Merchants accepting credit cards as a method of payment often struggle with finding a feasible, effective way of preventing chargebacks. Card networks and banks offer a variety of tools to assist merchants in fighting fraud and preventing chargebacks, but the most effective method of prevention and protection is a comprehensive plan that combines multiple strategies.
Address Verification System (AVS)
Perhaps one of the most useful chargeback prevention tools is the Address Verification Service.
Designed to prevent unauthorized transactions, AVS automatically compares the billing address used during card-not-present transactions with the cardholder’s address on file with the issuing bank. The merchant is then provided with one of several codes notifying them of the verification results, which can guide them in either approving or declining the transaction.
Unfortunately, merchants often use AVS to decline transactions that may be legitimate in an effort to avoid fraud. Such an aggressive approach to fraud prevention may end up costing merchants more than they save.
In order to prevent automatically rejecting valid transactions, merchants would need to evaluate sales on a case-by-case basis, a prohibitively costly and time-consuming process.
Card Security Code
The card security code is another element of fraud prevention. This code is known by multiple different names, including Visa’s card verification value (CVV) and MasterCard’s card verification code (CVC).
Card security codes first implemented in the late-nineties as a way to prevent fraud in card-not-present transactions. During the checkout process, the merchant may ask the cardholder to provide the three-digit code located on the back of the credit or debit card (note: American Express cards have a four-digit code embossed on the front of the card).
The card security code verifies that the individual making a purchase at least has physical access to the card. However, security code verification still does nothing to prevent friends or family members of the cardholder from engaging in “friendly fraud.”
3D Secure
With 3D Secure, cardholders register their debit or credit card information with the card association and create a unique PIN code. Cardholders are then asked to provide the PIN code when conducting a transaction online, thereby demonstrating that the sale is legitimate.
This tool is easy to utilize—the merchant need only register to request 3D Secure with their card processor, then download a plug-in that will prompt the cardholder for their PIN.
“3D Secure is essentially the online equivalent of a debit card PIN,” says fraud prevention expert Monica Cardone. “Logically speaking, no one should have the ability to use a card protected by 3D Secure without the cardholder’s stated authorization.”
Unfortunately, as Cardone explains, this method has its limitations as well. “The merchant is only protected on transactions conducted through a network that offers 3D Secure and with cardholders who have signed-up for the program.”
Blacklists
Compiling a ‘blacklist’ of banned addresses or cardholders may seem like an effective method of fraud prevention. After all, if an address is linked to fraudulent activity, it would make sense to refuse to ship additional orders there, right?
As with all other fraud prevention methods, it’s just not that simple. Some addresses, like large apartment complexes or college dorms, may have been used to commit fraud; however, that does not necessarily mean that everyone in the building is a criminal. Merchants relying solely on blacklists may unintentionally refuse legitimate transactions, thereby causing a loss of revenue and reputational damage.
A Multilayer Approach is Necessary
Merchants attempting to protect their company from credit card fraud and prevent chargebacks must be proactive in their strategy. Research shows a multilayer approach to fraud detection is most efficient. By creating multiple layers of complimentary tools, merchants establish comprehensive protection.