one hand passing off a credit card to another hand

How requiring a zip code helps prevent fraud in credit card transactions

Sunday, January 03, 2021

It’s a common occurrence: you run your card at the gas pump, select your grade of octane, then place the nozzle into your gas tank and wait for the fuel to flow…but it doesn’t. Why? Oh, that’s right, because you have to enter in your zip code!

What may seem like a silly inconvenience to some is actually a strong anti-fraud tool for offline transactions. Requiring a cardholder’s correct billing zip code (or address) to authorize a purchase is known as the Address Verification System (AVS). When a consumer is issued a card, the zip code they place on file with their bank is used to fulfill AVS requests. Fraudsters would need this additional info to perform certain offline purchases and for almost all online purchases.

Because consumers and merchants may be curious why certain transactions require this information, this article will focus on when zip codes are required, how they combat fraud, and how they save both merchants and customers time and money.

Where are zip codes collected for transactions?

Gas station pumps: As touched on earlier, gas stations are one of the most frequented vendors that take advantage of AVS. There are a few reasons why gas stations specifically implement this service.

Gas station pumps have had a history of being tampered with by fraudsters, either through hacking card reader terminals to collect sensitive data or by setting up small cameras to record photos of card information. Because of the common use of these terminals, it’s a good idea to require customers to supply their zip code or debit card PIN to complete transactions on a device separate from the card terminal, as to make that information more difficult for scammers to acquire.

Another reason gas station vendors make use of AVS is because of financial incentives. Card issuers and payment processors will charge merchants less in transaction fees if they instill certain modern security measures. Gas stations are one of the most common and most used businesses, with virtually countless credit card transactions performed at them daily across the country. Because of the high rate of transactions, implementing payment security measures is heavily incentivised for gas station owners in order to have their merchant fees reduced.

Additionally, a gas station with a reputation of easily allowing stolen cards to be used to perform fraudulent charges will have a difficult time building trust with their consumer base. For this reason, it’s in their best interest to stay up-to-date on security measures and anti-fraud tools.

At some in-person POS systems: While it’s a less likely occurrence than gas station pumps, some stores may make use of AVS on their POS systems. They may do so for many of the reasons gas station vendors do, that being, to reduce merchant fees, combat fraudsters, and build trust with their customers.

Online: Because the online marketplace leaves merchants unable to inspect cards in person and watch for suspicious cardholder behavior, they are left to take risks on purchases made using only user submitted card data. To reduce this risk and give merchants a greater fighting chance against fraud, AVS is almost always used for every transaction made online.

Why do merchants ask for zip codes?

The more sensitive information required to authorize a purchase, the more hurdles there are for scammers to commit credit card fraud, both offline and online. However, banks and merchants still want to streamline and make purchases convenient for authentic customers, so the goal is to find a good balance between easy to remember sensitive information for customers that fraudsters could still struggle to collect.

This is where requiring zip codes comes into play. If someone finds your card, and then decides to use it fraudulently, they may believe they have all that they need to do so. But thanks to the AVS, this isn’t the case. To make online purchases, these prospective fraudsters will need to be able to supply the billing address of the cardholder, and to make offline purchases, the billing zip code. Get the information wrong enough times, and banks, merchants, and cardholders can be alerted of suspicious behavior and they can close the account before nefarious purchases are made.

On the customer and merchant side, requiring zip codes to authorize transactions is an easy and seamless additional step, and in comparison to dealing with a disputed transaction or issuing a chargeback, is a minor inconvenience that quickly pays itself off.

Learn more about the AVS here: How Address Verification Services (AVS) make credit card transactions more secure

What is the credit card zip code?

For individuals with multiple mailing addresses, places of residence, or P.O. boxes, they may be confused as to which zip code to enter when POS systems or online forms request it.

To answer this question, cardholders have two options: (1) They can contact their bank (check your card for their customer service number) or (2) they can use the zip code of the mailing address their credit card billing statements are sent to, as that is the zip code the AVS will have on file and require to authorize purchases.

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