Top strategies to combat CNP (card-not-present) fraud
With the boom in online shopping and digital transactions, both businesses and consumers are facing an alarming increase in card-not-present (CNP) fraud. Unlike traditional card fraud, where a thief physically uses a stolen card, CNP fraud happens when someone uses stolen card details without ever touching the actual card. This type of fraud is particularly tricky because it doesn’t require a physical card, making it hard to detect and even harder to prevent. As this issue grows, it’s critical for businesses to understand CNP fraud and adopt strategies to protect their finances and earn their customers’ trust.
What is card-not-present (CNP) fraud?
Card-not-present (CNP) fraud happens when a criminal uses stolen card information to make a purchase or payment without having the physical card on hand. This often happens with online transactions, where all a fraudster needs is the card number, expiration date, and security code. Unlike traditional in-store fraud, there’s no swipe, chip, or tap to validate the transaction physically.
CNP fraud is most common in online shopping but can also happen through phone or mail orders. For instance, if a fraudster gets hold of your card details through a data breach or phishing scam, they could easily go to an e-commerce site, enter the stolen card information, and complete a purchase as if they were the cardholder. In other cases, fraudsters might use stolen card details to pay for services over the phone, making CNP fraud one of the more adaptable types of fraud that happens without the card ever being in the criminal’s hands.
The main reasons card-not-present fraud is increasing
Growth of e-commerce and digital payments
The rise of online shopping has created a convenient world for both consumers and, unfortunately, criminals. As people shop more online, the number of CNP transactions grows, giving fraudsters more opportunities to misuse stolen card details. In simple terms, as e-commerce grows, so do the risks of CNP fraud.
Technological factors
Cybercriminals are getting smarter with technology, often using tactics like data breaches and phishing to gather sensitive card information. Data breaches are particularly effective, as they expose masses of cardholder information at once. Similarly, phishing scams trick people into sharing their card details by impersonating trusted organizations.
COVID-19 and remote purchasing
The COVID-19 pandemic pushed millions of people toward online shopping as physical stores closed or restricted in-person shopping. This shift led to a huge jump in digital transactions and, with it, more CNP fraud. The sudden rise in online orders created a perfect environment for fraudsters to exploit card data, making CNP fraud a growing concern in recent years.
The different types of card-not-present fraud
Account takeover
In an account takeover, a fraudster gains access to a person’s account by stealing their login credentials. Once they’re in, they can use saved card details to make purchases without needing the actual card. This type of fraud is particularly damaging because the criminal can act as the legitimate account holder, making unauthorized transactions that are hard to detect.
Friendly fraud
Friendly fraud, despite its name, is far from harmless. This happens when a cardholder disputes a legitimate transaction, claiming it was unauthorized to get a refund while keeping the goods or services. For example, someone might buy a product online and then request a chargeback, claiming they never made the purchase. Businesses face significant losses from this kind of fraud, as they lose both the product and the payment.
Synthetic fraud
Synthetic fraud involves creating a fake identity by blending real and fabricated information. Fraudsters might use a real Social Security number mixed with a false name and address to open new accounts. Once these synthetic identities are established, fraudsters can rack up charges on accounts linked to the fake identity, often leaving businesses with unpaid balances and complicated paperwork to resolve.
Chargeback fraud
Chargeback fraud is another tactic where a fraudster disputes a transaction, aiming to reverse the payment. This is similar to friendly fraud but is often done with a clear intent to defraud. Chargebacks allow the cardholder to get their money back, but if done fraudulently, it can leave a business without payment for goods or services they already provided. Chargeback fraud is not only financially draining but also adds to the operational costs of handling disputes and investigations, straining a business’s resources.
The impact of CNP fraud on businesses and consumers
Financial consequences
One of the most direct impacts of CNP fraud is the financial loss for businesses. When fraudsters complete unauthorized transactions, companies are often left covering the cost. Unlike in-person fraud, where liability can sometimes fall on the bank or card issuer, CNP fraud puts the burden more heavily on the business. Additionally, chargebacks from disputed transactions also lead to revenue loss. With each chargeback, the business not only loses the payment but may also incur penalty fees, all of which add up over time.
Reputational damage
Beyond the immediate financial hit, CNP fraud can damage a business’s reputation. Customers expect a secure payment process, and if a business experiences frequent or high-profile cases of fraud, it may lose customer trust. When customers feel their information isn’t safe, they may hesitate to buy from that business again, opting instead for competitors with better security records. In today’s digital marketplace, where trust and security are everything, even a single fraud incident can harm a company’s image, making it hard to regain customer confidence.
Operational costs
CNP fraud also drives up operational costs. Businesses often need to invest in fraud prevention tools, security audits, and additional resources to manage and investigate fraud cases. Fraud-related insurance premiums can also increase, and the time and labor involved in dealing with fraud cases pull resources away from other business activities. From customer service handling disputes to IT managing fraud detection tools, operational costs can pile up quickly, putting extra pressure on the business’s bottom line.
How CNP fraud is committed
Techniques used by fraudsters
Fraudsters use various techniques to carry out CNP fraud, with phishing and data breaches being some of the most common. Phishing involves tricking people into sharing their payment details through fake emails, messages, or websites that mimic legitimate companies. In a phishing scheme, a customer might receive an email claiming to be from their bank, asking them to “verify” their account information. If they comply, their card information falls into the hands of a fraudster.
Data breaches are another major source of CNP fraud, where hackers infiltrate company databases to steal customer data in bulk. Once they have access to large sets of card information, they can use it or sell it on the black market for others to exploit.
Accessing card information remotely
To commit CNP fraud, criminals don’t need the physical card, just the information. This can include the card number, expiration date, security code, and sometimes even billing address details. They often get this information remotely through the dark web, where stolen card data is sold, or through social engineering tactics, where fraudsters impersonate trusted contacts to extract information. Once they have the details, they can use it on any platform that doesn’t require the card to be physically present.
Red flags to detect a card-not-present fraud
Detecting CNP fraud early can save businesses from significant losses. Certain behaviors often signal fraud, such as unusually high-value purchases, multiple orders in a short period, or shipping to unfamiliar addresses. For example, if a customer with no purchase history suddenly places a large order for high-value items, it might be worth double-checking. Similarly, orders from different locations or devices for the same account can be a warning sign of account takeover fraud.
Tools for fraud detection
To stay ahead of fraud, businesses can use advanced tools designed to spot unusual activity. Machine learning, for instance, helps detect fraud patterns by analyzing transaction data for anything out of the ordinary. Transaction monitoring can flag suspicious behaviors like repeated failed purchase attempts, which may indicate a fraudster testing card details. Real-time risk scoring adds another layer by assigning a risk score to each transaction based on factors like transaction amount, customer behavior, and IP address location. These tools help businesses flag high-risk transactions and prevent fraud in real-time, reducing the risk of financial loss.
Best strategies for preventing card-not-present fraud
Authentication techniques
One of the first defenses against CNP fraud is strong authentication. Tools like CVV verification, which asks for the card’s security code during a transaction, add a layer of security. The Address Verification System (AVS) checks that the billing address matches the cardholder’s records, reducing the chances of fraud. Multi-factor authentication, requiring customers to verify their identity through a second step, like a one-time password, is also highly effective in preventing unauthorized access.
Tokenization and encryption
Tokenization and encryption are vital tools for protecting sensitive card information. Tokenization replaces card details with a random token, so even if a fraudster intercepts the token, it’s useless without access to the payment system. Encryption scrambles data so that only authorized users can read it. Together, tokenization and encryption make it much harder for criminals to steal and use card information.
Regular fraud audits
Conducting regular audits helps businesses stay alert to potential fraud trends within their transaction data. By analyzing transaction patterns, a business can identify irregular activities, spot vulnerabilities, and improve its defenses before an issue arises. Periodic audits also help the business stay compliant with payment security standards, reducing their liability.
Employee training
Employees are often the first line of defense against fraud, especially in customer service. By training employees to recognize red flags—like requests for unusual shipping changes or high-value orders from new customers—businesses can reduce the risk of CNP fraud. Training should also include instructions on the secure handling of customer information to prevent accidental exposure.
Customer education
Educating customers on safe online practices is essential to prevent CNP fraud. Tips like recognizing phishing emails, using strong passwords, and avoiding public Wi-Fi for transactions empower customers to protect their information. Reminding them to monitor their bank statements for unusual charges can also help catch fraud early, protecting both the customer and the business.
The role of payment processors in CNP fraud prevention
Choosing a secure payment processor is crucial for businesses to prevent CNP fraud. Reliable processors come equipped with fraud detection tools and security protocols that help businesses protect against fraudulent transactions. By partnering with a secure processor, businesses can reduce their risk of fraud, avoid chargebacks, and provide a safer transaction experience for customers.
Security features to consider
When selecting a payment processor, businesses should look for specific security features like 3D Secure, tokenization, and real-time fraud monitoring. 3D Secure adds an additional verification layer by prompting customers to enter a one-time password or complete a biometric verification during checkout. Tokenization protects card data by converting it into a random token that’s useless to fraudsters. Real-time monitoring continuously scans transactions for unusual activity, helping to catch fraud before it’s completed. By opting for a processor with these features, businesses can significantly reduce their risk of CNP fraud.
Educating and protecting customers to prevent CNP fraud
To protect themselves from CNP fraud, customers should be encouraged to use strong passwords, avoid public Wi-Fi when shopping, and regularly monitor their bank statements for unusual charges. Simple precautions like these can go a long way in reducing the risk of falling victim to fraud.
Educating customers on recognizing phishing attempts is key. They should know to double-check the sender’s email address and avoid clicking on links or sharing personal information if they’re unsure of the source. Teaching customers how to spot and avoid scams can reduce the chances of their card data being exposed to fraudsters, ultimately protecting both them and the business.
Summing up
In the digital age, card-not-present fraud is a serious threat to both businesses and consumers. By understanding how this type of fraud works and implementing a mix of detection tools, secure payment practices, and customer education, businesses can protect themselves from substantial losses and reputational harm. The fight against CNP fraud requires a multi-layered approach, and vigilance is key. Staying informed and proactive can make a big difference. For consumers, practicing good online habits is equally important. Together, businesses and consumers can reduce the impact of CNP fraud and create a safer online marketplace for everyone.
FAQs
Who is liable for card-not-present (CNP) fraud?
In most cases, merchants are liable for fraudulent CNP transactions. Unlike card-present fraud, where the card issuer often bears the loss, CNP fraud losses typically fall on the merchant, making it crucial for businesses to implement robust fraud prevention strategies to mitigate potential financial impacts.
What is the difference between card-not-present (CNP) and card-present (CP) fraud?
Card-present (CP) fraud occurs when a physical card is used fraudulently at a point-of-sale terminal, often involving counterfeit or stolen cards. Card-not-present (CNP) fraud happens when transactions are made without a physical card, typically online or over the phone, making it harder to verify the purchaser’s identity.
How can card-not-present (CNP) fraud be prevented?
Businesses can safeguard against CNP fraud by implementing multi-factor authentication, utilizing Address Verification Systems (AVS), and employing tokenization to secure payment data. Regularly updating security protocols and educating staff on fraud detection are also essential measures.
What is a card-not-present (CNP) charge on my credit card?
A CNP charge on your credit card statement indicates a transaction where your card was not physically present, such as online purchases, phone orders, or mail-in transactions. These charges are common in e-commerce and remote services.
Is there a transaction limit for card-not-present (CNP) transactions?
Transaction limits for CNP transactions vary depending on the merchant’s policies and the card issuer’s guidelines. Some businesses may set lower limits for CNP transactions due to the higher risk of fraud, while others may require additional verification for larger amounts. It’s advisable to check with your card issuer or the merchant for specific limits.
