The Complete Guide To Processing Card-Not-Present Transactions

Card-not-present transactions have gone from a rarely used backup method of completing payments to a popular, commonly used payment method on par with traditional card-present transactions. Unfortunately, this increased popularity has also brought more credit card fraud, which is easier to accomplish if a merchant can’t physically inspect a customer’s card.

This article will explain card-not-present transactions and why they differ from card-present transactions. We’ll also review how much they typically cost to process and explain how the increased risk of fraud they present drives up that cost. Finally, we’ll offer some practical tips on protecting your business from card-not-present fraud, including some common security features that usually won’t cost you anything extra to implement.

Card-Present VS Card-Not-Present Transactions

A card-not-present (CNP) transaction is any credit or debit card sale processed without capturing the electronic data of the physical card at the time of the sale. This includes transactions where the merchant manually enters the card information into a terminal, even if the card itself is actually physically present.

The distinction here is that the digital data stored on a magstripe or EMV/NFC chip on a customer’s card must be read by a terminal or card reader to qualify as a card-present transaction. If this requirement is not met, the transaction will be considered card-not-present.

Digital wallets such as Apple Pay or Google Pay can be particularly confusing. Using Apple Pay in-store is treated as a card-present sale, as the customer’s device can electronically send the same digital data as a physical card to the terminal in real time. However, using a digital wallet to make an in-app or online payment will result in a card-not-present transaction.

Common Card-Not-Present Transactions

• Invoicing a client
• eCommerce/online shopping
• Mail order or telephone order (MOTO)
• Recurring payments that are automatically billed (subscriptions)

Common Card-Present Transactions

• Using a mobile card reader in conjunction with a connected smartphone or tablet app (e.g., Square)
• Digital wallets (e.g., Apple Pay or Google Pay) or NFC-enabled credit/debit cards (tap-to-pay)
• Countertop credit card virtual terminal or point of sale (POS) system

How Much Is A Card-Not-Present Transaction?

Card-not-present transactions cost more to process because there are more ways they can fail than card-present transactions. With a higher risk of chargebacks, friendly fraud, and malicious fraud, there is more vulnerability and a higher cost when things go wrong. Issuing banks and credit card processors guard against potential losses by charging higher fees to process these transactions.

Regardless of the type of processing rate plan your provider uses, you will invariably pay more for a card-not-present transaction. Flat-rate or tiered pricing plans charge a higher fixed fee for CNP transactions, including both a higher percentage rate and a higher fixed authorization fee. Interchange-plus or membership pricing plans likewise charge a higher markup on CNP transactions. Note that with these types of plans, the underlying interchange fees will be higher for card-not-present transactions.

Card-Not-Present Processing Rates Among Popular Credit Card Processors

It’s important to understand that not all card-not-present transactions pose the same risks. For instance, you are generally going to pay a higher cost for a keyed-in entry than for an online transaction because there are typically some built-in security measures (such as address and CVV verification) for online purchases. In contrast, there are no security measures for keyed transactions.

The Cost Of CNP Credit Card Fraud

*Sources: Nilson Report, UPS Capital

Not only can a card data breach turn into an embarrassing public relations issue, but the business owner is also ultimately responsible for absorbing the cost of any fraudulent charges in a card-not-present sale.

Unfortunately, the industry is seeing an increased fraud rate with CNP transactions, costing businesses billions globally. The rollout of chip cards and the EMV liability shift in the US for card-present sales in particular has played a major role in the increase of card-not-present fraud, which financial experts predicted would happen based on EMV adoption in other parts of the world.

Protecting Your Business From Card-Not-Present Fraud

Taking a proactive approach to detecting credit card fraud is a smart move. In this post, we focus on understanding the risks and costs of card-not-present transactions, but card-present sales are certainly not exempt from fraud. If your business processes both types, check out our post on preventing credit card fraud for a great breakdown of information on how to protect your business from card-present security issues.

How Much Do CNP Transactions Affect My Business?

If you’re a budding eCommerce entrepreneur, it’s critical you understand that the higher risk of fraud for online payments is the primary factor in making credit-card-not-present processing rates higher than that for card-present transactions.

Even merchants who run brick-and-mortar shops have to deal with the cost of CNP payments occasionally. If you have a storefront shop, training your team to understand the difference between the two types of transactions and keeping up with the latest compliant software/EMV readers will help keep your costs down — and your payment security tighter.

The good thing is that if you process with one of the best small business credit card processors, they will actually do the bulk of this security work for you, going a long way to protect your business from CNP fraud and its costs.