetic stripe system should be completely separate from the chip system. Make it so that the card ID (or whatever) reported by the chip can never be used for swipe transactions, and vice-versa. Combining them just seems to cross-product-ify the attack surface, which is dumb.
Only for countries like USA which have not completed the move from magnetic readers.
An old school version of this would be installing a camera in top of your ATM and recording your card data with the stripe, which as you say would be the stripe's fault, but here they get the information and the pin simply from the shimmer, which looking at the picture shows only a chip connector.
Then a fraudster can duplicate the card exactly, and use the duplicate with the same pin at a random ATM across the world. I think this is why banks can block your card if you didn't warn them about going abroad, as they're unable to tell if this is your card or a replica of your card used by a fraudster.
Furthermore, they can't get the card private keys in this manner, so they can't duplicate the card chip, only its magstripe; and they are definitely able to tell if a replica of your card is suddenly used in a magstripe-only mode. This means that it's a problem, as the parent post said, "only for countries like USA which have not completed the move from magnetic readers" because otherwise you can simply reject any transactions that might use a cloned magstripe.
That being said, this doesn't allow to duplicate a card (it relays the fraudulent transaction in real time to the real card while it's stuck into compromised hardware), the PIN is captured from video or the "la-cara"device, and you do need to have the "extracting" device mounted to a real ATM for prolonged periods until you can empty it (you can do it only as fast as the real transactions come in, and they do so at unpredictable intervals), which gives a nice opportunity to capture the involved people. It's a very powerful proof of concept, but harder to scale than the current "cashout crews"/mules - the logistic problems are somewhat comparable to the classic approach of setting up a completely fake ATM.