Consumers prefer card-not-present (CNP) sales because of their inherent convenience. Compared to physical payment options, purchases made online, by phone, or via continuous authorization involve far less friction. With CNP transactions, customers across the globe can easily search for and buy goods in a rapid and seamless sales cycle.
With removal of purchase barriers, it makes sense that digital sales channels have experienced explosive growth. Accelerated by Covid-19, U.S. online purchasing across several product categories expanded between nine and 50 percent in 2020 (household supplies ranked the highest). Worldwide retail e-commerce sales are expected to grow by another 50 percent in the next four years. Merchants continue to enjoy the $5 trillion in sales value online remote payments provide.
But while client convenience and access to worldwide markets are boons to purchase volume, they also leave retailers exposed to chargeback fraud. Card-not-present environments are less protected and put chargeback liability on merchants. Moreover, as digital transaction volume increases, the potential for customer disputes increases in kind. Numerous repudiated charges result in revenue loss—preventing and fighting card-not-present chargebacks is a necessity for merchants who want to maintain business profitability.
The Pros and Cons of Card-Not-Present Transactions
There are several advantages merchants can capture with card-not-present transactions. But the risks and extended costs associated with CNP-based chargebacks should not outweigh the benefits. Your approach to CNP transactions and their chargeback risk will depend on your exposure to the pros and cons involved with the payment method.
- Increased Payment Options: CNP transaction acceptance gives your clients the freedom to choose how to pay, such as mail-order, phone, or online. Differing payment methods lead to better consumer acquisition and retention (minimized abandoned carts, rapid checkouts, etc).
- Expanded Consumer Base: CNP allows you to access a global audience and cross-border markets through digital sales channels such as e-commerce platforms or online marketplaces.
- Customer Convenience: As stated before, card-not-present payments simplify the online buyer’s journey, and that convenience creates a pleasurable customer experience that results in drastic sales increases.
- Higher Fraud and Security Risk: While card-not-present transactions have verification features like Card Verification Codes (CVC) and Address Verification Services (AVS), your exposure to security flaws is higher compared to the protections involved with card-present methods (EMV chips and card reader devices).
- Increased Costs: Payment processors charge higher fees for CNP transactions.
- Exposure to Chargeback Abuse: Due to the frictionless payment environment, CNP transactions are vulnerable to increased system abuse by cardholders. Unlike EMV chip card-present transactions, in cases where cardholders claim fraud, CNP merchants are liable for the chargebacks, and not issuers.
How Do Card-Not-Present Transactions Increase Your Chargeback Risk?
Since card-not-present transactions are a less controlled payment environment than card-present situations, they expose you to increased instances of chargeback fraud.
For example, without physical sales interactions, customer service is much harder to maintain. That can result in an influx of chargebacks rather than refunds—and chargebacks are far more costly. Customers can also purchase and ship goods globally with a CNP transaction, so returns grow in complexity, encouraging more disputes. If a client experiences product dissatisfaction or buyer's remorse, a chargeback feels like a more convenient method for recouping losses. Card-not-present purchases appear discrete, so friendly fraud seems like a possible or acceptable option.
Chargeback abuse also occurs in CNP transactions because the customer might not recognize a billing descriptor. Consumer forgetfulness can play a part as online purchase volume increases, like when a customer cannot recall setting up recurring payment models established with a CNP transaction. The first instinct in such situations is to call the issuer rather than the remote merchant, and the client bank will take the claim at face value and initiate a chargeback.
Lastly, card-not-present can lead to merchant errors as online payment systems grow complicated. While technical malfunctions and human mistakes are not a result of chargeback abuse, merchants can still see an increase in dispute volume when integrating CNP infrastructure into business systems.
Preventing Card-Not-Present Chargeback Fraud
You can protect your business from the impacts of CNP chargeback fraud by first reducing your overall dispute volume. There are several steps every merchant should take to help limit customer chargeback abuse related to card-not-present transactions:
- Improve Customer Service Communication: The fewer purchase barriers your customers experience regarding accessing refunds and resolving issues (e.g., product dissatisfaction or buyer’s remorse), the fewer repudiated charges. Effective communication throughout the sales journey deters customer disputes by strengthening the customer-to-business relationship.
- Leverage Prevention Solutions: By integrating chargeback alerts or applications that assess transaction risk, you can better equip prevention teams to locate, review, and limit risky card-not-present orders that have a high likelihood of resulting in a chargeback.
- Streamline Your Business Operations: You can deter repudiated charges by creating an organized and safe card-not-present environment. Clearly state your terms and conditions before each sale, and for global orders made online, outline your store policy beforehand. Creating recognizable billing descriptors and reducing partial deposit payments (techniques used for card-present transactions as well) will always help.
How to Fight Chargebacks and Recover Lost Revenue
The second way to limit the costs of CNP chargeback abuse is to fight and win false dispute claims. You can improve and support your chargeback representment in three key ways:
- Compile Accurate Evidence: Since you cannot take advantage of physical card security measures, collect as much customer data as possible to prevent chargebacks resulting from claims of “Unauthorized Use.” The more evidence you collect that exactly matches the issuer-specific reason codes, the more likely you can dispute a false claim and win back revenues.
- Leverage Data: Through data collection on previous transactions and chargebacks, you can glean insights that can help you optimize your dispute process and chargeback resolution teams.
- Use a Third-Party Mitigation Service: Chargeback mitigation solutions provide high-level technical solutions and abundant expertise that can help you defend against false claims and recover revenues related to CNP chargeback abuse.
Card-not-present transactions present a wealth of benefits to merchants. And while that has propelled the rapid growth of e-commerce and global payments, it has also increased the issue of chargebacks.
You can expect chargeback abuse to continue to grow as both merchant and consumer demand for the digital payment flexibility, sales convenience, and global access associated with CNP payments continues to gain in popularity. Merchants should invest further in chargeback abuse prevention and false customer dispute reduction tactics to limit the loss of business profitability—without causing a decrease in the usefulness of CNP transactions. In the meantime, chargeback mitigation strategies present the best current solution to instances of chargeback fraud within card-not-present payments.