How to Prevent and Manage the risk of fraud in online payments by 2023
Risk of fraud with payment is a part of every enterprise. A great payment solution will benefit businesses as it gives customers a a positive, trustworthy experience which encourages them purchase from you in the future. An unprofessional payment system can sink your ship: today there is a lot of fraud. But, a comprehensive payment platform can mitigate those risk, shield your customers, and ensure your company's security. The best part is that the most comprehensive payment platform allows merchants to combat fraud with a minimum of effort or hassle.
What is a payment fraud?
Fraudulent payment occurs when there is a purchase where the person who made it was not the one to authorize the transaction. The most fraudulent transactions are usually performed using stolen credit card details, which is a type of identity theft. Fraud often results in losses to property or finances for either the consumer or merchant or both.
Fraud could manifest itself through a variety of methods such as stolen credit card data or stolen information from a bank account, phishing, triangulation. We see the results of these in dispute over payment (also called chargebacks) that are expensive and cause issues for businesses of all sizes. Fraud tactics are varied and will continue to evolve as our defense mechanisms improve. In this post, we'll cover different types of credit card payment fraud.
The number of attempts to commit fraud with payment is increasing.
In The State of Online Fraud report of Stripe the researchers discovered that fraud volume has increased substantially since the start of Covid 19 pandemic: 64 percent of the global leaders in business said that it has become more difficult for them to combat fraud. 40% of companies saw an increase in attempted card testing attacks compared to previous times.
The losses from online payments are expected to surpass $343 billion between 2023 and 2027 according to Juniper Research. There is no question of the likelihood that your company will be being targeted however, it's a matter of when. Facing inevitable adversity it is best to protect your company with effective fraud prevention strategies.
What's the reason for this rise in fraud? Growth in ecommerce.
Stripe found that in 2021, organizations using their platform processed 60% more payments amount than in the year 2020. This growth offered more opportunities to commit fraud.
Common types of payment fraud
Card testing or carding attacks
In the course of testing cards, a bad actor attempts to make small purchases with stolen credit card details in order to test if the number functions, which is often times with many different card. This allows fraudsters to quickly check whether the stolen information could be used to make larger purchases. The most common scenario is when card info is purchased through malicious individuals following a data breach.
Card testing purchases are often originated from foreign countries that has billing and delivery addresses that do not match the location of the IP address used by the client.
Declining or refunding suspicious transactions can help prevent this kind of fraud. Charges that are fraudulent will be challenged and reversed if they're not returned.
Stolen credit cards
The fraud of a stolen credit card is when a customer makes an actual purchase with stolen credit card details. If this is the case, billing and delivery addresses may be completely different since the fraudster would like the item delivered to them rather than to the card holder.
This kind of fraud could be difficult to detect because there are lots of possible reasons that a buyer might require different addresses, like travel or living away from home. If there are any suspicious situations the purchase might require manually reviewed to see if the transaction is suitable to your company and the typical customers.
What are the risk factors of fraud in the payment industry?
Revenue loss and loss of confidence are the top two concerns for security concerns with payment fraud, but the impact on business from fraudulent activities can have much more severe repercussions: Major fines from the violation of regulations and even getting removed from business.
Lost revenue from payment disputes
Abandoned carts due to the prevention of fraud
Stripe discovered that "the more fraud a business attempts to stop, the more likely they are to block legitimate charges as well -- reducing the rate of conversion for payments." Preventative measures can occasionally hinder the process of customers making a purchase.
If there are too many steps to verify, or when you direct customers to a popup or other site for them to input their credit card details They may be dissatisfied and drop their order.
The merchant is responsible for the case of fraudulent transactions
Merchants are responsible for the transactions they make on their websites as well as in their shops. This includes deciding when they should accept or reject a suspicious transaction.
The charges that result from fraud can be challenged and reversed, and will incur a fee in the process. You can prevent these fees by refusing to refund suspicious transactions. However, it's important to respond to disputes regarding chargebacks for legitimate charges by providing evidence that no fraud was committed.
Five strategies for reducing payment fraud
The five techniques are a set of tools or solutions which can be developed in house or purchased through a third-party. Risk management in-house may be the ideal choice for businesses that have sufficient resources and purchased tools may help simplify the management of transactions for small team members.
Integrate fraud prevention tools
Software designed to set thresholds for fraud will block high-risk transactions that meet your requirements. Tools for fraud thresholds will stop a payment that looks atypical or raises red flags based on data points like IP location or an unusual customer profile.
An in-house solution can take considerable time and resources to develop, but may be the best option for organizations that require a lot of customization as well as those who handle sensitive data. A third-party solution is faster to deploy, but may be charged per transaction.
Understanding the sensitivity and scope of your fraud risk will aid in determining which kind of tool is best for your business.
Hire fraud and risk management teams
A person or a group for transaction review is an established practice in manual fraud prevention. Transactions that are flagged for fraud can be inspected and approved or declined in accordance with the guidelines and rules that are set by your company, or by your payment supplier. Manual approvals for high-risk or high-value transactions may aid in reducing your expenses or losses due to fraud.
The purchases that appear to be fraudulent should be rejected or refunded. Any disputes should be addressed with evidence available or accepted in the event that they are fraud. Many disputes can be won when good evidence is provided to eliminate a charge and keeping the revenue. Some examples of evidence that is strong could be a tracking number and a photo of the delivery, interactions with the customer and proof of use. Possible evidence varies based on the type of business you operate and the nature of your business, however providing evidence of use or receipt is a good basis for dispute resolution.
Develop fraud prevention processes
Fraud prevention and response processes differ for every business. It is helpful to begin with a risk assessment to help you or your staff to know what your typical client looks like, what types of fraud your company could be vulnerable to, as well as what ways fraudsters can work around your current fraud prevention tactics.
Utilize the findings of the risk assessment you have conducted to modify the criteria for determining your thresholds for fraud and procedures for responding to fraud.
Make the switch to an all-in-one solution for payment
For small and medium sized businesses, an all-in-one solution is the ideal choice to save money and your time.
What should you look for in an all-in-one payments solution
Machine learning
The models of Machine Learning are trained for decision-making by being fed massive amounts of relevant existing data on output and input. With given inputs, a model calculates the likelihood of each given output. It then uses this probabilities to decide on its fraud assessment of each transactions.
Risk filters and customizable rules
Custom risk filtering allows companies to establish the thresholds for risk tolerance that identify suspicious transactions if they meet certain criteria. These thresholds can be tuned in accordance with your company's needs. Filters can be set for many different factors like:
- Authorized IP addresses from certain servers or from specific regions
- Blocked IP addresses known for fraudulent activity
- Reliable, frequent transactions coming from the same IP address
- Shipping address verification
- Volume or amount of transaction
Customizable rules give flexibility to diverse business forms. Where a clothing merchant may flag purchases that are too large while a wholesaler for construction could be more concerned with billing and shipping details.