Card-not-present, CNP fraud happens when a transaction is done without using a physically present card. 

In this article, we explore CNP fraud and the best ways to prevent falling into these fraudulent scams.

What is Card-Not-Present Transactions?

A Card Not Present (CNP) transaction is a payment transaction where the physical payment card is not presented to the merchant at the time of the transaction. This typically occurs in remote purchases, such as:

Examples of CNP Transactions:

• Online purchases (e-commerce)
• Phone orders
• Mail orders
• In-app purchases

What is Card-Not-Present (CNP) Fraud?

Card-not-present (CNP) fraud happens when the cardholder does not need to provide their physical card to secure payments. CNP frauds happen when a scammer has access to essential card details such as card number, security code, CVV and expiration date. These are essential information typically needed when carrying out an online transaction or over the phone.

In such a transaction, the merchant has no access to the card and would rely on the customer to provide the information to complete the purchase. This is how criminals get stolen card information to carry out their own transactions. Criminals exploit the vulnerabilities of digital payment systems and card-not-present fraud accounts constitute a good percentage of the credit card fraud worldwide, making it a cause for concern for both merchants and customers.

How Does Card-Not-Present Fraud Work?

CNP fraud happens when the scammer gains access to card details and makes purchases. Here's how it happens:

1. Stolen card details

The fraudster gets the victim’s card information. This could happen through phishing attacks, buying stolen credit card information on the dark web, data breaches, etc.

2. Making purchases

Once the fraudster gets the necessary information, they can make purchases online or over the phone from e-commerce stores, transfer money to themselves or pay for digital services. Since CNP transactions do not need a physical card, the scammer can carry out the act from anywhere in the world.

3. Avoiding detection

Fraudsters use card not present transactions because it is more difficult to detect them compared to outright credit card fraud. Without a physical card, financial institutions cannot verify whether the person making the purchase is a legitimate owner.

4. Shipping and reselling

In some cases, the fraudster will ship the items to a different address, often called a ‘drop’ address, where the stolen goods can be resold and the profits sent to them without ever needing to show the stolen credit card.
 

Without proper safeguards in place, CNP fraud can be a significant threat to customers as digital payment methods continue to increase and improve.

Key Risks Associated with CNP Transactions

These payment methods constitute CNP transaction risks that both consumers and merchants must consider:

1. Increased vulnerability to fraud

Because there is no direct way to identify the person making a transaction, it is easy for fraudsters to use stolen card details to make purchases. According to the Nilson Report, CNP fraud was projected to account for 50% of global card fraud in 2023.

2. Financial loss

Merchants who face such fraudulent online transactions face significant financial losses and they may have to cover for the cost of the fraudulent purchases and even refund legitimate customers. Some payment processors may charge merchant fees for processing fraud-related chargebacks.

3. Chargebacks and penalties

If a customer disputes a fraudulent charge, the merchant may suffer chargebacks. This process typically involves returning customer funds and they could also be fined or even lose their merchant account if the chargebacks are too much.

4. Reputational damage

Merchants who experience frequent data breaches can suffer damage to their reputation and lose customer's trust. This can impact sales as customers will choose other merchants because of digital payment security.

5. Legal consequences

To fail to implement adequate CNP fraud prevention measures can lead to legal consequences for businesses. Some regions have strict business regulations regarding consumer protection and non-compliance can lead to lawsuits or hefty fines.

Recommended: How to prevent credit card fraud

How to Detect and Prevent Card-Not-Present Fraud

Preventing CNP fraud requires technological tools, awareness and processes to effectively spor and prevent it. Here are some effective strategies for handling it:

1. Use Strong Authentication Methods

To reduce fraudulent online card-not-present transactions, use multi-factor authentication to secure remote payments. This may involve getting customers to provide a normal password or a one-time passcode sent to their phone during checkouts. Using 3D secure also requires additional authentication which provides an extra layer of security.

2. Monitor for Suspicious Activity

Merchants can use transaction monitoring and reporting to check for signs of CNP fraud. This focuses on unusual spending patterns, multiple purchases from same IP address or mismatched billing pr shipping address. Such automated tools can flag such transactions for review.

3. Use Address Verification Systems (AVS)

Address verification systems verify the billing address in a CNP transaction. It compares the address entered by the customer with the address on record with the card issuer which helps spot discrepancies that suggest fraud.

4. Secure Payment Gateways

Always use trusted and secure payment gateways that offer encryption and tokenization. These technologies can protect sensitive user details by converting them to unreadable code, making it useless for criminals to use even if intercepted.

5. Educate Customers on Security

Business should educate their customers about digital payment security and help them build strong unique passwords for their accounts. Customers should also be aware of phishing scams and avoid sharing sensitive information over unsecured channels.

What to Do If You're a Victim of CNP Fraud

If you have fallen to card-not-present fraud, here are some steps you should take immediately:

1. Contact your bank or card issuer

Make sure to notify your credit card issuer as soon as possible. This helps them to block the card and issue a replacement quickly. In many cases they can also begin an investigation and issue chargebacks for the fraudulent transaction.

2. Review your transactions

Go through your transactions and report any suspicious transactions to your bank or payment processor.

3. File a fraud report

If your personal information has leaked, you should file a fraud report with the right authorities. This could be your local law enforcement agencies or the fraud department of your card issuer.

4. Change your passwords

If the fraud is linked to an online account, it is wise to change the password immediately. Use two-factor authentication to add an extra layer of security.

5. Monitor your account

Make sure to keep a close eye on your financial accounts following the incident to ensure no future unauthorized transactions happen.

Conclusion

CNP fraud poses significant issues in the world of digital payments and continues to increase with multiple fraudulent online transactions yearly. Understanding how this fraud works and the risks associated is important for merchants and customers.

By adopting the best CNP fraud prevention practices using multi-factor authentication, transaction monitoring and secure payment gateways, businesses can reduce their exposure to such fraud.

Youverify offers valuable resources on such prevention methods as well as the tools needed to secure your accounts for good. To try our CNP fraud prevention methods, book a demo with Youverify today.