Address Verification Services and Chargebacks
AVS: An Essential Tool for Fraud Detection
Merchants are in a constant battle to protect their revenue and prevent credit card fraud. With the rising number of card not present transactions, merchants are relying on automated tools such as Address Verification Service to help reduce their risk exposure.
What are Chargebacks?
Originally designed to protect consumers from unscrupulous merchants or theft, chargebacks have become one of the leading forms of consumer fraud and an expensive problem for merchants to deal with.
The most common form of chargebacks, friendly fraud, occurs when a customer contacts the bank to protest a charge. This can result in a chargeback, a reversal of the charge, forcibly removing the payment from the merchant and returning the payment to the customer.
Criminal fraud occurs when unauthorized purchases are made on a cardholder’s account. This can happen when credit card information is compromised or the cardholder’s identity is stolen. When discovered by the cardholder, a chargeback is filed – removing the charge from the cardholder’s account, but also removing the revenue from the unsuspecting merchant’s bank.
To prevent chargebacks, merchants must use an assortment of tools to protect their revenue from various forms of fraud. AVS is one such tool.
How Does Address Verification Service Work?
In an attempt to prevent unauthorized transactions, AVS is designed to quickly verify the cardholder’s address on file with the issuing bank against the billing address being used in the transaction. Merchants use AVS to confirm that the cardholder is the one participating in the transaction, thereby reducing the risk of fraud.
After evaluating the information given, the bank will respond with a code indicating the accuracy of the address. Codes are numerous and describe situations like the street address doesn’t match, the zip code is wrong, or there is partial match of information. The less accurate the information, the higher level of risk the transaction poses. Based on that information, merchants can then authorize or decline the transaction.
Does Address Verification Service Have Drawbacks?
Merchants must decide what level of risk they are comfortable accepting. Many merchants err on the side of caution and decline transactions based on information that may be a false positive. To prevent this, risky transactions should be evaluated on a case-by-case basis, costing the merchant both time and effort.
Coded that indicate the transaction is ‘risky’ could be the result of an innocent customer mistake. Failing to update their address with their bank or incorrect entry of their zip code could result in the transaction being declined. Or, it could be the result of fraud. Using additional verification strategies such as calling the bank or contacting the customer may provide more information, but require personnel and time.
What Other Indicators of Fraud Might be Present?
Along with the risk level assessed by the AVS, merchants can be on the lookout for transactions that are being shipped somewhere other than the billing address, larger than normal orders or orders that are marked “Rush Delivery”.
There may be legitimate reasons for each of these situations, but when combined with a high risk AVS assessment, merchants should proceed with caution.
How Can Merchants Protect Themselves?
Merchants who want to reduce their risk of chargebacks are wise to use tools such as Address Verification Service. However, AVS will not prevent every form of fraud and should not be relied on to catch every risky transaction. For effective fraud prevention, AVS should be used as part of a comprehensive strategy.
If you’d like help creating a multi-layer, comprehensive approach to fraud mitigation, contact us today.