The expansion of digital commerce has been followed by a surge in payment fraud, placing businesses across the globe on high alert.
According to a recent study by Juniper Research, the global online payment fraud losses are projected to surpass $343 billion in the next five years.
While identity verification measures can mitigate some of the impact of fraud, scammers are employing more sophisticated techniques, like account takeover, which continue to challenge these defenses. As a result, it's evident that we need a deeper understanding of payment fraud, its impact, and effective strategies to counter it - which is what we’re covering in this edition of Payment 101.
What are common types of payment fraud?
Payment fraud presents itself in several ways, each with unique challenges for businesses and customers. Here are the most prevalent forms.
Chargeback fraud
Chargeback fraud, also known as friendly fraud, is when customers dispute legitimate charges, which can lead to a refund from the bank or credit card network. Unfortunately, the retailer often bears the cost, even if the goods or services were delivered and used.
Online credit card fraud
Credit card fraud involves unauthorized individuals using stolen credit card information to make purchases. From physical goods to digital services, this form affects both the businesses and the actual credit card owner.
Account takeover fraud
Account takeover fraud occurs when a fraudster gains control over a legitimate user's account to make unauthorized purchases. The methods used to gain access to an account range from phishing schemes to purchasing credentials from the dark web.
Refund fraud
Refund fraud occurs when fraudsters use stolen card information to make purchases, and then ask the retailer or store for a refund. They often intentionally overpay and request the excess amount to be refunded via an alternative method.
What is the impact of payment fraud?
Payment fraud poses a real threat to online businesses, with repercussions extending far beyond immediate financial loss.
Financial impact
Financial loss is the most direct and visible effect of payment fraud. Businesses not only suffer financial losses from the fraudulent transactions themselves but also often have to bear the cost of chargeback fees, administrative costs related to fraud detection and dispute resolution, and the expense of implementing preventative measures.
Reputational damage
Repeated payment fraud can severely impact a business's reputation. If customers feel their financial information isn't safe, they are likely to take their business elsewhere. Rebuilding trust after a fraud incident can be a long and arduous process during which businesses may lose a significant share of their market.
Operational disruption
Fraud detection and mitigation efforts can put a strain on a company's resources, diverting attention from core business activities. Moreover, having to deal with fraud can lead to increased complexity in transaction processes, which may disrupt normal business operations.
Business continuity risk
High levels of fraudulent transactions can result in high chargeback rates, which may lead the acquiring banks of the payment service providers (PSPs) to suspend the merchant's account.
Understanding the potential impact of payment fraud is the first step towards devising effective countermeasures and strategies for minimizing risk and protecting your business.
How can I detect online payment fraud?
Knowing what to look for is crucial in detecting and preventing payment fraud. Certain trends and patterns can serve as warning flags. Below are a few common indicators.
Rapid, repeated transactions
If there are multiple transactions made in a short time frame, particularly from the same IP address or using different credit cards, this could be a sign of fraudulent activity.
Transactions from high-risk locations
Transactions originating from countries with high rates of fraud may warrant additional scrutiny. Similarly, if the IP location doesn't match the billing or shipping address, it could indicate fraud.
Unusually large orders
A sudden order that is much larger than your typical transaction size may be a fraud attempt, particularly if it involves express shipping or multiple quantities of the same item.
Mismatched information
Discrepancies between the billing and shipping addresses, an IP address in a different location from the customer, or orders that fail the address verification service (AVS) checks can all be indications of potential fraud.
Staying aware of these indicators can help businesses spot potential fraud early, reducing the likelihood of financial loss and minimizing the impact on operations and customer trust. Remember, however, that these are just indicators, and each situation should be evaluated holistically to avoid false positives that could lead to lost legitimate sales.
How can I prevent online payment fraud?
There are a few measures that you can take to fortify your online business against fraud. Here are key security features that you might want to consider implementing into your payment and checkout process.
Dynamic 3DS management
3D Secure (3DS) is an integral part of online transaction security, adding an additional layer of verification to online card transactions. The advanced version of this is dynamic 3DS management, which allows for a flexible, transaction-based application of 3DS. This means that 3DS verification can be applied more rigorously for higher-risk transactions, and less intrusively for lower-risk ones. This balances security and customer experience, offering robust fraud protection without unnecessary hurdles for the customer.
Risk-based dynamic payment pages
Unlike static payment pages, dynamic checkout pages are designed to adjust operations based on the risk level associated with each transaction. These dynamic payment pages take into account a variety of factors like the value of the transaction, past transaction history, and patterns in user behavior. Based on these assessments, certain payment methods might be enabled or disabled. This allows for a more tailored approach to securing each transaction.
Integrated multi-layer fraud prevention tools
Many merchants employ a variety of fraud prevention tools in an effort to enhance security and reduce fraudulent transactions. However, the integration of these systems can sometimes be complex and time-consuming. Consider a solution that allows for a simplified integration of fraud detection and prevention tools, for instance one that allows you to connect to integrations rather than having to integrate them individually. This layered approach can allow you to defend against emerging threats while maintaining a focus on your core operations.
Interested in gaining a deeper understanding of online payment fraud and its prevention? We're here to help. Contact us today to discuss the complexities of payment fraud, common indicators to watch out for, and effective strategies to protect your business and customers.
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