The Dynamic Duo — Card-Present and Card-Not-Present Transactions

Ramya purchased an item from her local shop with her credit card. The shopkeeper plugs the card into the card machine, and Ramya enters her pin to complete the transaction. In an alternate world, Ramya makes the same purchase online and completes the transactions digitally.

While both situations have the payment aspect in common, there is still a massive difference. Because the first scenario has a physical presence at the store while the second is purely digital.

In banking terms, the former is known as a “Card-Present Transaction” and the latter as a “Card-Not-Present Transaction”. But this is just a mere explanation of the terms. A transaction is only deemed “card-present” if electronic information is recorded at the point of sale when the card is physically swiped in a card reader. All other payment methods are considered “card-not-present” transactions, for example, an online payment made with UPI, wallets, or a card payment through a payment gateway.

What Is a Card-Present Transaction?

When payment information is taken in person for a good or service, the transaction is referred to as Card-Present (CP). Cards that are physically swiped through a card reader or cards that are tapped or dipped into a card reader are the classic use cases we come across in our everyday lives. Some examples of CP transactions are:

Examples of CP Transactions:

• When a cardholder’s card is swiped in an EMV chip card reader device
• Using NFC or contactless-enabled payment terminals
• The customer’s mobile wallet is captured via a contactless POS.
• Traditional countertop credit card machines
• Card readers are connected to electronic devices like smartphones.

Scenario:

To understand the above definition and example better, let us consider a situation. Ramya is on a shopping trip on the way to her home. She uses a mobile wallet app to make the payment. She lets her mobile phone interact with the shop’s card terminal. This may seem like a CNP transaction. But this scenario comes under a CP transaction as it is an NFC transaction where the card stored in Ramya’s device interacts with the POS machine just like a physical card will do. The card details will be sent as e-data, and the same will be received by the PoS machine even if her actual card is at home.

The positives and negatives of CP transactions:

Positives:

• The cost of processing is much lower than CNP transactions.
• Lower risk of fraud and chargebacks as CP transactions involve the cardholder’s presence.

Negatives:

• Need for a specific card processing device to accept credit and debit card payments.
• Though the processing fee is lower than CP transactions, here the processing fee is charged according to the card network.
• The card processing device may include contactless, cards and EMV readers, which is an added expense.
• The card processing device must be maintained and updated as payment methods and technology evolve.

What Is a Card-Not-Present Transaction?

When the cardholder and credit card are not physically present during a transaction, it is known as a Card Not Present (CNP). Instead of capturing the card details using a secure card machine, customers manually enter the card information for CNP transactions. This typically includes methods such as by phone, fax, or mail.

After the global pandemic, customers’ purchasing preferences have changed more towards remote purchases, and Card-not-present transactions now reign supreme as they are used in e-commerce, mobile wallets, marketplaces, or P2P transactions.

Examples of Card-Not-Present Transactions

• When the cardholder enters their card details via an e-commerce site or app.
• When the cardholder provides their card information for subscription billing.
• “Buy” buttons on websites
• Electronic invoicing
• Payment apps

Scenario:

Consider that Ramya receives an e-invoice for items she purchased. She then clicks the payment link, chooses the UPI option to make the payment, enters the PIN, and completes the transaction. Voilà, it is a CNP transaction.

The positives and negatives of CNP Transactions

Positives:

• Customer convenience
• Increase in sales

Negatives:

• Higher risk of fraud and chargebacks than CP transactions
• Less secure than CP transactions as it is difficult to verify whether the transaction received was legitimate or fraudulent.
• Higher processing fees for potential card fraud and chargebacks.

It is common knowledge that CNP transactions are now more favored than CP transactions as they are quick, seamless, and convenient. But they do have a primary challenge, and it is fraud that results in chargebacks. While the popular guess rests on criminal fraud, so is not the case. The situation of friendly fraud is much more grave as there are no systems to detect if the cardholder has a genuine complaint or is taking advantage of the manually managed dispute system.

That’s where Backspace’s Unified Dispute Management (UDM) can be of great service. Our AI-assisted system will assign the right reason code that helps the issuer to identify friendly fraud at its source. That’s not all, UDM can completely manage the dispute cycle end-to-end, including seamless communication between the chargeback participants to resolve a dispute within the issuer’s turnaround time and service level agreements.

Get in touch with us today to know more about UDM and how it can help regulate, tailor, and modernize chargeback processes and responses.