What Is Card-Not-Present Fraud? (And 6 Ways Businesses Can Spot It)

Ecommerce is booming, and sadly, for online retailers, that means digital fraud is too. One growing form of fraud is card-not-present (CNP) fraud.

If you sell online, this statistic highlights the importance of understanding exactly what card-not-present fraud is and how you can spot it. Then, you can use this knowledge to build a better fraud prevention strategy for your ecommerce site (or brick-and-mortar retail operation).

Ultimately, the reason CNP fraud in ecommerce is so prevalent is that it’s so easy to perpetrate. All a fraudster needs is stolen credit card information. And after making fraudulent purchases, this can result in massive chargeback penalties and other headaches for unsuspecting online sellers.

Interested in what you can do to protect yourself? This guide provides a closer look at CNP fraud and offers ideas for detecting it, tools to prevent it, and fraud prevention tips for ecommerce sites.

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

Card-not-present fraud occurs when a fraudster uses stolen credit card information to make a purchase but does not actually have physical possession of the card. CNP fraud is most common in ecommerce transactions, as the thief does not need to present the card to a cashier.

CNP fraud is most frequently used to:

• Perform unauthorized purchases (typically online)
• Make over-the-phone purchases
• Transfer bank balances to a different account
• Max out the credit cards
• Create fake cards and change addresses

Although this is most common in ecommerce, CNP fraud can happen in retail operations. This is why brick-and-mortar shops shouldn’t process a transaction when the card cannot be presented.

Types of Transactions Most Vulnerable to CNP Fraud

Here are some examples of the most common types of transactions for CNP fraud:

• Online shopping
• Mobile payments and digital wallets
• In-app purchases
• Unsecured websites or platforms
• Over-the-phone transactions

The online payments landscape is continuously changing, and taking precautionary measures to prevent CNP fraud is crucial.

How CNP Fraud Affects Businesses

For any business operating in the digital sphere, CNP fraud is a persistent, evolving threat that can inflict profound and long-lasting damage across multiple facets of operations.

1. Financial losses

The most immediate and apparent impact of CNP fraud is direct financial loss. When a fraudulent transaction occurs, merchants often bear the brunt of chargebacks – a forced reversal of funds initiated by the cardholder’s bank. This means not only losing the revenue from the original sale but also incurring additional chargeback fees, which can range from $20 to $100 per incident. If goods or services were delivered, the business also loses the cost of that inventory. These cumulative losses can quickly erode profit margins, especially for businesses with high transaction volumes or lower-value goods. Effective CNP fraud prevention is vital to protect these margins.

2. Increased operational costs

Beyond direct financial hits, CNP fraud creates a ripple effect of increased operational expenditures. Businesses must dedicate significant resources to investigating chargebacks, processing refunds, and communicating with banks and customers. This involves allocating staff time, investing in CNP fraud detection software, and potentially hiring external fraud management teams.

3. Reputational damage

Trust is fragile in the digital realm. A surge in CNP fraud incidents linked to a business can quickly erode customer confidence and severely damage its brand reputation. Customers who experience fraud after transacting with a particular merchant may choose to take their business elsewhere, fearing their financial data isn’t secure.

4. Impact on customer experience

While focused on preventing fraud, businesses must walk a tightrope to avoid alienating legitimate customers. Overly aggressive CNP fraud detection measures can lead to “false declines,” where valid transactions are mistakenly blocked. This frustrates customers, leading to abandoned carts, negative perceptions, and potentially lost future sales. Striking the right balance between robust CNP fraud solutions and a frictionless checkout experience is paramount to maintaining customer satisfaction and loyalty.

5. Regulatory and legal consequences

CNP fraud directly impacts a business’s compliance with payment card industry (PCI DSS) standards and other anti-money laundering (AML) regulations. High fraud rates can trigger audits, lead to compliance violations, and result in substantial fines from card networks and regulatory bodies. In severe cases, businesses could even face limitations on their ability to process card payments, effectively crippling their online operations. Adhering to strict card-not -present fraud prevention protocols isn’t optional; it’s a regulatory imperative.

6. Long-term challenges

The ongoing fight against CNP fraud presents persistent challenges. Fraudsters constantly evolve their tactics, demanding continuous investment in new technologies and strategies. Businesses face the perpetual task of staying ahead of these sophisticated attacks, adapting their CNP fraud detection and prevention systems, and training their teams. This creates a long-term resource drain and requires a strategic, forward-thinking approach to security, recognizing that the threat is dynamic and ever-present.

How CNP Fraud Affects Customers

While businesses bear the direct financial and operational brunt of CNP fraud, customers are far from immune. The psychological, emotional, and practical toll can be significant, extending beyond simple monetary losses.

1. Financial loss and liability

Though credit card companies often offer zero-liability policies for fraudulent charges, customers can still face immediate financial disruption. Unauthorized transactions might temporarily drain bank accounts, leading to overdraft fees, bounced payments, or a temporary loss of access to funds. While eventually reimbursed, the inconvenience and potential for immediate financial strain can be substantial. For debit cards or less protective policies, some direct financial liability might even fall on the customer if not reported promptly.

2. Privacy concerns

CNP fraud frequently stems from data breaches, phishing attacks, or other compromises of personal information. For victims, this exposes deeply unsettling privacy concerns. The realization that their sensitive financial and personal data has been stolen and exploited can lead to a profound sense of violation and anxiety about future identity theft. This personal information can then be used for other illicit activities beyond simply making unauthorized purchases.

3. Loss of trust and confidence

When customers fall victim to CNP fraud, their trust in online transactions, and often in the specific merchant where the breach occurred, can be severely eroded. This can lead to hesitation in making future online purchases, a preference for cash or in-person transactions, and a general distrust of digital commerce. Rebuilding this lost confidence is a significant challenge for the entire ecommerce ecosystem, making CNP ecommerce solutions that prioritize security essential.

4. Time and effort in resolution

Resolving CNP fraud is a laborious process for customers. It involves identifying fraudulent charges, contacting banks and credit card companies, disputing transactions, cancelling compromised cards, updating payment information across numerous services, and monitoring credit reports for further unauthorized activity. This administrative burden consumes valuable time and can be a source of considerable stress and frustration.

Why You Should Address CNP Fraud Right Now

CNP fraud has become a big problem, and businesses need to build better systems to protect themselves:

1. Rising Digital Transactions

More commerce is moving online. In the future, the majority of businesses will have at least some ecommerce activities.

2. Inter-Connectivity

To allow the users easy accessibility, generally, all the cards and bank accounts are interlinked.

This interconnected nature of the global economy allows fraudsters to commit fraud and steal account details by gaining access to a single card.

3. Consumer Trust

You lose business when customers stop making purchases. One of the common reasons is the need for more trust during online payments.

Consumers need to feel confident that their financial information is secure, further maintaining trust and encouraging the growth of the digital economy.

4. Financial Loss Prevention

CNP fraud can result in significant financial loss. Keeping CNP fraud under control helps reduce the economic losses from such fraudulent activities.

Industry Standards and Compliance

Businesses must comply with industry standards and regulations for enhanced protection. Here are some key requirements based on your business:

• Payment Card Industry Data Security Standard (PCI DSS)
• Secure Payment Gateway Standards
• Identity Verification Tools and Regulations
• Know Your Customer (KYC) Requirements
• Card Verification Values (CVV) – Generally used during card payments
• Address Verification System (AVS)
• Organization for Standardization (ISO) Compliance
• Consumer Data Privacy Norms
• Strong Customer Authentication (SCA) & 3-Domain Security (3DS) Regulations
• Data Encryption Standards
• Network Security Standards

How to Respond to CNP Fraud in Your Business

If you suspect CNP fraud, here are some steps you can take to help remedy the issue:

1. Internal Investigation

It is essential to identify and assess the extent of the fraud. This step will help to evaluate the system’s vulnerabilities as well.

2. Report the Fraud

For any individual or business, it is crucial to report the fraud to prevent any further complications, and it is a mandatory step to claim the amount of fraud (if applicable to your business).

3. Notify Payment Processors

You must inform them about the fraud if there is a security breach from the installed payment gateway application. They can investigate their software’s vulnerabilities and alert other clients.

4. Customer Communication

Once you have taken security measures to stop further fraud, you NEED to inform your customers and STOP other cashless transactions until everything is clear.

5. Implement Security Measures

Invest in a robust identity verification system and strengthen security measures to safeguard your business from future incidents.

Responding to CNP Checklist

• Step 1: Contact Local Law Enforcement
• Step 2: File a Report with the Concerned Trade Partner
• Step 3: Contact Banking or Card Companies
• Step 4: Notify Your Software Company (if their software was compromised)
• Step 5: Alert Your Customers
• Step 6: Notify Your Payment Gateway Partner
• Step 7: Report to a Cyber Crime Agency (if applicable in your business)

Card-Not-Present (CNP) Fraud vs. Card-Present (CP) Fraud

Understanding the fundamental differences between CNP fraud and card-present (CP) fraud is crucial for tailoring effective fraud detection and prevention strategies. The key distinction lies in the physical presence of the payment card during a transaction.

Card-Present (CP) Fraud occurs when a customer physically presents their payment card at the point of sale. This involves swiping the magnetic stripe, inserting an EMV chip, or tapping for contactless payment. Because the physical card is present, merchants can leverage various authentication methods:

• Visual Inspection: Checking security features like holograms, signatures, or photo IDs.
• Chip (EMV) Technology: The Europay, Mastercard, and Visa (EMV) chip generates a unique cryptogram for each transaction, making card cloning significantly harder. This shifts liability for fraud to the party with the least secure technology.
• PIN Verification: Requiring a Personal Identification Number (PIN) further authenticates the cardholder.

CP fraud typically involves stolen physical cards, counterfeit cards (though EMV chips have drastically reduced this), or “friendly fraud,” where a legitimate cardholder disputes a valid transaction. The fraud risk for CP transactions is significantly lower, often resulting in lower processing fees for merchants due to the added layers of security and liability shifts.

Card-Not-Present (CNP) Fraud, conversely, takes place when the cardholder and their physical card are not present during the transaction. This includes online purchases, phone orders, mail orders, and recurring payments. In these scenarios, only the card’s data (number, expiration date, CVV, and billing address) is provided. Without the physical card for inspection or chip verification, CNP fraud inherently carries a much higher risk. This elevated risk translates to higher processing fees for merchants.

The challenges in CNP fraud detection stem from this absence of physical interaction. Merchants can’t visually verify the card or the cardholder. Therefore, CNP fraud prevention relies heavily on:

• Card Verification Value (CVV/CVC): A three- or four-digit security code not stored with the main card number.
• Address Verification System (AVS): Checks if the billing address provided matches the one on file with the card issuer.
• 3D Secure (e.g., Verified by Visa, Mastercard SecureCode): Adds an extra authentication step where customers verify their identity directly with their bank (e.g., via a one-time passcode).
• Advanced Fraud Detection Tools: Utilizing machine learning and behavioral analytics to identify suspicious patterns in transactions, regardless of physical presence.

The shift towards CNP fraud is a direct consequence of improved CP security, particularly the widespread adoption of EMV chip technology. As it became harder to commit fraud in physical stores, criminals migrated their efforts to the less secure online environment, making robust CNP fraud solutions absolutely essential for ecommerce.

How Scammers Illegally Obtain Card Information

The sophisticated nature of CNP fraud means scammers employ a diverse array of tactics to illegally acquire the sensitive card information needed to execute their schemes. These methods often exploit vulnerabilities in technology, human psychology, or physical security.

1. Phishing

A perennially effective tactic, phishing involves fraudsters impersonating trusted entities – banks, popular retailers, or even government agencies – through fake emails, text messages, or websites. These deceptive communications lure unsuspecting victims into revealing their credit card details, login credentials, or other sensitive personal information. Once obtained, this data can be immediately used for CNP fraud transactions.

2. Social engineering

Beyond phishing, social engineering encompasses a broader range of psychological manipulation techniques. Scammers might call posing as bank representatives to “verify” account details, or they might trick customer service agents into divulging information. The goal is to exploit human trust, empathy, or fear to coax individuals into volunteering information they shouldn’t, enabling subsequent fraudulent activity.

3. Spyware

Malicious software, or spyware, installed on a victim’s computer or mobile device without their knowledge, serves as a digital informant. This malware can covertly record keystrokes (keyloggers) when a user enters credit card numbers on a legitimate website, capture screenshots, or directly access stored payment information. Once compromised, this data is transmitted back to the fraudster, who can then freely use it for CNP fraud.

4. Card Skimming

While often associated with physical card fraud, card skimming devices installed on ATMs, gas pumps, or POS terminals can capture card details from the magnetic stripe or even the EMV chip. Although the physical card isn’t present for the subsequent online transaction, the stolen data is used for CNP fraud. Sophisticated skimmers can also transmit data wirelessly, making detection difficult for the average user.

5. Public Wi-Fi Networks

Unsecured public Wi-Fi networks in cafes, airports, or hotels are fertile ground for cybercriminals. Without proper encryption (like a virtual private network (VPN), sensitive information transmitted over these networks, including credit card details entered during online shopping, can be intercepted by fraudsters using “man-in-the-middle” attacks.

6. Hacking

Cybercriminals target businesses, often through sophisticated hacking techniques, to breach databases containing vast amounts of customer payment information. These data breaches can expose millions of credit card numbers, expiration dates, and even CVV codes. Once this treasure trove of data is exfiltrated, it’s often sold on the dark web or used directly by hackers to commit large-scale CNP fraud.

7. Triangulation fraud

A particularly complex form of CNP fraud, triangulation involves three parties: the fraudster, an unsuspecting customer, and a legitimate ecommerce merchant. The fraudster sets up a fake online store, advertising popular products at deep discounts. When a customer places an order and pays with their legitimate card, the fraudster then uses a stolen credit card to purchase the same item from a legitimate merchant (like Amazon or eBay) and has it shipped directly to the unsuspecting customer.

Prevent Card-Not-Present (CNP) Fraud with FTx Identity

As a business owner, you need to protect your company reputation, customer data, and monetary collections. This is possible by investing in smart and intuitive tools, real-time customer and transaction monitoring, regular staff training, and updating yourself with the latest cybercrimes, etc.

FTx Identity can help you manage this. With years of experience and a strong client base, we offer a solution to help you build a stronger, more secure customer onboarding process. Contact us today to learn more.