Telephone sales opened new markets for merchants who advertised in any area of the country. However, the Internet opened worldwide markets to businesses with websites. Since credit cards are the most convenient payment method, the marketing potential of local merchants expanded worldwide.
Unfortunately, the expanded markets increased the number of card-not-present sales. Anyone with a telephone or Internet connection could purchase items using another person’s credit card. Fraud and chargebacks are extremely expensive.
Since risks of card-not-present transactions are greater than card-present transactions, processing fees are higher. However, many safeguards have been established, and new ways to prevent fraud are constantly researched.
Credit Card Processing
- Card is presented for authorization
- Merchant presents card and transaction information to the merchant’s bank
- Merchant’s bank submits request to credit card network
- Credit Card Network sends request to card issuer
- Card issuer approves or disapproves transaction
- Credit Card Network sends response to merchant’s bank
- Merchant’s bank sends response to merchant
- Merchant receives response and completes transaction
- Merchant deposit receipt with merchant’s bank
- Bank credits Merchants account and sends transaction to Credit Card Network
- Credit Card Network pays merchants bank and debits card issuer account
- Card issuer posts transaction to the cardholder account
- Card issuer sends monthly statement to cardholder
Methods of Protecting Against Fraud
Merchants are protected from fraud when card-not-present transactions are processed. Some examples follow:.
- Address Verification – The cardholder’s billing address is confirmed by matching it with the address on file with the issuer. The customer must have more information than the card number.
- Card Security Code – Customers must have physical possession of credit cards to know the security number on the back of the card.
Authentication of Credit Cards – Visa and Master Card use secure methods to verify online purchases made with their cards. Cardholder identification is made in real time if the cardholder is registered in their programs. Merchants are protected from chargebacks when cardholders use these services.