What Is a Card Not Present (CNP) Transaction and Why Does It Cost More?

What Is a Card Not Present (CNP) Transaction and Why Does It Cost More?
By alphacardprocess January 14, 2022

A card not present transaction is an ecommerce transaction in which the customer did not present a physical card. Typically, this scenario takes place when you shop online using your computer or mobile device. Although these transactions are often considered “card not present” (CNP), there are some cases where cards are physically presented to complete the transaction, but this is an exception rather than the rule.

It may seem like there should be no difference between a physical card swipe and online purchase; however, processing these transactions involves significantly different operations for merchants. For example, when you swipe your card in-person at a brick-and-mortar location, the merchant’s Point-of-Sale (POS) system takes the information from the magnetic stripe on your card and sends it to the acquiring bank.

Online, this is not possible because there are no physical cards to read or merchants able to take inbound messages. Instead, Card Not Present transactions rely on customers’ personally identifiable information (PII), such as name, address, and credit card number. This data is entered into a form on the merchant’s website and then sent to the payment gateway for authorization.

Since there are more opportunities for something to go wrong in an online transaction that doesn’t involve a physical card, Card Not Present transactions tend to cost merchants more. There are a number of reasons for this, but two of the most important are fraud and chargebacks.

Fraud is a major issue for CNP transactions, as criminals can easily steal people’s personal information to make fraudulent purchases. In fact, card not present fraud is now the most common type of payment fraud. This isn’t surprising, since research shows that online card not present (CNP) transactions are 10 times more likely to result in fraudulent activities than ecommerce transactions using physical cards.

If criminals successfully use your credit or debit card number for an illegal purchase, you may be liable for the charges because of “unauthorized transaction” or “chargeback” fraud. A chargeback is when a customer disputes a charge on their credit card statement and the bank initiates a reversal of the transaction. This process can be time-consuming and frustrating for merchants, as it often results in having to provide documentation to prove that the purchase was legitimate.

Chargebacks are more common in CNP transactions because customers can easily dispute a charge without needing to return anything to the merchant. This is not the case when they have a physical card, as they would need to return whatever they bought to the store in order to get a refund.

Although there are higher risks associated with CNP transactions, this doesn’t mean that customers are necessarily untrustworthy. Instead, the higher incidence of fraud and chargebacks in CNP is due to the lack of information available at the time of purchase (versus when swiped in-person). Since CNP transactions don’t allow merchants to physically verify customer identity or require customers to sign their name, there is more opportunity for criminals to take advantage of the system.

Despite these risks, CNP transactions are still a preferred way to shop for many customers. In fact, a study by Accenture showed that 39 percent of global consumers prefer to make purchases online, and this number is only going to increase in the coming years. This is because online shopping offers a number of advantages, such as convenience, choice, and better prices.

As a merchant, it is important to understand the different types of transactions your customers are likely to use. By taking the time to learn about the benefits and risks associated with CNP transactions, you can make sure that your business is set up to accept these transactions.