How is it that some e-commerce stores are able to process credit card transactions without getting the 3 (or 4-) -digit security code from the back of my credit card?
What value does this code add if it's optional in the end?
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As a general premise:
In most of the online transactions in case of dispute the benefit of doubt is given to the customer. IE if the customer refuses to pay and claims that its not his transaction, the card company reverses the charges and does not pay the merchant (or recovers if its already paid).
There are many types of online vendors who use a variety of methods to ensure that they are not at loss. Some of these are:
Given that the laws on consumer liability for unauthorized transactions mean no cost in most cases, the CVV is there to protect the merchant. Typically a merchant will receive a lower cost from their bank to process the transaction with the CVV code versus without.
As far as the Netflix case goes, (or any other recurring billing for that matter) they wouldn't care as much about it because Visa/MC/Amex regulations prohibit storage of the CVV. So if they collect it then it's only used for the first transaction and renewals just use the rest of the card info (name, expiration date, address).
Does the presence of CVV indicate the merchant has better security? Maybe, maybe not. It probably means they care about their costs and want to pay the bank as little as possible to process the transaction.
There are different ways of credit card purchase authorizations. if some choose less secure method it's their problem. Merchants are charged back if a stolen card is used.
Some businesses verify the shipping address with the credit card company, and refuse to ship to an alternate address without additional, offline verification. Of course, this is only useful for physical goods.
@Jeremy Using CVV doesn't decrease the transaction cost. I know this because I have quotes for CC transactions and the cost/transaction doesn't depend on using CVV. That said we don't plan to use CVV because we sell insurance and the likelihood that someone who steals CC will buy insurance is very low.
The truth is that Visa does not require a merchant to enter the cvv number before authorizing a transaction. The only information that is really needed is the credit card number and expiration date.