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Card-Not-Present Transactions

card-not-present transactions

The Risks & Benefits of Card-Not-Present Transactions

“Card-not-present transaction.” The term seems fairly self-explanatory at first glance; a payment card transaction where the actual card itself isn’t involved.

At one point, this referred solely to transactions made by phone, physical mail, and eventually, on the computer. Tech innovations have muddied the waters a little, though. It’s now possible to conduct card-not-present sales using shopping apps, marketplaces, or with P2P and so-called “mobile wallet” apps. To bring it full circle, you can even conduct CNP transactions in a physical store.

It can definitely get confusing. So, in this post, let’s try to clear up some of the main points you need to know about the card-not-present space. We’ll define what card-not-present transactions are, provide some of the advantages and disadvantages they present, and explain how merchants can get the most from this key payment channel.

What Are Card-Not-Present (CNP) Transactions?

Card-not-present transaction

[noun]/* kaard • nät • prez • unt • tran • zak • shn /

A card-not-present transaction is any payment card transaction in which the cardholder does not physically present the card in question to a merchant.

Like we alluded to above, new technologies and the rise of eCommerce have blurred the line between card-present and card-not-present transactions. Whether or not a transaction is considered “card-present” is no longer decided by the location of the payment card. Rather, a card-present transaction is one in which the account’s electronic data is captured at the same time as the sale. There are complicated factors distinguishing card-present vs card-not-present transactions.

For example, suppose the computer system in your store is down. A customer wants to make a purchase, so you haul out an old manual imprint machine and create a physical imprint of the card. Despite the fact that you actually handled the physical card, no electronic data was exchanged. So, it’s considered a card-not-present transaction.

Card-Not-Present Transactions

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Or, say a customer comes to checkout, but instead of presenting a payment card, they use a mobile wallet app, letting a phone interact with your card terminal. Electronic data is sent and received during the transaction, so it’s considered card-present, even if the customer’s actual plastic card is safe at home. Again, the deciding factor is whether information is passed directly from the account to the merchant’s terminal.

Examples of Card-Present Transactions:

Swiping a magnetic strip card

Swiping a magnetic
strip card

Dipping an EMV “chip” card

Dipping an EMV
“chip” card

Tap-and-go” (NFC) payments

“Tap-and-go”
(NFC) payments

Mobile payments via digital wallets

Mobile payments via
digital wallets


Examples of Card-Not-Present Transactions:

Sales via telephone or mail order

Sales via telephone

Sales through mail order

Sales through mail order

On-line sales (including in-app sales)

On-line & in-app sales

Sales involving card imprint or manual entry

Card imprint/Manual entry

Card on-file transactions*

Card on-file transactions**

Recurring payments*

Recurring payments**


**In these situations, the initial order may be a card-present transaction, but all subsequent payments are CNP

This is a general list, but things can get even more detailed and complex. For example, Apple Pay is generally considered a card-present transaction, but not in cases of an in-app purchase. In other words, paying for coffee at the counter with Apple Pay is card-present, but buying tokens from inside your game app is considered card-not-present.

Learn who qualifies as a merchant

In short: it’s generally just more convenient.

Whether you’re shopping from home or in-store, CNP payment options tend to mean less hassle and fewer barriers to completing a purchase. It’s a win-win for customers, who get more options in terms of how to shop and pay, as well as for merchants, who can sell products to more buyers.

The popularity of eCommerce has produced an interesting side effect. The more customers shop online, the more they begin to expect some of the same features and benefits when shopping in-store.

A perfect example is the card-on-file transaction. Your regular online customers can opt to have you keep their payment information in a secure file, and use it whenever they place an order. This saves them the trouble of entering their card number over and over for each purchase–but that’s an option generally unavailable at brick-and-mortar stores.

The in-store experience will never be completely the same as online shopping, of course. Still, understanding consumer trends can help merchants be proactive in delivering what their customers want.

Learn more about consumer buying behaviors

Getting Started with CNP Transactions

Accepting credit cards requires a processor and a merchant account. But, depending on your product vertical, accepting card-not-present payments may force you to use a high-risk merchant account. This generally has more stipulations and higher costs.

It’s possible to bypass a traditional merchant account by going with a service provider like Stripe or Paypal. However, this option usually comes with its own set of limitations, including reports of lower reliability and limits to how much you can process in a given period.

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If you’re just getting started with online selling, don’t expect a huge influx of sales right from the start. You could get lucky, but the average eCommerce conversion rate is right around 2%. Even huge sites like Amazon still get a lot more visitors compared to actual orders. That’s not inherently bad, just realistic.

At the same time, you want to make sure you’re prepared to handle any additional orders that do come in when you start accepting card-not-present payments. You may need help with operations like delivery and fulfillment, especially in peak sales times such as the holiday season.

One way to get in the game is to set up as a marketplace seller. Major eCommerce sites like Amazon allow third-party sellers to operate on their platform, thereby eliminating some of the necessary costs you would have to bear up front.

Learn more about marketplace selling

Dropshipping could be another option, too. This lets you effectively white label products, and operate as a middleman between a buyer and another seller.

Learn more about dropshipping

Advantages of Accepting CNP Payments

The biggest reason for merchants to accept card-not-present purchasing is obvious: eCommerce. While walk-in stores aren’t going to disappear any time soon, even the smallest merchants are finding it increasingly difficult to function without an online presence. And if you want to sell online, accepting CNP payments is essential.

There are indirect advantages, as well. For example, offering more payment options is one way to increase customer satisfaction. It only makes sense that shoppers who feel catered to are more likely to buy again, and hopefully, become long-term customers.

Enabling card-not-present purchases also means you can expand your customer base to regions where you don’t have a physical store. This includes cross-border markets. Consumers can obviously buy online, but you may also increase sales from telephone or mail-order channels.

In the end, it all gets back to potential sales. According to the US Census Bureau, estimated eCommerce sales for 2021 were $870.8 billion, an increase of over 14% from 2020. You can’t tap into that market without allowing card-not-present transactions. It’s a must for any type of eCommerce operation.

Disadvantages of Card-Not-Present Payments

Card-not-present transactions are great for you and your customers. But, are there any downsides you should know about?

Like we mentioned earlier, there are the higher costs associated with accepting CNP transactions. Even if your business doesn’t require a high-risk merchant account, you typically pay higher processing fees. Visa’s average interchange rates, for instance, run roughly 15 percent higher for card-not-present transactions.

There’s also the matter of fraud.  Nearly half of all credit card fraud incidents in the US involve CNP transactions, leading to billions of dollars in losses. That’s easy to understand, since cardholder information is exponentially harder to verify in CNP situations. There’s no sure way of validating the card itself, and only limited methods for connecting that card to a specific cardholder.

Learn more about eCommerce fraud

Card-not-present transactions also pose a higher risk of chargeback abuse, known as “friendly” fraud. These are invalid disputes coming from actual cardholders. This can happen unintentionally, or as a deliberate scam (often called “cyber shoplifting”). Either way, you lose both the revenue from the sale and the goods provided to the customer.

Learn more about friendly fraud

Overall, however, the benefits of CNP transactions usually outweigh the risks. This is particularly true when there are multiple steps you can take to protect your profits.

Card-Not-Present Transactions

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Reduce Risk & Optimize for CNP Success

It pays to be proactive about anticipating card-not-present challenges. Here are a few things you can do:

1. | Get All The Information

One of the easiest ways to protect yourself is to properly process CNP sales. The first step is gathering the right customer information for every transaction. This includes:

1

Full name (as shown on card)

2

Phone number(s)

3

Email address

4

Billing address

5

Shipping address

6

Full card number and expiration date

7

CVV security code


Learn more about payment industry rules

2. | Use Available Tools

It’s hard to verify your buyer’s identity if you never come face-to-face with them. However, cardholder validation tools such as Address Verification Services (AVS) and 3-D Secure can help ensure your buyer is actually the authorized cardholder.

Learn more about fraud prevention

3. | Keep Excellent Records

Organize and file orders, payments, correspondence, and customer details on every transaction. Inconsistencies may help identify fraud. Even if a chargeback is filed, something in your notes could help to disprove the bogus claim.

Learn more about fighting chargebacks

4. | Optimize Conversion

Take steps to segment “good” and “bad” points of friction in your customer experience. You want to keep the former in place, while eliminating bad friction points whenever possible.

Learn more about optimizing conversion

5. | Understand Seasonal Patterns

Business probably won’t be steady throughout the entire year. Consumer behavior changes over time. So, be sure that you’re familiar with predictable patterns of consumer behavior, like seasonal shopping patterns.

Learn more about holiday shopping patterns

6. | Optimize Shipping & Fulfillment

You can’t forget about what happens after the transaction. You have to ensure that you are taking all necessary steps to provide great customer service through the order fulfillment process.

Learn more about shipping & fulfillment

Closing Thoughts

There’s no doubt that accepting card-not-present transactions are profitable. Still, there are risks. You can mitigate some of that risk, but you can’t prevent problems in every case.

That’s where the right chargeback management plan can be invaluable. If you’d like help putting one in place, contact us today. We can perform a free ROI analysis to demonstrate the benefits of the right prevention and risk-mitigation strategy.


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