The Complete Guide to Payment Authentication

Jun 9, 2023 by Brandon Jones

Protecting your business from payment fraud is crucial, but don't worry — there are steps you can take to ensure a safe and secure financial environment. By staying vigilant, you can avoid potential losses and maintain the integrity of your company's transactions.

Did you know that experts estimate global losses from card fraud to reach nearly $400 billion over the next decade? And according to a recent study, each fraudulent transaction costs U.S. businesses an average of $3.75. Pretty shocking, right? But it's not all bad news. By prioritizing payment authentication, you can significantly reduce these costs and protect your company's financial well-being.

In this article, we’ll explore the difference between payment authentication and payment authorization, learn how payment authentication works, and discover a practical solution to avoid the high costs associated with poor authentication practices.

What is Payment Auth (Payment Authentication)?

In the world of B2B payments, transactions tend to be higher. That’s why it’s even more important to authenticate payments. But what does it mean to authenticate the transaction for products or services?

Payment authentication refers to the process of verifying the identity and legitimacy of a payment transaction. Authentication is a crucial step in ensuring that the person or business initiating the payment is indeed the authorized account holder or cardholder. Authentication also helps to protect merchants from chargebacks, fraud, and other unauthorized activities.

Authentication vs Authorization

While both payment authentication and authorization are important to ensure that a transaction goes through smoothly, the two terms convey different meanings and correspondingly different challenges.

With credit card authentication, the responsibility is on the purchaser to provide adequate proof that they have the right to make the purchase using the method at issue. To do this, the purchaser must offer information to verify that they are the legitimate cardholder and not an impersonator attempting to misappropriate the legitimate card owner’s identity to perpetrate an unauthorized transaction.

Payment authorization, on the other hand, is a necessary step that follows the authentication of payment. When you authorize a payment, you take steps to verify that the payment method being used — such as a credit or debit card — is a vehicle that can relay sufficient funds to cover the transaction. The goal of payment authorization is to ensure that the payer has enough money to complete the transaction and that the payment method isn’t declined by the payer’s bank.

What Does It Mean to Authenticate Your Payment?

Payer authentication requires that your clients present evidence to prove their identity. For instance, they may be asked to provide a username and a password, answer screening questions, or provide a fingerprint or face scan. Sometimes a person can be authenticated through the information provided by the device they are using.

Common categories of authentication are address verification systems, card verification values, challenge-handshake authentication protocols, and 3-D secure (3DS) authentication. Let’s look at each in more detail.

Address Verification System (AVS)

The purpose of using an address verification system is to discourage fraud by requiring that the billing address on the card and the one provided by the client are a match. With AVS validation, the client provides a billing address which is then checked for accuracy against the address on file at the bank or credit card company.

AVS puts the payee in control of whether and when to approve a payment, investigate a transaction — something they may decide to do if the address given has only minor discrepancies when compared to the bank’s information — or cancel a transaction altogether.

While AVS is easy to implement and doesn’t interfere with the purchasing process, a major drawback is the ease with which professional hackers can provide the address associated with a card. Experts in fraudulent AVS (meaning credit card thieves) know all the tricks to locating an address through social media or through an internet search. For this reason, most experts recommend using AVS in conjunction with other independent authentication systems.

Card Verification Value (CVV)

Anyone who uses credit or debit cards is familiar with the CVV numbers on the back of their cards. When a customer attempts to make a purchase without the opportunity to present the physical card — they may when paying for something via a website or over the phone, for example — they’ll be asked to provide the three- or four-digit CVV number. This authentication protocol is designed to ensure that the person providing the card number is, in fact, in possession of the card they’re using.

The advantage of this type of payment authentication is that it prevents someone who fraudulently co-opted another’s credit card number from using the card. Unfortunately, it doesn’t stop a credit card thief or another unauthorized user from using a credit card that is in their actual possession. And CVV authentication doesn’t prevent an unauthorized user from making note of the CVV number off a card — even if they’re not in physical possession of it at the time of the transaction.

Challenge-Handshake Authentication Protocol (CHAP)

The Challenge-Handshake Authentication Protocol is used to thwart bad actors who try to steal a user’s payment information by relying on a device-driven authentication system. CHAP periodically re-authenticates the user device during a given online session, using a shared secret as an access point. This cryptographic exchange is referred to as a “handshake.”

Throughout an electronic exchange, the authorizing party’s device sends challenges to the already connected party. This authentication and reauthentication process ensures that the original user is not being interfered with by a third party who has misappropriated the legitimate user’s credentials.

CHAP works best in conjunction with other authentication methods that are designed to provide actual payment authentication.

3-D Secure (3DS)

3-D Secure authenticates digital transactions through a mechanism that relays payment and contextual information — such as device identification, billing address, transaction history, purchase amount, and location — to banking institutions to verify a customer’s identity. The user verifies their identity through email, text, or phone.

3DS is a risk-based payment authentication method that handles transactions differently based on the level of risk associated with the payment. Using 3DS technology is considered a best practice for authenticating transactions as it uses multiple data points for identity verification.

How Paystand’s Payment Authentication Solutions Protect Your Bottom Line

Maintaining and building your business depends on incorporating a payment authentication process into your accounts receivable protocols that is both dependable and robust. Paystand’s advanced B2B payments platform makes it possible to digitize receivables, automate processing, reduce time-to-cash, eliminate transaction fees, and enable new revenue all in a state-of-the-art secure environment that incorporates the most robust financial authentication protocols.

To learn more about Paystand’s secure payment solutions, contact us today.