Card-present vs card-not-present transactions: What businesses need to know

With global e-commerce sales projected to reach nearly US$6 trillion in 2023, it's clear that card-not-present (CNP) transactions are a significant part of the transaction mix for many businesses. However, card-present (CP) transactions also continue to play an important role, especially for businesses that maintain physical locations. In order to consider their advantages, potential challenges and suitability for different business models, businesses must first understand these transaction types in depth.

We'll cover the differences between CP and CNP transactions, examining their unique characteristics and exploring how businesses can evaluate and select the best option for their needs. We'll also outline the role of payment processing providers in this decision-making process and the benefits that these partners can bring to businesses navigating this complex landscape.

What's in this article?

• What is a card-present transaction?
  
• Benefits and challenges of card-present transactions
  
• What is a card-not-present transaction?
  
• Benefits and challenges of card-not-present transactions
  
• Card-present vs card-not-present transactions: How to choose what's best for your business
  

What is a card-present transaction?

A card-present (CP) transaction refers to a payment method in which the cardholder presents their physical credit or debit card to the business at the point of sale. Most of the time, this takes place in a brick-and-mortar shop, where the customer either swipes, inserts or taps their card at a card reader.

Benefits and challenges of card-present transactions

CP transactions are the backbone of everyday commerce and represent the type of transactions that most consumers use when making purchases in shops. Just like any type of transaction, CP transactions present their own set of advantages and challenges that businesses need to understand.

Benefits

• Enhanced security
  One of the primary benefits of CP transactions is increased security. The physical presence of both the cardholder and the card at the point of sale makes it possible for the salesperson to verify the cardholder's identity, thereby reducing the likelihood of fraudulent transactions.
• Lower transaction costs
  Since CP transactions are considered to be less risky than card-not-present transactions, the processing fees for CP transactions are often lower. This can mean significant cost savings for businesses over time.
• Instant payment processing
  CP transactions are processed in real time and businesses receive confirmation of successful payment immediately. This means that transactions are completed swiftly, enhancing the customer's shopping experience.

Challenges

• Need for physical hardware
  CP transactions require a physical POS system to process the payment card. This can be a hurdle for small businesses or businesses in remote locations, which may find it difficult to acquire or maintain these systems.
• Potential for hardware failure
  Any hardware, including POS terminals, can malfunction or break down, potentially disrupting business operations. Businesses must be prepared to address these issues quickly to prevent any loss in sales.
• Exposure to card-present fraud
  While CP transactions are considered to be more secure, they are not immune to fraud. There is still a risk of counterfeit cards, stolen cards or card skimming, where fraudulent actors capture card data from the magnetic stripe.
• Limited to in-person sales
  By definition, CP transactions are possible only when the customer is physically present, which limits the reach of the business's market compared with online transactions.

What is a card-not-present transaction?

A card-not-present (CNP) transaction refers to a transaction that takes place online, over the phone or via postal order, where the cardholder does not present the physical card to the business at the time of the payment. In these situations, the business must rely on the customer to provide the necessary card details (i.e. card number, expiry date and CVV code) to process the payment.

Since these transactions can carry a higher risk of fraud due to the lack of physical card verification, they usually require additional security measures, such as address verification service (AVS) or the use of security codes.

Benefits and challenges of card-not-present transactions

CNP transactions have grown increasingly common due to the rise of digital and remote business operations. They facilitate global commerce, giving customers the flexibility to make purchases anywhere and at any time, without needing to be physically present at a business's brick-and-mortar location. But these transactions also carry inherent risks – most notably, an increased potential for fraud. It's vital that businesses understand the pros and cons of CNP transactions so that they can manage these transactions effectively.

Benefits

• Broadening market reach
  CNP transactions break down geographic barriers by allowing businesses to cater to customers across the globe. This can greatly expand a business's customer base and potential revenue.
• Enhancing customer convenience
  CNP transactions make it possible for customers to shop at any time and from any location, enhancing the overall shopping experience.
• Reducing operational costs
  Maintaining physical shops comes with a myriad of overhead costs, such as rent, utility bills and staff wages. CNP transactions, which often require fewer resources to manage, can help to reduce these costs.
• Increasing sales opportunities
  CNP transactions offer businesses additional sales opportunities, such as online impulse buys, upselling and cross-selling, which are more difficult to execute in a physical shop environment.

Challenges

• Increased risk of fraud
  As the cardholder is not present during the transaction, it's more difficult for the business to verify the customer's identity, leading to a higher risk of fraudulent transactions.
• Higher processing fees
  Due to the higher risk associated with CNP transactions, payment processors typically charge higher fees for these types of transactions.
• Customer trust issues
  Since the transaction occurs remotely, customers may have security concerns about providing their card details, which could potentially affect conversion rates.
• Dispute and chargeback risks
  CNP transactions are more prone to disputes and chargebacks, in part because the customer can make a purchase without being physically present at a brick-and-mortar location to verify what they're purchasing.

Card-present vs card-not-present transactions: How to choose what's best for your business

When choosing between CP and CNP transactions, businesses should consider their broader operating model and customer expectations.

Historically, CP transactions are linked to brick-and-mortar establishments where customers or salespeople swipe, insert or tap physical cards at a terminal. CNP transactions, on the other hand, have become synonymous with the rise of e-commerce, because the physical card is not present at the point of sale. Instead, the customer types in their payment details. However, for many businesses, particularly those with a mix of online and in-person sales, it isn't an either/or decision. Often, a hybrid approach is more suitable.

The key differences between these transaction types lie in the way in which they handle customer data, transaction fees and fraud-prevention needs. While CP transactions offer lower transaction fees, they can limit a business's reach to their physical location only, and require an investment in POS equipment. Meanwhile, CNP transactions allow businesses to expand their reach globally. However, they do demand a more robust security infrastructure due to higher fraud risks.

For businesses with multiple sales channels, such as a brick-and-mortar shop with an online shopping option, it's essential to have a payment processing solution that can handle both transaction types efficiently. It's not a matter of choosing one over the other – it's about finding the right mix based on your unified sales strategy.

Working with a reliable payment processing provider is essential to make this decision. Your payment processing provider can offer valuable advice based on industry expertise, scalable solutions tailored to your business needs, and support in maintaining compliance and addressing security concerns.

Ultimately, optimising your payment process boils down to understanding the key differences between CP and CNP transactions, and how they affect your business. These considerations can help enhance your transaction efficiency while improving your overall customer experience.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.