All credit cards have at least 2 components for making a transaction: card number and a card security code. Most people know what a card number is; it is the 15-16 digit number on the front of the card (and stored in the magnetic strip on the back of the card). What most people do not know is that when a credit card is swiped there is actually a second piece of data sent with the number and expiration date called a CVV1 or CVC1. This CVV1/CVC1 is stored in the magnetic strip and helps to verify the card was actually swiped (meaning it was physically present).
CVV2 means 'Card Verification Value'; it's an additional 3-4 digit security code that is written somewhere on the card. CVC2 means 'Card Verification Code'; it's the same thing as CVV2, just with a different name.
The CVV2 is crucial in card-not-present transactions. Almost every time a credit card is used by entering the number (instead of swiping it) the CVV2 number must be sent as well for the transaction to be approved. By requiring this this second value you help ensure that you actually have the card and are authorized to make charges with it.
Good question. Credit card numbers are often stored by companies in their internal databases. This is especially true with online sales systems (e-commerce). These databases, unfortunately, get compromised when a company is negligent (by compromised, we mean the credit card numbers are stolen). As a security precaution, the major card brands (Visa, MC, etc) mandate that CVV2 data (and magnetic strip data) can NOT be stored, period. So, if someone does break into a database and get credit card numbers it will be much harder for them to go around buying things since they do not have the CVV2 number.
Note: Some clients have expressed a lack of concern for this because they think it"s either not necessary or just an annoying step. Well, ignoring the security implications, there is one other reason to require CVV2: money. If your merchant service provider does not require CVV2 you can often get a discount on your transaction rates by supplying the CVV2 number during checkout