Despite the rise of e-commerce and the dramatic expansion of online payments, in-person payments remain a foundational part of the global economy. Not only have sales channels diversified with the evolution of digital payments, but the very nature of card payments has become more complex and varied over the past few decades.

For businesses that accept card payments from customers – online, in-person or both – it's important to understand the key differences between card-present (CP) and card-not-present (CNP) transactions and the best ways to handle each of them.

What's in this article?

• What is a card-present transaction?
  
• What is the difference between a card-present and a card-not-present transaction?
  
• Are card-present transactions more secure than card-not-present transactions?
  
• Processing fees and costs associated with card-present transactions
  

What is a card-present transaction?

A card-present transaction refers to a payment transaction that occurs when both the cardholder and the payment card are physically present at the time of the transaction. This is most common in traditional retail environments such as supermarkets and restaurants, where the customer hands over their physical credit or debit card to the cashier for payment.

During a card-present transaction, the customer swipes, inserts or taps their card at a point-of-sale (POS) terminal, which reads the card's information. The transaction is authorised or declined based on the information read from the card and the availability of funds or credit.

Examples of card-present transactions

• Supermarket purchase
  One of the most common types of card-present transaction occurs when a customer shops at a brick-and-mortar supermarket. After the cashier rings up the customer's items, the customer presents their credit or debit card for payment. Then, either they or the cashier swipes, inserts or taps their card (taps, in the case of contactless cards) at the POS terminal to complete the transaction.

• Restaurant dining
  Another common type of card-present transaction takes place at a restaurant. When the waiter or waitress brings the bill to the table, the customer gives them their credit or debit card. They then take the card to a POS terminal – or use a portable, handheld POS terminal – to process the transaction.

• Petrol station payment
  At a petrol station, a customer can pay at the pump by inserting their card into the card reader on the pump and then filling up. This is another form of card-present transaction, where the POS terminal is located at the pump itself.

• Retail shop purchase
  Similar to a supermarket, retail shops, such as clothing, electronics or book shops, also process card-present transactions. After the customer brings their items to the till, the cashier scans the items and processes the customer's card through the POS terminal.

• Ticket purchases at a box office
  Customers often use their credit or debit cards when buying cinema or event tickets directly from the box office or ticket counter.

• Public transportation
  Many public transport systems now allow customers to use card payments for tickets or for topping up travel cards. Customers can complete these transactions at staffed counters or automated machines.

• Contactless payments
  With the rise of NFC (near-field communication) technology, paying for something can be as simple as tapping a card or a smartphone that's equipped with a digital wallet – such as Apple Pay or Google Pay – at a compatible POS terminal. From coffee shops to gates on the underground, contactless payments are becoming a common type of transaction.

What is the difference between a card-present and a card-not-present transaction?

The primary difference between CP and CNP transactions is whether or not the cardholder and their card are physically present at the point of sale when the transaction occurs. This distinction has implications on multiple fronts, including security, transaction costs and customer experience. Here's a breakdown of the key distinctions that matter for businesses:

• Risk and fraud protection
  Generally, CP transactions are considered to be less risky because the business can physically inspect the card and, in some cases, verify the cardholder's identity. On the other hand, CNP transactions, such as online or over-the-phone purchases, carry a higher risk due to the business's inability to verify the customer's identity in person. For businesses, this could mean implementing additional fraud-protection measures for CNP transactions, such as requiring CVV numbers, setting up two-factor authentication or using advanced fraud-detection tools.

• Processing costs
  Payment processors often charge a higher fee for CNP transactions due to their higher risk of fraud and chargebacks. This can affect the business's bottom line, especially for companies with a large volume of CNP transactions. CP transactions, on the other hand, typically have lower processing fees.

• Customer experience
  The choice between CP and CNP transactions can also influence the customer experience. For example, when creating an ideal CP transaction experience, businesses with brick-and-mortar shops must take into account a list of factors that are completely different to those that go into cultivating the best CNP transaction experience. Top concerns for customer experience with CNP transactions include website load times and payment gateway reliability, whereas top concerns for in-person, CP transactions include queue wait times, the flow of foot traffic and store layout.

• Infrastructure and operation
  CP transactions require physical POS systems, which can include card readers, POS terminals and cash registers. CNP transactions, on the other hand, require digital infrastructure, such as e-commerce websites, secure payment gateways and mobile apps. Because of these different requirements, the choice between CP and CNP transactions can affect the business's operational setup and associated costs.

• Sales channels
  The choice between CP and CNP transactions can also depend on the business's sales channels. For example, a business that operates in a traditional retail environment might prioritise CP transactions, while a business that sells products or services online would focus on optimising its CNP transaction processes. For most modern retail businesses, this is not an "either/or" situation – they require a comprehensive payment strategy that encompasses a variety of both CP and CNP sales channels. However, businesses where sales and fulfilment take place entirely online, such as software-as-a-service (SaaS) businesses, might never handle a CP transaction.

• Geographical reach
  CNP transactions allow businesses to reach customers beyond their physical location, making it possible to sell products or services globally. However, this can also expose the business to additional challenges, such as managing international payment processing and handling potential cross-border payment fraud.

Choosing between CP and CNP transactions – or finding a balanced mix – is a strategic decision that businesses must make by considering factors such as their business model, customer preferences, operational capacity, geographical reach and risk tolerance.

Are card-present transactions more secure than card-not-present transactions?

Yes, CP transactions are generally considered to be more secure than CNP transactions.

In a CP transaction, the cardholder and their payment card are physically present at the point of sale. This allows the business to validate the transaction in several ways. For example, the card terminal reads the card's magnetic strip or EMV chip, which confirms that the card is physically present at the point of sale. In many cases, the cardholder is required to enter a PIN or provide a signature to approve the transaction. The business can also inspect the card for any signs of tampering and check the cardholder's ID, if needed.

On the other hand, CNP transactions, which do not involve the cardholder presenting the physical card to the business (e.g. with online shopping or over-the-phone payments), are inherently less secure. These transactions rely on the cardholder to enter their card information manually, which can leave room for fraudulent activity. Because the card and cardholder aren't physically present, businesses can't verify the transaction in the same way that they can with a CP transaction.

It's also worth noting that payment processors often categorise CNP transactions as higher risk, which leads to higher processing fees for businesses. This reflects the increased risk of fraud and chargebacks associated with these types of transactions.

However, the security of CNP transactions has been improving over the years with advancements in technology, including encryption, tokenisation, and the use of security codes (e.g. CVV or CVC), along with additional verification methods such as two-factor authentication and biometric authentication. Fraud-detection tools and systems have also become more sophisticated, helping to mitigate some of the risks associated with CNP transactions.

Processing fees and costs associated with card-present transactions

Businesses must pay card-present-transaction processing fees to their payment processors (the companies that handle the transfer of funds from customers to businesses) for each transaction that involves a debit or credit card. These costs can vary widely based on a number of factors, including the payment processor, the type of card used for the transaction, the business's industry and the business's sales volume. Here are some factors that affect these costs:

• Interchange fees
  These are fees that the business's bank pays to the customer's bank for each transaction. The fee amount is set by the card networks and varies based on factors such as the type of card (credit, debit, rewards etc.), the type of transaction (in-store or online) and the type of business. Interchange fees are typically a percentage of the transaction amount plus a fixed fee. Learn more about Stripe's transparent fee structure here.

• Network fees
  These are fees that the card networks (Visa, Mastercard, American Express and Discover in the US) charge for using their infrastructure. Usually, they are a small percentage of the total transaction value.

• Processor's markup
  This is the fee that the payment processor charges for their services, including processing the transaction, providing customer service, account maintenance and more. This is often where pricing structures can vary the most between different payment processors. The markup can be a flat fee, a percentage of the transaction or a combination of both.

These fees are typically lower for CP transactions compared with CNP transactions, due to the lower risk of fraud and chargebacks.

It's important for businesses to understand these fees when choosing a payment processor, as they can have a significant effect on the business's overall costs. Some processors offer tiered or bundled pricing structures, while others offer interchange-plus pricing, which passes the interchange fees directly onto the business, plus a fixed markup.

Additionally, businesses should consider other potential costs, such as fees for equipment (i.e. card readers or POS systems), payment gateway fees (for online transactions) and any additional fees for other services, such as chargeback management or advanced reporting.

Learn more about how Stripe powers both CP and CNP payments here.