The Role Card Security Codes Play in Preventing Chargebacks
Credit cards come with a number of security features that are intended to boost shoppers’ confidence and reduce chargebacks for merchants. Card security codes are one such feature that can reduce fraud, especially in card-not-present transactions.
What Is a Card Security Code?
Card security codes help authenticate a card-not-present transaction and ensure the actual cardholder is participating in the purchase.
Card security codes were instituted in the late 1990s and early 2000s in response to an increasing number of transactions being completed online.
MasterCard was the first company to institute card security codes in 1997. American Express followed suit in 1999 and Visa in 2001. Today, including card security codes on credit and debit cards is standard procedure for all card issuers.
MasterCard, Visa and Discover print a three-digit card security code on the signature stripe on the back of the card. American Express prints the card security code (four numerals) above the embossed account number on the front of the card.
Each network has its own name for the security feature:
- Visa’s Card Verification Value 2 (CVV2)
- MasterCard’s Card Validation Code 2 (CVC2)
- Discover’s Card Member ID (CMID)
- American Express’s Card Identification Number (CID)
A Fraud Protection Mechanism
Card security codes (sometimes known by Visa’s brand name, card verification value) are a consumer protection mechanism for card-not-present transactions.
Merchants are not allowed to store the card security code once the transaction is complete. Even if the system’s security is breached and the other card data is hacked, the fraudster won’t be able to obtain the card security code.
Without this code, the account information can’t easily be used for card-not-present transactions with participating merchants. Card security codes are an effective fraud protection mechanism–but only if merchants require customers to provide them!
If the code can’t be provided, the transaction should be terminated. Personally follow up with the customer to validate the order.
Card Security Codes and Chargebacks
In theory, only the cardholder would have access to the card security code. Therefore, any transaction that is successfully completed with this information poses a lower threat of criminal fraud; transactions with a lower risk of criminal fraud come with a lower risk of chargebacks.
Plus, a validated card security code is a powerful representment tool in cases of unauthorized transaction chargebacks.
Merchants are not required to use card security codes to authorize transactions, though transactions processed without verification increase the risk of chargebacks. Additionally, if you don’t use security code verification, more chargeback will be resolved in favor of the consumer.
Limitations of Card Security Codes
Even if your business always requires the card security code for every transaction, you will not be able to completely eliminate chargebacks. There are several situations when the correct card security code could be entered, but a chargeback would still be filed:
- The card was lost or stolen and the fraudster has possession of it. The card security code is in plain sight.
- The cardholder commits friendly fraud with the intention of getting something for free.
- The cardholder is unaware of authorized purchases made by a family member or friend.
- The cardholder knows who made the transactions, but doesn’t feel obligated to pay for them.
Merchants should certainly use card security codes to prevent as many chargebacks as possible and compose compelling representment cases. However, merchants shouldn’t rely on this fraud protection mechanism as their sole chargeback defense.
If you’d like help implementing the most effective chargeback management system possible, let us know. We’ll conduct a personalized ROI analysis, showing you how much more you’ll earn by preventing and disputing chargebacks.
Requesting card security codes is the first step towards detecting and preventing fraud. Now, take your chargeback defense to the next level.