Understanding Card Not Present Transactions & Fraud Prevention

Offering its in-store and online customers multiple ways to make payments is fundamental for every business. Your customers want options, and it’s your job to meet their needs. 

Today, a customer can still make purchases even if they don’t have a payment form in hand through a card-not-present transaction. In fact, that’s the term used for purchasing without being physically active. 

In 2021, card-not-present transactions comprised 33% of all transactions, an increase from 31% in 2020.

What Is a Card Not Present (CNP) Transaction?

In the case of a card-not-present (CNP) transaction, a cardholder or credit card isn’t physically present while making a payment. This transaction is typical for remote fax, Internet, mail, or over-the-phone orders. 

Unlike “card present” transactions, when payment details are provided in person at the time of the sale, CNP transactions are completed without the merchant examining the card visually.

Examples of CNP Transactions

Online Shopping

Online shopping is buying products or services over the Internet, allowing customers to shop from anywhere. During this online transaction, customers provide their card number, security code (CVV/CVC), and expiration date. The merchant processes the payment using these details, usually with the help of a payment processor and gateway.

Buy Online, Pick up in Store

This is similar to online shopping, with the difference that the customer picks up the order in-store instead of having it delivered. This unique shopping experience saves on shipping. It also offers a faster fulfillment option without the usual wait for conventional delivery.

Mail Orders

When ordering through mail, customers fill out a form providing their billing information and mail it to the company. Mail orders were used frequently before online shopping became popular, and some people still use them today. 

Although online shopping has become very popular, many consumers still prefer traditional forms of purchasing or do not have access to the Internet. For such consumers, mail orders are still relevant. 

Phone Orders

A phone order is a card-not-present transaction where customers provide their card details and billing information to a salesperson over the phone, who then processes the charge. 

This type of transaction is useful for customers who prefer verbal communication or cannot access online shopping platforms. Phone orders also allow businesses to cater to a wider range of customers, ensuring a seamless purchasing experience regardless of the customer's preferred transaction method.

Card-On-File Payments

Card-on-file payments are a common type of card-not-present transaction. Here, a merchant stores customer cards and payment information, billing customers when appropriate after being authorized by them.

Online Invoices

Using online payment systems, businesses send invoices for customers to pay electronically. The invoices can be paid with credit or debit cards, digital wallets, or bank transfers.

Enhancing Card-Not-Present Transactions With Depositfix

Companies that take orders over the phone can greatly benefit from tools like DepositFix. The company is invaluable for businesses operating in sectors such as coaching and training. Imagine a salesperson offering personalized coaching sessions over the phone. During the call, the client expresses interest in a particular program and is ready to purchase. 

In this case, the salesperson can smoothly obtain the client's credit card information and securely process the payment using DepositFix. DepositFix handles card details with top security and ensures compliance with industry standards. It also provides a smooth purchase experience for the client and the business.

Card-Present vs. Card-Not-Present Transactions

The difference between card-not-present and card-present transactions may seem simple. But, it involves more than just the physical presence of the credit card. 

A card-present transaction is identified by the capture of electronic data when the sale occurs. This can be accomplished by magnetic strip card swiping, tapping an NFC/contactless digital wallet connected to a stored card (like Apple Pay on a smartphone), or inserting an EMV chip card. 

We explored some examples of CNP transactions. Let’s now list a few examples of card-present transactions:

• Contactless terminals
• Card readers connected to smartphones or tablets
• Countertop card machines
• POS card-reader-equipped systems

All other payment methods fall under the category of "card-not-present" transactions.

CNP Fraud and Ways to Prevent It

CNP fraud is a credit card scam where the scammer makes a remote purchase using someone else’s card information. The merchant cannot verify the purchase's identity since neither the card nor the cardholder is present. 

Without fraud prevention, a fraudster only needs a few details from a card. These are the card number, expiration date, and type. Predictions suggest CNP fraud will surge to 74.0% of all fraud by the end of this year. 

Merchants face substantial costs resulting from CNP fraud:

• High chargeback rates
• Possibility of losing customer trust and revenue
• Increased operational expenses for fraud prevention measures

A 2022 study found that US merchants lose $3.75 for every $1 of fraud.

To prevent CNP fraud, businesses use technology, educate consumers, and use operational strategies. Here are the key steps:

• Ensure your business complies with the Payment Card Industry Data Security Standard (PCI DSS). This confirms that you follow security rules for handling cardholder information. 
• Implement Address Verification Service (AVS) to authenticate the address provided by customers during transactions. This helps to verify their identity and reduces the likelihood of fraudulent purchases.  
• Set up a clear and detailed customer billing statement. This will help customers recognize legitimate charges and detect any unauthorized transactions promptly.  
• Outline a clear and transparent return and exchange policy. This will foster customer trust and deter fraudsters who may exploit lenient return policies to engage in fraudulent activities. 
• New authentication tools, like 3D Secure and device fingerprinting, can add more layers of security. 
• Educate consumers on safe online practices. Encourage them to check their financial statements often for suspicious activity.

How to Accept a CNP Transaction Securely

There are various ways that businesses can securely accept card-not-present transactions:

• The use of eCommerce shopping carts that help with online payments for purchases made on websites
• Online invoice systems that allow businesses to send and receive electronic bills remotely
• Virtual terminals enable businesses to process credit card payments. They can do this over the phone or by inputting payment data from paper forms.
• They can develop payment acceptance apps using payment APIs. The APIs provide custom solutions tailored to their unique needs. 

These methods ensure that CNP transactions are processed smoothly and securely. 

CNP Transaction Processing Fees and Costs

When businesses process card-not-present payments, they incur fees similar to those charged for processing credit cards in person. 

These include:

• interchange fees
• assessment fees from card brands like Visa and Mastercard
• risk and PCI compliance fees
• the payment provider's markup

Interchange fees tend to be higher for CNP transactions due to the increased risk of fraud and chargebacks. 

As a result, merchants typically end up paying more for CNP transactions than for card-present transactions. The total cost of CNP processing fees varies depending on the industry and the payment processor's markup. The markup is calculated using a formula that considers these factors.

Emerging Technologies in CNP Transactions That Improve Fraud Detection

Advances in CNP transaction tech help detect and stop fraud. They also reduce false positives, improve customer experience, and ensure regulatory compliance. As fraud tactics become more sophisticated, it's crucial to continue developing and integrating these technologies to combat transaction fraud effectively. 

Blockchain Technology

Blockchain technology creates a decentralized and unalterable ledger system, which helps detect and prevent fraudulent transactions. It also enhances transparency and ensures the validity of transactions, especially those that try to exploit anonymity.

Artificial Intelligence and Machine Learning

AI/ML algorithms can examine large amounts of transaction data in real-time, facilitating businesses' identification of patterns that suggest fraudulent activity. These systems can anticipate and detect novel types of fraud by using historical fraud data.

Natural Language Processing

NLP enables the analysis of customer communication. This includes emails and chat conversations. It is used to find any signs of phishing or social engineering. By issuing alerts, NLP helps to prevent fraudulent transactions.

Biometric Verification

Including biometric verification, such as facial, fingerprint, or voice recognition, in transaction processes provides an extra layer of security. Biometric identifiers are more challenging for fraudsters to replicate or steal than traditional passwords.

Behavioral Analytics

Behavioral analytics is a powerful tool that tracks customer behavior patterns to identify deviations that may indicate potential fraudulent activities. 

Using machine learning algorithms helps stop fraudulent transactions. The algorithms do this by watching customer behavior and flagging suspicious activity. Thus, they enable businesses to proactively prevent fraud, improving customer trust and loyalty.