How to Prevent and Manage the risk of fraud in online payments by 2023
The risk of payment fraud is a part of every enterprise. An effective payment method can be a huge benefit to businesses as it gives customers a a positive, trustworthy experience which encourages them return to your store. If you choose a poor payment option, it could sink your ship: today there is a lot of fraud. However, a robust platform to process payments will help reduce risks, protect your clients, and help ensure your company's security. The best part is that the most comprehensive payment platform allows merchants to manage fraud without a lot of hassle or complexity.
What exactly is fraud in payment?
Fraudulent payment occurs when there is a purchase where the person who made it was not the one to authorize the transaction. In most cases, fraudulent payments are done using stolen credit card details, which is a type that is known as identity theft. The result of fraud is usually financial or property loss by consumers, the seller, or both.
Fraud can come about through a variety of methods including stolen credit card details as well as stolen account details, phishing, triangulation. We see the results of this in disputes with payment providers (also known as chargebacks) that are expensive and could cause problems for businesses of all sizes. Fraud tactics are varied and will continue to evolve as we improve our security mechanisms. In this article, we'll cover different types of credit card payment fraud.
Pay fraud is on the rise.
In The State of Online Fraud report by Stripe, researchers found that the volume of fraud has grown substantially since the start of the Covid 19 pandemic: 64 percent of business executives around the world said that it has become more difficult for them to combat fraud. 40% of businesses reported an increase in attempted card testing attacks compared to previous times.
Payment losses from online transactions are predicted to reach $343 billion worldwide between 2023 and 2027, according to Juniper Research. There is no question of the likelihood that your business is being targeted but when. Facing inevitable adversity, the best option is to safeguard your business by implementing effective fraud prevention strategies.
What's the reason for this rise in fraud? Ecommerce growth.
Stripe observed that, in 2021, businesses who use their platform made 60% more payment volume than in 2020. The growth in transactions created more possibilities to commit fraud.
Common types of payment fraud
Card testing or carding attacks
In the course of testing cards, a bad actor attempts to buy small items using stolen credit card details in order to test if the number is working, usually many times, using various card. It allows criminals to swiftly check whether the stolen information is able to be utilized to make larger purchases. Card testing typically happens when the card information is bought through malicious individuals following a data breach.
Card testing purchases are often originated from foreign countries that has billing and delivery addresses that don't match the customer's IP address location.
Refunding or denying suspicious transactions can help prevent this type of payment fraud. The fraudulent charges will be challenged and reversed if they're not returned.
Stolen credit cards
A stolen card payment fraud happens when consumers make an actual purchase with stolen credit card information. If this is the case, address of delivery and billing could be completely different due to the fact that the fraudster wants the product delivered to them rather than to the card holder.
This kind of fraud could be difficult to identify because there are lots of possible reasons that a buyer may require a different address for example, travel or living in a different location. If there are any suspicious situations, a purchase may need manual review for whether the transaction is suitable to your company and the typical customers.
What are the risks of fraud in the payment industry?
Loss of revenue and customer confidence are the top two concerns for risk of fraud in the payment industry, however the business impact of fraudulent activities can have much more severe penalties: Large fines due to breaking regulations, or being removed from business.
The loss of revenue resulting from payments disputes
Carts abandoned due to fraudulent prevention
Stripe found that "the greater the amount of fraud that a company tries to prevent and prevent, the more likely it is to stop legitimate transactions and also reduce the rate of conversion for payments." Prevention measures may sometimes get in the way when customers make a purchase.
If there are too numerous verification steps or when you direct your customers to an pop-up or a different site where they have to input the details of their credit card They may be dissatisfied and drop their order.
Merchant responsibilities in fraudulent transactions
Merchants are accountable for transactions on their websites and in their shops. They must decide when to approve or deny a suspicious transaction.
The fees that are incurred due to fraud will often be disputed and reversed, and will result in a charge in the process. It is possible to avoid these charges by denying and reimbursing fraudulent transactions. However it is crucial to react to disputes regarding chargebacks in the event of legitimate charges, with proof that there was no fraud was committed.
Five ways to reduce the risk of payments fraud
Five of the methods are either tools or services which can be developed at home or bought by a third-party. Internal risk management could be the best option for large-scale businesses with enough resources as well as purchased tools could help simplify the management of transactions for small team members.
Integrate fraud prevention tools
Software that sets fraud thresholds will hold or prevent high-risk purchases that fit your set requirements. The tools for detecting fraud will block the purchase that is not typical 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 and is an ideal choice for businesses with high customization needs or those that deal with sensitive data. Third-party solutions are quicker to implement, however it may come with a per-transaction fee.
Identifying the scope and sensitivity of your fraud risk can aid in determining which kind of tool is best for your organization.
Team members for hiring fraud and risk management teams
The selection of a team or individual for review of transactions is commonplace for manually preventing fraud. The transactions that have been flagged can be reviewed and approved or declined according to the rules and guidelines set in place by your organization, or by your payments supplier. Manual approvals for higher-risk or more expensive transactions could help reduce your costs as well as losses from fraud.
The purchases that appear to be fraudulent are not to be accepted or returned. Any disputes should be addressed with proof to support them, or accepted if they are fraudulent. There are many disputes that can be settled with evidence that is solid, eliminating a fee and keeping the revenue. Evidence that can be used to prove the case include a tracking ID, screenshot of the delivery, the interaction with the customer and proof of use. Possible evidence varies based on your company's nature but providing proof of receipt or usage can be a solid foundation for dispute protection.
Develop fraud prevention processes
Response and prevention strategies for fraud are different for each company. It's helpful to start with risk assessments to help you or your team understand what your typical customer is like, the types of fraud your business is vulnerable to, as well as how fraudsters might find ways through your fraud protection methods.
Utilize the findings of your risk assessment to revise the criteria for determining your thresholds for fraud and fraud response processes.
Choose a one-stop payment system
Small and medium-sized companies, an all-in-one system can be the best option for both your budget and your time.
What are the things to search for in an integrated payment solution
Machine learning
Models of machine learning are trained to make decisions using huge amounts of pertinent existing data on output and input. With given inputs, a model determines the probability of a given output. It then uses this probability to make decisions in the fraud evaluation of every transaction.
Rules that can be customized and risk-filtered
Customized risk filters enable firms to define limits on risk tolerance, which will alert suspicious transactions whenever they satisfy certain requirements. The thresholds can be adjusted to suit your specific business requirements. Filters are set to meet various factors like:
- Authorized IP addresses from certain server or region
- Blocked IP addresses known for fraud
- Multiple transactions, rapid and frequent using the same IP address.
- Verification of shipping address
- Volume or amount of transaction
The ability to customize rules allows for flexibility diverse business forms. While a retailer of clothing may flag purchases that are too large while a wholesaler for construction could concentrate on billing and shipping data.