Using Address Verification Systems to Reduce Risk

Just how bad is credit card fraud? According to the Nilson Report, losses due to credit card fraud estimated to be about $3.8 billion worldwide in 2003. And it continues to grow, despite increased awareness and technology in the industry. The problem lies in verifying someone's identity: How do you know that the person using a credit card is the actual cardholder?

There are many different techniques used today for credit card verification. One method of credit card verification used today is the Address Verification System. AVS checks to see if the billing address of the credit card given by the user matches the address on file at the credit card company. The system verifies only the numbers in the address, such as the street number and ZIP code. If the numbers match, the system returns an affirmative response code. The system works in that it prevents criminals from using credit card numbers that have been stolen. These perpetrators may have no idea what the billing address of the stolen card is, and when the system returns a negative response code, the transaction is terminated.

However, the system has its flaws. AVS has a tendency to create a lot of false negatives, since other numbers in an address (suite numbers, apartment numbers) may prevent a match from occurring. Additionally, some cardholders have the bills sent to an accountant to pay or the card is a business account that is billed to their office. However when they are making the purchase they use their home mailing address so the addresses do not match but there is no fraud being committed.

The biggest flaw with AVS is that a billing address is not a confidential piece of information. Criminals who steal a credit card through the mail or assume someone's identity will have the billing address, and by supplying this information, the transaction will pass the AVS test.

Address verification is one way to decrease fraud, but it is not foolproof. It's just one layer of security to help the merchant feel sure that the card user is legitimate, and that a chargeback will not occur. When combined with other verification methods, AVS can be useful in reducing exposure to fraudulent transactions.