Difference between card present and card not present transactions

Card-present transactions (e.g. POS machines) refer to transactions where the physical credit or debit card is present at the point of sale, such as in-person transactions at a retail store or restaurant. In these transactions, the merchant typically pays a lower fee to the acquiring bank and payment processor, as the risk of fraud is considered to be lower. The money flow in these transactions typically goes from the customer’s bank to the merchant’s acquiring bank, then to the merchant.

Card-not-present transactions (e.g. online payment) refer to transactions where the physical credit or debit card is not present at the point of sale, such as online or over-the-phone transactions. In these transactions, the merchant typically pays a higher fee to the acquiring bank and payment processor, as the risk of fraud is considered to be higher. The money flow in these transactions also typically goes from the customer’s bank to the merchant’s acquiring bank, then to the merchant.

Different parties involved in card-present transactions are:

• Cardholder: the person making the purchase
• Merchant: the person or business selling the goods or services
• Acquiring bank: the bank that processes the transaction on behalf of the merchant
• Payment processor: the company that facilitates the communication between the acquiring bank and the customer’s bank
• Issuing bank: the bank that issued the credit or debit card to the customer

In card-not-present transactions, the parties involved are the same, but the additional parties involved are:
* Payment gateway: the software that securely communicates the customer’s card information to the payment processor

The complexities in card-not-present transactions are more as the risk of fraud is higher and the customer is not present physically to sign or provide identification. Hence, additional measures like 3-D Secure, AVS (Address Verification System) and CVV (Card Verification Value) are used for authentication and to reduce the risk of fraud.

Here are some examples of the same transaction in card-present and card-not-present channels, as well as the potential costs associated with each:

Card-present transaction:

• Example: A customer purchases a pair of shoes at a retail store for AED 100.
• The customer presents their credit card to the cashier, who swipes it through the card reader.
• The acquiring bank processes the transaction and sends the funds to the merchant’s bank account, minus a transaction fee of approximately 2%.
• In this example, the merchant pays a transaction fee of AED 2 to the acquiring bank and payment processor.
• Other fees might include bank transfer or settlement fees, but we are excluding them for this example.

Card-not-present transaction:

Example: A customer purchases a pair of shoes online for AED 100.
* The customer enters their credit card information into the website’s payment form and submits the order.
* The payment gateway securely transmits the card information to the payment processor, which forwards it to the acquiring bank.
* The acquiring bank processes the transaction and sends the funds to the merchant’s bank account, minus a transaction fee of approximately 2%.
* In this example, the merchant pays a transaction fee of AED 2 to the acquiring bank and payment processor, plus an additional charge for the card-not-present transaction. This additional charge usually ranges between 0.5-1% of the transaction amount.
* The total amount would be up to AED 3 in this example, or a total of 3% of the initial transaction.

It’s worth noting that these are just examples and the actual fees will vary depending on the merchant’s agreement with the acquiring bank and payment processor, as fees vary greatly based on the payment provider, the type of card, locally or internationally issued card, and the currency. Also, these fees are just for the transaction, there are other costs associated with card-not-present transactions such as chargebacks, which is when a customer disputes a charge on their credit card statement and requests a refund.