Card-Not-Present Fraud

DEFINITION of 'Card-Not-Present Fraud'

Card-not-present fraud is a type of credit card scam in which the customer does not physically present the card to the merchant during the fraudulent transaction. Card-not-present fraud can occur with transactions that are conducted online or over the phone. It is theoretically harder to prevent than card-present fraud because the merchant cannot personally examine the credit card for signs of possible fraud, such as a missing hologram or altered account number.

BREAKING DOWN 'Card-Not-Present Fraud'

Credit card payment processors take a number of steps to minimize card-not-present fraud. These include verifying that the address provided by the customer at the time of purchase matches the billing address on file with the credit card company, checking the validity of three-digit CVV security codes and prohibiting merchants from storing these codes. However, if the criminal has stolen these details, the fraudulent transaction may appear legitimate.

How Card-Not-Present Fraud is Committed

Card-not-present fraud can occur when a criminal obtains a cardholder’s name, billing address, account number, three-digit security code and card expiration date. These details can be stolen electronically, without obtaining the physical card. The theft of credit card data for use in card-not-present fraud most commonly occurs through online phishing or through theft of a business’s customers’ credit card information by dishonest employees. It also occurs less commonly through merchant database hacks.

When card-not-present fraud occurs, the merchant bears the loss. This type of fraud can have a significant impact on the merchant’s bottom line, especially for retail establishments, which tend to have small profit margins. By contrast, in card-present fraud, the credit card issuer usually bears the loss, not the merchant. Under credit card terms and conditions, the credit card issuer will not hold the cardholder liable for any fraudulent charges, whether through card-present or card-not-present fraud.

Sophisticated technology can detect many instances of attempted card-not-present fraud. For example, credit card companies have methods of detecting credit card purchases that are likely fraudulent given the account holder’s typical card usage. However, they cannot easily detect a type of card-not-present fraud called online shoplifting or friendly fraud. In this scenario, the criminal will make a purchase online or by phone, receive the merchandise, then file a dispute with the credit card issuer saying that the merchandise is inferior or that it never arrived. The issuer initiates a chargeback, and the merchant has to refund the dishonest customer.

The continuous rise and spread of online shopping has been cited as contributing factor in the increase of card-not-present fraud.