What it means
In standard retail sales, you insert or swipe your physical card and often enter a PIN, which proves you are present. A card not present transaction removes that physical verification step entirely.
Instead of checking a physical card or ID, merchants rely on digital details like the card number, expiry date, and security code, alongside billing addresses. Because nobody is physically checking the card, these transactions carry a higher risk of fraud.
If a criminal steals your card details, they cannot use it in a local shop easily, but they can easily type the numbers into an online checkout. Consequently, payment processors charge higher fees for these transactions to cover the increased risk of chargebacks.
A chargeback occurs when a true cardholder notices a fraudulent purchase and asks their bank to reverse it. In card not present situations, the merchant usually absorbs the financial loss.
To protect themselves, businesses use security tools like address verification systems and one-time security codes sent via text message to confirm the buyer is legitimate. For managers, understanding this payment type is vital when planning an online store or phone-ordering system.
You must balance making the checkout easy for honest customers while putting enough security checks in place to stop fraudsters. Ignoring these risks can lead to steep financial losses from stolen cards and reversed payments.
Ordering goods with a card not present is like ordering food over the phone compared to buying it inside a restaurant. Over the phone, the restaurant must trust you are who you say you are, whereas inside, they can look right at you.
In practice
Real-world examples
Example 1
Sarah runs an online boutique and sells a handmade ceramic vase for $45. The customer types their debit card details into the website checkout, creating a card not present transaction. Because the order ships to a new address, her payment provider flags it for an extra security check before dispatch.
Example 2
A local plumbing company takes a $120 booking deposit over the phone. The office manager types the client's card numbers into a virtual terminal, processing a card not present sale. The firm keeps a written note of the booking so it can answer a dispute if one arises.
Example 3
A boutique hotel accepts a $300 room reservation deposit via email invoice. The guest clicks a secure online payment link to settle the bill, completing a card not present payment. The hotel checks that the billing address matches the guest's booking details before confirming the room.
Think of it
Ordering goods with a card not present is like ordering food over the phone compared to buying it inside a restaurant. Over the phone, the restaurant must trust you are who you say you are, whereas inside, they can look right at you.
Formula
Calculation
Card Not Present Fraud Rate = (Fraudulent CNP Volume / Total CNP Volume) x 100
Total Fraud Cost = Fraudulent Sales Refunded + (Number of Chargebacks x Chargeback Fee)
Worked example. If you process $50,000 in online sales and $1,000 turns out to be fraudulent, your fraud rate is ($1,000 / $50,000) x 100 = 2%.
The true cost is higher than the stolen sales alone. Suppose the $1,000 came from 10 fraudulent orders averaging $100 each, and your bank charges a $25 fee per chargeback. Total fraud cost = $1,000 + (10 x $25) = $1,250, which is $1,250 / $50,000 = 2.5% of your card not present sales.
Processing fees also differ. Assume your processor charges 2.5% on in-person payments and 3.0% on card not present payments. On $50,000 of sales, the in-person fee would be $1,250 and the card not present fee is $1,500, so the extra cost of selling remotely is $250 before any fraud losses are counted.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf Organics, a small subscription box company, launched a website to sell fresh vegetable boxes. Initially, they enjoyed a surge in online orders worth $15,000 in the first month. However, because they did not enable basic security checks like address verification, criminals used stolen card data to buy boxes. By month two, real cardholders reported the fraud, leading to chargebacks totalling $1,200 plus bank penalty fees.
The company quickly updated its checkout software to require two-factor authentication and address checks. This addition reduced their monthly fraud rate from 8% down to less than 1%, protecting their profit margins. The $1,200 of chargebacks equalled 8% of the first month's $15,000 of sales, which was enough to wipe out the profit on several hundred boxes. The owner now reviews the fraud rate every week alongside sales, and treats any sudden rise as a warning that her checkout settings need attention.
Watch out
Common mistakes
- Assuming online payment processors automatically protect you from all fraudulent chargebacks.
- Failing to use address verification services because you worry it might slow down customer checkouts.
- Forgetting to factor the higher merchant fees for online sales into your product pricing strategy.
Questions
People also ask
Why do card not present transactions cost businesses more?
Banks and payment processors charge higher fees because the risk of fraud is significantly greater when nobody physically verifies the card.
What is a chargeback?
A chargeback is a forced reversal of a payment by a bank, usually initiated by a customer who claims they did not make or authorise the purchase.
How can small businesses reduce fraud risks?
You can reduce risk by using address verification checks, requiring security codes, and implementing two-factor authentication at checkout.