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: it provides customers with an enjoyable, reliable experience as well as entices them to purchase from you in the future. If you choose a poor payment option, it could cause a lot of damage to your company: today, we're talking about fraud. However, a robust platform to process payments will help reduce risks, protect your clients, and help make sure your business is secure. Best of all, an extensive platform can help merchants deal with fraud, without any amount of effort or hassle.
What exactly is fraud in payment?
Fraudulent payment occurs when there is a transaction where the cardholder did not authorize the payment. Fraudulent payments are often made with stolen credit card information and are a kind of identity theft. Fraud often results in the loss of property or financial assets by consumers, the seller, or both.
Fraud can come about through a variety of methods such as stolen credit card data, stolen account information and phishing. We see the results of these in dispute over payment (also known as chargebacks) that are expensive and can create problems for any business. The methods used to commit fraud are diverse and are likely to continue evolving when our defense systems improve. In this piece we'll look at different forms of fraudulent use of credit cards.
Pay fraud is on the rise.
In The State of Online Fraud report of Stripe the researchers discovered that fraud volume has increased significantly since the onset of the Covid 19 pandemic: 64% of global business leaders stated that it is more difficult for them to fight fraud, and 40% of companies saw an increase in attempted test attacks as compared with previous year.
Online payment losses are projected to exceed $343 billion globally between 2023-2027, as per Juniper Research. It's not about the likelihood that your company will be at risk, however, it's a matter of what happens when. Facing inevitable adversity and threats, it's best to defend your business with effective fraud prevention strategies.
Why is this increased fraud? The growth of e-commerce.
Stripe discovered that by 2021, organizations using their platform processed 60% more payments amount than in the year 2020. This increased volume of transactions opened up more avenues for fraud.
Common types of payment fraud
Card testing or carding attacks
If a card is tested is a crime, the perpetrator attempts to purchase items with stolen credit card numbers in order to test if the number works, often many times with many different card. This allows fraudsters to quickly check whether the stolen information could be used to purchase larger amounts. The most common scenario is whenever card details are purchased by criminals after a breach of data.
The majority of purchases for card testing are made from a foreign country using billing and delivery addresses that are not in line with the customer's IP address location.
Refunding or denying suspicious transactions could help to prevent the fraud that occurs with these types of transactions. Charges that are fraudulent will be challenged and reversed if they're not reimbursed.
Stolen credit cards
The fraud of a stolen credit card happens when consumers make a real purchase using stolen credit card information. In this instance, the delivery and billing addresses could differ completely because the fraudulent purchaser wants their product delivered and not the cardholder.
This kind of fraud could be difficult to detect due to the many reasons why a customer could require multiple addresses for example, travel or living in a different location. In the event of suspicious circumstances the purchase might require manual review for whether the purchase looks right to your company and the typical buyer type.
What are the risk factors of payment fraud?
Loss of revenue and customer trust top the list for payment fraud risks, but the impact on business from fraudulent activity also includes much harsher penalties: Large fines due to violating regulations or even being closed.
Lost revenue from payment disputes
Abandoned carts due to fraud prevention
Stripe found that "the more fraudulent activity a company attempts to stop, the more likely they are to prevent legitimate purchases as well -- reducing the rate of conversion for payments." Preventative measures can sometimes get in the way when customers make a purchase.
If there are many steps to verify, or you send users to a pop-up or other site for them to input the details of their credit card customers may get dissatisfied and drop their order.
Merchant responsibilities in the case of fraudulent transactions
Merchants are responsible for the transactions on their websites and in their shops. This includes deciding when to approve or deny an unreliable transaction.
The fees that are incurred due to fraud will often be disputed or reversed and result in a charge due to the fraud. You can prevent these fees by denying and reimbursing fraudulent transactions. In addition, it's important to respond to chargeback disputes with legitimate charges by proving that there wasn't any fraud occurred.
Five ways to reduce the risk of the risk of fraud in payment
The five strategies are tools or services which can be developed in house or purchased by a third-party. In-house risk management may be the most effective solution for larger-scale companies with the resources to support them, while purchased tools can help simplify the management of transactions for small and busy teams.
Integrate fraud prevention tools
Software that establishes thresholds for fraud can block or stop high risk purchases that fit your set standards. Tools for fraud thresholds will stop any payment that appears unusual or raises red flags based on specifics like the location of an IP or a customer's profile that is unusual.
An in-house solution can take a lot of time and resources to develop however, it could be a good choice for companies who require extensive customization, as well as those who handle sensitive data. An external solution is quicker to set up, but it could be charged per transaction.
Understanding the sensitivity and scope of your fraud risk will assist you in choosing the type of software is appropriate for your organization.
Risk management and hiring fraud teams
Designating a person or team for transaction review is a common practice for manual fraud prevention. The transactions that have been flagged can be reviewed and then approved or denied based on rules and guidelines set in place by your organization or your service company. Manual approvals for higher-risk or high-value transactions may help reduce your costs or losses due to fraud.
The purchases that appear to be fraudulent must be rescinded or reimbursed. Any disputes should be addressed by providing evidence to provide or even accepted when there is fraudulent. Many disputes can be won by providing evidence which eliminates the fee, and keeping the revenue. Evidence that can be used to prove the case include a tracking ID, screenshot of the delivery, interactions with the customer or evidence of use. Possible evidence varies based on the nature of your business, but providing any evidence of receipt or usage can be a solid foundation for dispute protection.
Develop fraud prevention processes
The processes for preventing and responding to fraud are different for each company. It's best to begin by conducting an assessment of risk to help you or your team understand what your typical customer looks like, what types of frauds your company is susceptible to, and the ways that fraudsters could find ways around your current fraud prevention methods.
Make use of the results from your risk assessment to update the criteria for determining your thresholds for fraud and fraud response processes.
Adopt an all-in-one payment solution
For small and medium sized companies, an all-in-one system could be the most efficient choice to save money and your working hours.
What to look for in an integrated payment system
Machine learning
Models of machine learning are educated to make decisions by feeding huge amounts of pertinent existing data on output and input. Given inputs, the model calculates the likelihood of a given output. The model then utilizes this probabilities to decide on its fraud assessment of each transaction.
Rules that can be customized and risk-filtered
Custom risk filters allow firms to define limits on risk tolerance, which will flag suspicious transactions when they satisfy certain requirements. These thresholds can be tuned to suit your specific business requirements. Filters can be set for various factors such as:
- The IP addresses are authorized by certain servers or regions
- Blocked IP addresses known for fraudulent activity
- Reliable, frequent transactions coming at the same IP address.
- Shipping address verification
- Transaction amount or volume
The ability to customize rules allows for flexibility various business models. If a clothes retailer might flag excessively large purchases, a construction wholesaler might concentrate on billing and shipping data.