Why Do CNP (Card not Present) Transactions Cost More?

Read Time: 3 min

Card not present transactions are becoming much more prevalent in consumer culture. They also make it nearly impossible to run a business without them. But on the flip side, they actually cost more for the merchant. But why is that? Unfortunately, it’s not such a simple answer. There are a few factors that are involved in this pricing decision on behalf of the payment processor. After reading this article, you should be able to understand why card not present transactions cost so much more than their card-present counterparts.

An Increase in Fraud Makes CNP Transactions Cost More

The level of risk with card not present transactions is much higher than for card-present purchases mainly due to an increase in fraud. There is much less transactional verification required to make purchases online. So many fraudsters take advantage of that and either use unauthorized card numbers to make purchases or buy and refund goods that they have received. So even though a merchant can reach more customers online, it makes their payment processing provider and merchant account more vulnerable.

Stolen Credit Card Information aka ‘Traditional Fraud’

customer pays at a terminal with only their phone

Using a stolen credit card is one way to perform fraud and can be done in-person or online. This is a typically cut and dry form of fraud. The purchaser is using stolen information to make a purchase. In this case, they receive the products or services but have someone else foot the bill.

The biggest reason that this form of fraud is much more common online is because the merchant has far fewer forms of verification to prove that the cardholder is the purchaser.

These verifications for card-present transactions include:

  • Comparing the card to the driver’s license
  • Matching the signature on the back of the card
  • Requiring the personal PIN number

Unfortunately, none of these options are available for card not present transactions.

Chargeback fraud aka ‘friendly fraud’

Chargebacks, also known as “friendly fraud”, are anything but friendly. They are often the most common form of fraud taken by consumers. It involves the cardholder receiving the products or services and then filing a dispute with their card issuer for a refund saying that they did not receive the item(s). Arguably the easiest way to perform fraud, chargebacks cost merchants and supporting banks millions of dollars each year.

This form of fraud is more complicated than stolen credit card information. It may be that customers do this unintentionally. If a charge appears on their card that they don’t recognize and the billing descriptor does not provide any helpful information, they might dispute it thinking that it’s fraudulent. Or they may think that a chargeback is the same as a refund- which it isn’t.

Man using his credit card to make a purchase in his online shopping cart

Either way, it negatively affects your business and loses you revenue. Mitigate credit card chargeback risk by implementing simple tips and tricks directly on your website.

It is the Bank’s Responsibility to Cover The Costs of Fraud

When fraud is present, the bank that hosts the merchant account is responsible for the funds. This means that since there is an increase in fraud for card not present transactions, there will also be an increase in revenue lost because of it. Merchant account providers for online and card not present businesses have to mitigate their own risks first. One of those risk management procedures is to charge more on every card not present transaction to cover the costs of possible fraud taking place.

This is why merchants who have both card-present and not present transactions will see a difference in how they are billed on their merchant account statement each month.

The Solution is to Mitigate The Fraud Risks 

The best thing that you can do to help keep your costs low is to mitigate risks of fraud. This way you can stop fraud from happening before it turns into something greater. Banks and credit card processing companies can see what steps you are taking and will be able to review your rates more favorably with these procedures in place.

In addition to that, simply reducing the prevalence of fraud will bring down your fees. Typically merchant account providers charge a per chargeback fee on your account. So by simply doing what you can to prevent those, you can considerably reduce the amount you pay each month.

Take it step by step and do what you can to be proactive.