Cardholder-not-present transaction occurs when the transaction is made remotely, so that only the card’s details are needed, and a manual signature and card imprint are not required at the time of purchase. Such transactions include telephone sales and online transactions, and this type of fraud accounts for a high proportion of losses.
Merchants are the most affected party in a credit card fraud, particularly more in the card-not-present transactions, as they have to accept full liability for losses due to fraud. Whenever a legitimate cardholder disputes a credit card charge, the card-issuing bank will send a chargeback to the merchant (through the acquirer), reversing the credit for the transaction. In case, the merchant does not have any physical evidence (e.g. delivery signature) available to challenge the cardholder’s dispute, it is almost impossible to reverse the chargeback. Therefore, the merchant will have completely to absorb the cost of the fraudulent transaction. In fact, this cost consists of several components, which could add up to a significant amount. The cost of a fraudulent transaction consists of:
Loss of Reputation: Maintaining reputation and goodwill is very important for merchants as excessive chargebacks and fraud monitoring could both drive cardholders away from transacting business with a merchant.
ClearSale recommends pre-reservation. The ideal scenario is one where, when an order is received, the order amount is reserved in the payment means, avoiding losing the purchase due to lack of credit. In the meantime, the order will be analyzed for risk.
As soon as ClearSale issues an answer, the merchant may opt to complete the pre-reserve or cancel it. If the order is turned down, the reserve can be cancelled. This avoids unnecessary losses with the card operator. If the order is approved the reserve is released and the order safely delivered to the customer.
However, this is only our recommendation; we can handle several different scenarios.
There are two possibilities here:
A chargeback occurs when a customer disputes a charge on his/her credit card bill. If the true owner of the card does not recognize the purchase, he or she will ask for their money back, by filing a complaint regarding a non-authorized transaction with the issuing bank. This is known as a chargeback.
In practice, the card administrator in the process of financial settlement between the parties debits the amount that would be transferred to the merchant.
Losses can extend far beyond the value of the goods lost due to fraudulent purchases. If fraud management is not properly handled, high levels of unauthorized purchases due to suspected fraud or lengthy analyses can lead to lost sales, loss of any marketing investment, an adverse effect on the merchant's image and, most importantly, lost customers.
Merchants may not realize that transactions can be declined for the smallest errors. This may lead to loss of immediate revenue from the purchase, or more importantly, loss of a future loyal customer. As data breaches and fraud rises, security restrictions are becoming tighter. The need for hands-on fraud management for every merchant is now vital.
Unlike purchases where the customer walks into the store and the clerk can ask for signatures, PIN numbers, and I.D., in purchases made online or by phone (card-not-present) there is no physical or visual contact between merchant and customer, facilitating fraud.
Here is how the process works:
A fraudster makes a purchase at an online store using someone else's credit card.
The acquirer (or issuing bank) checks if the card has enough balance and approves the purchase.
The transaction is completed and the goods delivered to the fraudster.
The actual cardholder does not recognize the purchase and asks for a chargeback.
The online store reimburses the cardholder and is left with a loss.
Fraudster activities range from using stolen, adulterated or cloned cards - in general using the data of upstanding citizens who are completely unaware that their credit card is being used inappropriately. Unauthorized purchases may also be considered fraud, such as when a child uses a parent's card, for example.