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I understand that Amazon charged my card the $1 to put all that in motion to make sure the card isn't stolen, but how does that help them?
My credit card company isn't going to contact them and advise Amazon that we spoke and everything is cool, so what information does charging my card the $1 first give them that charging the whole amount doesn't?
I just found out this morning that thieves do the exact same thing--seeing if they can get a $1 charge to authorize through some service like Itunes...
My understanding is that gas station pumps are a favorite place of thieves to test stolen cards. This is because they can walk-up with a gas tank in hand and easily hide their face from identification. Not to mention that gas stations, until rather recently, made no attempt to verify billing address, etc. Also, gas stations rarely trigger fraud alerts because, well, who hasn't used their credit card at a gas station to avoid going inside? -- so the charges never seem out of the ordinary.
As for the Amazon $1 charge, I don't have an exact answer to share... However, I get my car insurance through Progressive and have them automatically withdraw the payment from my account. Every time, right before the payment hits, I see a charge for a small amount. I am assuming this is to make sure the card/account is still valid a few days prior to withdrawing the full amount; doing so gives them time to contact me and resolves any problems before the payment is actually due.
When the article is ready to ship, then the hold is converted to a sale.
Hotels and Car companies have been doing this for years.
This is different then pre auth which as stated above allows systems like CyberSource to run AVS and CVV(2)
The reason for the $1.00 authorization is for fraud check. The amount of $1.00 is authorized so that AVS and CVV2 can be checked without placing a large hold on the customer's account. The issuing bank does not check AVS or CVV2, they simply return this information and place a hold on the customers funds. If the transaction does not pass fraud checks, such as AVS (perhaps the customer mistakenly entered an old address), only $1 is held rather than the entire purchase amount.
A successful authorization is a two step process. First, the authorization is submitted to the issuing bank. They approve or decline. If they approve, a hold is placed on the account.
If approved, the billing address is then submitted to AVS. If AVS fails, the entire transaction is declined, but the authorization hold remains.
Putting a small authorization through first ensures that customers won't have a large phantom hold in their account if AVS fails.