When it comes to credit card processing, there are essentially two ways to process a debit or credit card payment: in person through contactless, swipe, or chip technology or through keyed entry. These transactions are called Card Not Present (CNP) transactions when the card or cardholder is not present, even if the physical card is in front of you. CNP transactions are considered unique because they come with higher risks and fees. Here’s what you should know.
What Are Card Not Present Transactions?
A transaction is considered card-present when the card used for the transaction is in the presence of the merchant at the time of the transaction. These transactions can involve cards swiped in a self-service terminal, a cardholder handing the cashier their card to swipe, EMV chip payments, contactless payments, and when an imprint of a credit card is captured with a manual machine.
When the transaction happens when the merchant and buyer are not in the same place together, it’s considered a CNP transaction. The most common CNP transactions include:
- Mail orders
- Phone orders
- Mobile Purchases
- Electronic or e-commerce orders
- Subscription or recurring billing
- Payment apps on smartphones that don’t use card readers
CNP Transactions Come With Higher Risks
CNP transactions are considered riskier for merchants than card-present transactions. When a transaction is conducted with the card present, the merchant can verify the transaction by comparing the card with the buyer’s identification and/or requiring a PIN. CNP transactions are susceptible to two primary forms of fraud:
- Chargeback fraud. This happens when a buyer receives something from a merchant but informs their bank that they did not receive the product or authorize the charge. Chargeback fraud deprives the merchant of their product as well as the revenue. Merchants can also be assessed fees for chargebacks from their merchant services provider.
- Credit card fraud. This is when someone uses stolen card information to make fraudulent purchases that are not authorized by the cardholder. According to independent research from 2016, 45% of all credit card fraud in the United States involves CNP transactions.
Card Not Present Transactions Have a Higher Cost
CNP transactions don’t just affect your chargeback liability with your merchant services; they also affect the cost of credit card processing. This is because the cost of payment processing can be broken down into three components: interchange, which is the biggest share of the cost to process a transaction; assessments; and the markup from your payment processor.
There are hundreds of interchange categories based on the type of transaction, the type of card used, and your business category. Without considering other factors that influence payment processing rates, CNP transactions are always more expensive than card-present transactions due to the higher risks.
You can’t always control whether a transaction will be card-present or CNP. For example, e-commerce transactions are always CNP. You may be paying higher interchange rates and accepting greater risks than necessary, however. If you physically take cards from customers and key the information into a mobile device or terminal, you can save money on merchant services by investing in a card reader or POS terminal. If you have a mobile business, a card reader that can be attached to a tablet or smartphone can allow you to process card-present transactions rather than paying for CNP transactions.
