Card Not Present Transaction – All You Need to Know About CNP

The Basics of Debit or Credit Card Processing (CCP)

As opposed to cash payments, when customers decide to pay using their cards, the purchase needs to be completed with the credit card processing company on the one hand, and issuing bank, on the other. Naturally, both of these services come at a price. That is why every person who wants to implement the CCP in their business needs to pay fees for each purchase where cards are used, alongside a POS fee, for using a point-of-sale system. Learning how credit card processing works is essential if you want to develop your business by introducing this method.

However, many different factors can affect the fees you’ll be seeing on your merchant statement, such as the type and brand of the plastic, merchant category code, purchased items, and so on. When using this means of payment, customers nowadays can opt for the card-present (CP) or card-not-present method (CNP), and that decision will also reflect on the amount of the fees.

What Is a Card-Not-Present Transaction Process – A Simple Overview

Customers’ decisions are based solely on their needs and wishes, but for merchants, it could make a great difference. With CNPs, salespersons can’t obtain electronic data at the exact time the transaction is made because the plastic doesn’t come in contact with the terminal. Moreover, there is a difference in hardware and software you are going to use, too (physical or virtual terminal, POS station, tablet, and the like).

Still, the difference in equipment is not the most serious issue. With CNPs, salespeople have to rely only on the information that the person who contacted them gave. It is not always easy to confirm a customer’s identity, and that could escalate to bigger problems for merchants.

Card-Not-Present Transaction – Different Types and Levels of Security

In general, CNPs are those transactions where cards and their cardholders are not physically at the terminal at the time of the sale, like in the case of:

• Online purchases,
• Purchases via email,
• Phone orders,
• Subscription and other recurring payments.

So, if you want to start an e-commerce business, for example, CNPs will be an inevitable part of your future. Keep in mind that some types of CNPs are safer than others because of the safeguards they provide. When you make an online purchase, for instance, you have to provide different information besides the card number, such as expiring date, CVV, address, and so on. On the other hand, people don’t feel safe sharing this personal information via the phone or email, and for the right reasons. Such information can easily be misused.

Where Does the Confusion Start?

Thanks to unfortunate terminology, people are often confused when it comes to defining payments as CNPs or CPs. For example, know that you could have CNPs even though cardholders and cards are physically in the retail object – if the payments are manually keyed. It goes both ways – if cards are not physically there, but customers pay with their mobile wallets, it is considered as CP.

To be sure, keep in mind the payment will be considered CNP unless:

• An EMV chip is being used,
• A magnetic chip is swiped, or
• Plastic is tapped on the terminal (including the smartphone tap).

Greater the Risk, Greater the Cost – Card-Not-Present Transaction Fees

When the cardholder’s data is obtained indirectly, the risk of fraudulent transactions is higher. That is why you will have higher charges from processing services on your merchant account statement.

There are three types of fees you are obliged to pay for CCP:

• Interchange fees
• Network fees (assessment fees), containing acquirer processor fee, different for each brand,
• Markup fee.

While the first two are connected to the issuing bank and the brand, a markup fee needs to be paid to processing companies, which serve as a middle man between merchants and issuing banks. When choosing merchant services, processing costs included in the markup could vary depending on the model and company you pick.

There are numerous merchant services rates and models you can opt for (interchange-plus, tiered, flat-rate credit card processing, and alike), but the thing they all have in common is that CNPs will always be more expensive than average processing fees. Even flat-rate CCP, as the best credit card processing for small businesses, doesn’t have the same prices for each purchase, contrary to its name. It also brings higher charges for CNPs, with a difference between online purchases and keyed transactions – the latter brings higher risk, so their fees are the highest.

Are There Any Ways to Evade Fees for CNP?

How do you avoid card-not-present fees? The only way of doing so is to avoid CNPs in general. However, it could severely harm your business and have a negative impact on the experience your buyer will have. For e-commerce businesses, for example, you could try the method of ordering online and paying in-store, but many don’t see it as a good solution, with so many canceled orders. The same goes with the encouragement for paying via cash and asking your customers to pay credit card convenience fees. Just be careful if you want to choose these options – they could backfire pretty quickly.

CNP Payments and a Need for Reserve Accounts

Once you set up a merchant account, on each purchase, you will be connected to the acquiring and issuing bank. It is good to know that chargebacks, in the case of CPs, are the issuing bank’s responsibility, and in the case of the CNPs, the acquiring bank’s. If your business belongs to a high-risk category with a lot of CNP transactions, processors may decide to ask for reserve funds in order to protect themselves. It could be:

• Rolling reserve – your processor will get a percentage of your daily income each day for a certain period of time, after which you’ll get your money back if everything goes without problems.
• Capped (fixed) reserve – not paid indefinitely, like the previous one. After applying for a merchant account, the percentage will need to be paid until the agreed cap. After that, the payment process will be reactivated if chargebacks are required – until the capped price is reached again.
• Up-front reserve – Agreed price needs to be paid upfront.

Scams and How They Are Usually Committed

Each fraud is based on one person stealing the information from another. With CNPs, it is challenging to figure out if the purchase itself has been authorized by the cardholder, which leaves a lot of doors for scammers to go through. It could, most obviously, happen if the physical card gets stolen, but there are also more and more cases of virtual fraud, which could be based on:

• Hacking – getting a cardholder’s data through the retail system,
• Phishing – pretending to be a trusted source in order to get a cardholder’s data,
• Skimming – using a skimming device in order to gain data from the machines that collect them (such as ATMs),
• Triangulation fraud – using fake websites to lure customers into buying, only to later steal data.

Note that smaller companies usually don’t have good data protection systems, which makes them a good target for scammers. So, if you plan to open a small business sometime soon, besides learning all the important things such as what a good effective rate is, as well as how small businesses pay taxes and how to get a small business tax deduction, you’ll need to find a way to protect yourself from potential scammers.

Solutions to Preventing Fraudulent Transactions

Different strategies could help you put an end to scamming, at least concerning your business, such as:

• Address Verification Service (AVS) – it is a database provided by issuing banks and CCP companies from which you can compare the billing address provided for the issuing bank and the address that you got for your order.
• Card Verification Number (CVN/CVV) – three or four-digit on the back of the card (American Express has them in the front). When a shipping address is different from the billing address, asking for CVV could confirm if the purchase has been authorized by the cardholder. But, Is CVV required for card-not-present transactions? Not necessarily – it depends on the CNP type and other provided data.
• The Payment Card Industry Data Security Standard (PCI DSS) – a set of rigorous standards that need to be met in order to protect customer data to the fullest.
• 3D secure code – an additional verification step, provided by different brands, in which the payment process can be completed with face or fingerprint recognition or some other means of verification. Visa Secure, for example, is a system that guarantees to customers a safe purchase on websites containing Visa Secure badges and guarantees to merchants that every purchase is authorized by a cardholder.
• Training all employees when it comes to dealing with potential scammers is a necessity for data security.

Friendly Fraud – When the Customer Isn’t Always Right

Friendly or chargeback fraud arises when a customer tries to scam you, usually by claiming that the goods they ordered never got to them or that they arrived in bad condition. The chargeback is the ultimate goal, while they get to keep the money and the goods. Dealing with this problem is a sensitive issue and, if wrongly accused, you could lose a customer and possibly get a few bad reviews in the process.

Support the Transparency – A Way to Protect Yourself From Chargeback Fraud

There are many different types of businesses, but no matter which one you belong to, being transparent is the best way to protect yourself. Make your refund policy transparent on your website and invoices. It would also be good to provide your customers with a way of tracking the shipment process – it will benefit you, too, because you can see if a customer is telling the truth about a shipment that didn’t come through. For your security, also remember to take a photo of the goods you ship before you close the box, as proof of their condition pre-shipment.

Why Is It Important to Accept CNPs?

All this talk about frauds and scams might scare you, but don’t make one of the common mistakes business owners make and avoid CNPs – if you do, you will only hinder the development of your business. Nowadays, e-commerce is becoming a great source of income, especially with younger generations, and deciding against CNPs would mean giving all those potential customers away. A much smarter decision would be to invest in security to protect you from getting scammed and choose the best merchant processing company that won’t charge you more than needed. After all, with more than 210 million online shoppers a year in the US, you can only win.