How to Prevent and Manage Online Payment Fraud in 2023
Risk of fraud with payment is a part of every company. The right payment system will benefit businesses: it provides customers with an enjoyable, reliable experience, and encourages them to return to your store. A terrible payment solution can ruin your business: right now there is a lot of fraud. But, a comprehensive platform for payments can help you reduce those risks, protect your customers, and keep your business secure. The best part is that a comprehensive platform helps merchants manage fraud without a lot of effort or hassle.
What exactly is fraud in payment?
Fraudulent payment occurs when there is a payment where the cardholder didn't authorize the transaction. In most cases, fraudulent payments are made with stolen credit card information that is a form that is known as identity theft. Fraud often results in losses to property or finances for consumers, the seller, or both.
Fraud can manifest through a variety of methods including stolen credit card details, stolen account information, phishing, triangulation. We can see the effects of these in dispute over payment (also called chargebacks) that are expensive and cause issues for any business. The methods used to commit fraud are diverse and continue to change as our defense mechanisms 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 from Stripe Researchers found that the volume of fraud has grown dramatically since the beginning of the Covid 19 pandemic: 64 percent of the global leaders in business stated that it is more difficult for them to stop fraud. 40% of companies saw an increase in attempted tests compared to prior times.
Payment losses from online transactions are predicted to surpass $343 billion between 2023-2027, in accordance with Juniper Research. It's not a matter of the likelihood that your company will be targeted, but the time it will be. Facing inevitable adversity and threats, it's best to protect your company with effective fraud prevention strategies.
Why is this increased fraud? The growth of e-commerce.
Stripe observed that, in 2021, organizations that use their platform handled 60% more in payment quantity than they did in 2020. This increased volume of transactions opened up more avenues to commit fraudulent transactions.
Common types of payment fraud
Card testing or carding attacks
In the course of testing cards an intruder tries to buy small items using stolen credit card details to determine if the number is working, usually many times with many different cards. The fraudsters can quickly verify whether the stolen data is able to be utilized for larger transactions. Card testing typically happens when the card information is bought by malicious actors following a data breach.
Card testing purchases are often purchased from an overseas country with delivery and billing addresses that do not match the customer's IP address location.
Declining or refunding suspicious transactions can help prevent this kind of fraud. Fraudulent charges can be disputed and reversed if they're not reimbursed.
Stolen credit cards
A stolen card payment fraud occurs when customers make an actual purchase with stolen credit card details. If this is the case, address of delivery and billing could differ completely because the fraudulent purchaser wants the product delivered to them, not to the cardholder.
This kind of fraud could be difficult to detect since there are many reasons why a customer might require different addresses, like travel or living away from home. For suspicious cases the purchase might require manual review for whether it is appropriate to your company and the typical customer type.
What are the dangers of payment fraud?
Loss of revenue and customer confidence are the top two concerns for payment fraud risks, but the impact on business from fraudulent activities can have much more severe penalties: Large fines due to violating regulations or even being shut down.
Lost revenue from payment disputes
Abandoned carts due to fraudulent prevention
Stripe discovered that "the more fraud a business attempts to stop it is, the more likely it is to block legitimate charges and also reduce the conversion rate of their payments." The preventative measures could sometimes get in the way of customers making a purchase.
If you have too many verification steps, or you send users to a pop-up or a different site where they have to input their credit card details They may be annoyed and stop buying.
Merchants are responsible in the event of fraud
Merchants are accountable for transactions that occur on their websites and in their stores. This includes deciding when they should accept or reject an unreliable transaction.
Charges resulting from fraud are often contested and reversed, and will incur a fee in the process. It is possible to avoid these charges by denying and reimbursing the suspicious transactions. In addition you must respond to chargesback complaints for legitimate charges with proof that there was no fraud took place.
Five methods to prevent payments fraud
Each of these five methods are either tools or services that can be built at home or bought by a third-party. Internal risk management could be the most effective choice for businesses that have the resources to support them, while purchased tools can make transaction management easier for smaller, busy teams.
Integrate fraud prevention tools
Software designed to set thresholds for fraud will block high-risk transactions that meet your requirements. The tools for detecting fraud will block a payment that looks atypical or alerts you to red flags due to specifics like the location of an IP or an unusual customer profile.
A solution developed in-house can require long and effort to design, but may be the best option for organizations that require a lot of customization as well as those who handle sensitive data. Third-party solutions are quicker to set up, but it could be charged per transaction.
Identifying the scope and sensitivity of your fraud risk can aid in determining which kind of software is appropriate for your company.
Hire fraud and risk management teams
The selection of a team or individual for review of transactions is a common practice for manual fraud prevention. Flagged transactions can be reviewed and subsequently approved or rejected according to the rules and guidelines set in place by your organization or service company. Manual approvals for higher-risk or more expensive transactions could aid in reducing your expenses as well as losses from fraudulent transactions.
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're fraudulent. Many disputes can be won with evidence that is solid, eliminating a fee and retaining the money. Examples of strong evidence are a tracking ID, screenshot of the delivery, customer service interactions and proof of use. Possible evidence varies based on the nature of your business but providing proof of receipt or use is a good foundation for dispute protection.
Develop fraud prevention processes
Response and prevention strategies for fraud will look different for every firm. It's best to begin by conducting an assessment of risk to help you and your staff determine what your average customer looks like, what types of fraud your company could be at risk for, and what ways fraudsters can work to circumvent your existing fraud prevention methods.
Make use of the results from your risk assessment to update your fraud threshold criteria and the fraud response procedures.
Make the switch to an all-in-one solution for payment
For small and medium sized firms, an all-in one solution can be the best option for your money as well as your time.
What should you look for in a complete payment solution
Machine learning
Models of machine learning are educated to make decisions by feeding huge amounts of pertinent existing data on output and input. With given inputs, a model calculates the likelihood of each given output. It uses that probability to make decisions in its fraud assessment of each operation.
Customized risk filters and rules
Custom risk filtering allows businesses to set the thresholds for risk tolerance that alert suspicious transactions whenever they satisfy certain requirements. These thresholds can be tuned to suit your specific business requirements. Filters can be configured for many different factors such as:
- The IP addresses are authorized by certain server or region
- Blocked IP addresses are known to be associated with criminal activity
- Reliable, frequent transactions coming using the same IP address
- Shipping address verification
- The amount or the volume of transactions
Customizable rules give flexibility to different business types. Where a clothing merchant may flag purchases that are too large, a construction wholesaler might concentrate on billing and shipping details.