Payment security is a key goal for all businesses that accept digital payments. Juniper Research estimates that global losses from online payment fraud will total more than $343 billion between 2023 and 2027, highlighting the growing need for fraud prevention. Businesses must strive to keep payments secure while upholding a high standard of customer experience and maximizing operational efficiency.
However, achieving this goal can be complicated, especially as new technology continues to shape the world of payments. While it’s true that the ideal customer experience and payment experience will depend on the specific business and situation, certain important practices can work across the board. Among these is real-time card validation. Below is a quick guide on card validation: what it is, different ways to use it, and how to validate cards in real time.
What’s in this article?
- What is card validation?
- Why does card validation matter?
- Card validation methods
- How to validate a card in real time
What is card validation?
Card validation is a collection of checks and protocols designed to verify the authenticity of a credit or debit card during a transaction. For businesses that want to minimize financial risks, such as fraud and chargebacks, card validation is fundamental. The processes that make up card validation come in different forms and scopes, but they share a common goal: confirming that the person who initiates the transaction has a legitimate right to use the card in question.
Why does card validation matter?
While it might seem routine and technical, card validation is one of the most consequential parts of the payment process. When card validation works well, every part of the business benefits. But the high security stakes around this issue mean that when card validation fails, the potential downsides can be serious.
Card validation is important for a few key reasons, including:
Card validation offers customers valuable financial security. An efficient system can flag the unauthorized use of lost or stolen cards early in the transaction process, reducing potential financial damage to the cardholder.
Well-executed card validation elevates the customer experience and improves how customers perceive transaction security. This increased confidence can lead to higher customer loyalty and more repeat transactions. Additionally, a lower rate of fraudulent cases allows customer service teams to direct their attention to other issues and improve the overall quality of service.
Effective card validation measures help the business maintain a stable financial environment. Less revenue lost to fraud and chargebacks means more resources for other growth-oriented projects.
Card validation measures help businesses adhere to industry standards and regulations, which is nonnegotiable for businesses that process card payments. Meeting compliance standards also minimizes the risk of facing penalties or legal issues, which can be costly for businesses.
Often, payment processors determine fees based on a business’s transaction history. A history marred by fraud could lead to increased processing fees, affecting the business’s bottom line. Effective card validation can help maintain or even lower these fees by reducing the incidence of fraud.
Ineffective card validation systems mean extra investment in fraud detection and management. Instead, businesses could spend these resources on innovation, customer service, or other areas that drive business growth.
Brand trust and reputation
Businesses with lower fraud rates tend to win more trust from their customer base. This trust can translate to increased customer loyalty and more favorable reviews, which can be instrumental in attracting new customers.
As businesses expand their geographic reach, they encounter a more diverse set of payment methods and associated fraud risks. An adaptable card validation system can ease the entry into new markets by minimizing the risk of transnational fraud.
For these reasons, card validation should be a high priority for any business that accepts card payments, especially card-not-present (CNP) transactions.
Card validation methods
Businesses that accept card payments must create and maintain impenetrable security protocols around payments while giving customers an easy, low-friction payment experience. Checking both of these boxes requires implementing technology that reflects the nuances of fraud prevention and the expectations of modern customers. To this end, here are some of the most common card validation methods:
Card verification value (CVV) checks
Checking the three- or four-digit code on the back of the card is a straightforward and effective verification method. By asking customers for this code during checkout, businesses can make it more difficult for unauthorized individuals to complete a purchase using stolen card information.
Address verification service (AVS)
With AVS, businesses match the billing address provided during the transaction with the address associated with the card. A mismatch can trigger additional verification steps or even halt the transaction.
Two-factor authentication (2FA)
2FA offers an extra layer of security, which typically sends a text message or app notification to the cardholder’s phone. This system helps confirm that the person attempting to make the transaction also has access to the phone linked with the card account.
This method replaces sensitive card data with a randomly generated number, or “token.” When businesses store this token, rather than the card information, they minimize the risk of data breaches and make it more challenging for hackers to gain usable information.
With geo-filtering, businesses can set boundaries based on the geographic origin of the transaction. If the card is from a country or region with a high fraud rate, the business can implement additional checks to confirm the transaction’s legitimacy.
This sophisticated method examines the behavior of the customer during the transaction. Elements such as keystroke dynamics, mouse movements, and even the angle at which a mobile device is held can help verify the identity of the individual carrying out the transaction.
Machine learning algorithms
Over time, systems can learn to spot suspicious activity from transaction data. This self-improving method is one of the most up-to-date ways to combat fraud because it continually adapts to new techniques employed by fraudulent actors.
Each of these methods contributes to a multilayered card validation system. This system offers businesses a flexible defense against fraudulent transactions while giving customers a safer, more reliable payment experience.
How to validate a card in real time
Any business that deals with customer payments knows transactions must be fast and secure, which means card validation must be efficient as well as accurate. Real-time card validation is also a defense against the many types of payment fraud that might penetrate a payment system using a slower validation process. Here are some of the methods businesses can use to validate card payments in real time:
1. API-based card verification
Businesses can automate the validation process with application programming interface (API) calls to the payment gateway. This enables the business to send the issuing bank a request to confirm the card’s authenticity. The issuing bank’s response will tell the business if the card is valid and if the entered information, such as the billing address and CVV, matches the issuer’s records. Implementing API-based verification helps reduce human error and speeds up the transaction process. This method can also contribute to customers’ trust, because the entire process is automated and therefore less susceptible to manual mistakes.
2. Preauthorization transactions
These are small transactions—sometimes only a few cents—that businesses can charge to a card before making the full transaction. If the preauthorization goes through successfully, the chance that the actual transaction will be accepted skyrockets. While some businesses refund these small charges immediately after successful preauthorization, others choose to subtract them from the total transaction amount.
3. Machine learning algorithms for anomaly detection
Sophisticated machine learning models can analyze transaction data immediately to flag potential issues. These models take into account several variables, including spending patterns and geolocation, to produce a risk score. High-risk transactions can be automatically declined or flagged for manual review, which adds another important component to your transaction security strategy.
4. Multifactor authentication (MFA)
In multifactor authentication, the cardholder must produce two or more pieces of evidence to verify their identity. Evidence can include SMS-based authentication, email verification codes, and mobile app notifications, which are used in conjunction with traditional card details to determine the customer’s identity. While MFA may add a few seconds to the transaction time, the benefits outweigh the small delay.
5. Biometric verification
Though not yet part of mainstream methods, biometric verification—such as facial recognition or fingerprint scans—can bring another layer of security to card transactions.
Each of these methods can contribute to a comprehensive real-time card validation strategy. When businesses combine multiple methods, they decrease the risk of unauthorized transactions substantially.
Learn more about how Stripe supports businesses with tech-powered card validation.