Fraud Management—Controlling Security Risk in Online Payments
Fraud can happen anywhere in the online business world. Regardless of whether you run a small e-commerce store or are the owner of a retail chain. Fast-paced technological development and e-commerce market growth are incentives for fraudsters for finding new methods of hacking the market. So, how do you manage fraud?
It’s predicted that the global e-commerce market will grow to 6.54 trillion US dollars by 2022. Online and mobile shopping has already become part of our life and the scale of it is constantly growing.
From a consumer’s perspective, credit cards are one of the safest ways to pay for online purchases, as they enable them to easily dispute any unauthorized charges. At the same time, card-not-present fraud is especially common, as fraudsters don’t even need a physical card to make a purchase. All they need are card details, which can be stolen in several ways.
Card-not-present (CNP) transactions are a huge target for cybercriminals—the European Central Bank estimates that CNP transactions represent more than 60% of the card fraud. And, according to the European Fraud Report—Payments Industry Challenges card not present fraud in Europe represents almost 80% of the total volume of fraudulent card transactions.
In many cases, merchants need to put an enormous amount of effort into verifying whether the actual cardholder made a purchase, and the need for fraud management has never been greater.
Fraud isn’t only related to monetary loss, it can also severely harm your reputation and brand image. But, with the right strategy and smart anti-fraud tools in place, you can minimize the risk of fraudulent activities.
So, what can your business do to prevent fraud?
What Is Payment Fraud?
Payment fraud occurs when online transactions are made illegally. The victim here is usually a consumer—fraudsters steal their sensitive information, credit card data, their identity, etc., and then use it to make purchases.
The number of fraudulent practices is growing with the increased use of online credit cards. However, payment fraud can be characterized in various ways, and the most common ones are fraudulent or unauthorized transactions, lost or stolen merchandise, and false requests for a refund.
Different Types of Online Fraud
The increased popularity of online shopping resulted in a growing number of fraudulent activities. Most of the time, cybercriminals steal sensitive information, but they also penetrate network security systems to find glitches or to spot systems that haven’t been updated for some time.
Below are some of the most common types of payment fraud.
This type of fraud is committed by a cybercriminal who sets up a merchant account that is similar to that of a legitimate business. Then, they place charges on stolen credit cards and vanish as fast as possible before the cardholder realizes what happened.
This kind of theft occurs when fraudsters obtain credit card information which can be used to make a purchase—card number, expiration date, and CVV/CVC.
Identity theft is quite common and it happens when a cybercriminal obtains key details of personally identifiable information that are then used to make a purchase. If a fraudster gathers all of the information needed to make an online purchase, they can bypass fraud detection firewalls.
When a fraudster obtains genuine cardholder details, such as address verification credentials or 3D secure code, such an attempt is called clean fraud, as it’s almost impossible for merchants to recognize.
Typically, card testing fraud happens when fraudsters use stolen cards to make frequent low-value purchases. If your system doesn’t block such card testers, you need to prepare for a number of chargebacks from credit cards’ real owners.
Another technique used by fraudsters is using a stolen card to buy physical items and then intercepting or rerouting the package during delivery.
This method is related to emails or websites that require sensitive information such as a username, password, credit card details, etc. Luckily, most search engines and web tools effectively identify untrusted sources which try to deceive customers and acquire sensitive information. Nonetheless, customers should stay vigilant.
This type of fraud is anything but friendly. Friendly fraud happens when a cardholder files a chargeback instead of attempting to obtain a refund. This can sometimes be the result of a customer’s mistake or confusion. However, a chargeback can also be filed on purpose—in such a case, the customer wants to get their money back for a legitimate purchase.
This type of fraud mainly affects e-commerce businesses. It’s when cybercriminals attack websites and redirect customers to untrusted pages.
Fraud Management Solution—Tips for Merchants
There are some warning signs you can focus on and various security measures you should analyze to minimize the risk of being hacked. Here’s a list of what you can do to prevent and lower the risk of fraud.
Overall, check your business orders closely—monitor them before shipping and react quickly when you notice repeated order attempts made by the same card.
Machine learning works on payments in real-time, using historical and updated data simultaneously, which generates results almost instantaneous.
You can flag potentially risky purchases for manual review and verify the order by contacting a cardholder.
Long and complex passwords usually require more effort and time for cybercriminals to guess.
It’s important to know exactly what you are up against to stay one step ahead of fraudsters.
The payment processor you work with can help you with fraud detection. Just make sure that fraud prevention is a part of their services and that they provide resources to effectively protect your business.
Don’t forget to update your network security systems in order to ensure that all the sensitive information is safe. You can also encrypt transactions and emails with important data for extra security.
Online businesses need to be aware of the extra costs of fraud such as chargeback fees, fraud investigation, merchandise distribution, etc. Not to mention the costs of losing customer loyalty and other non-financial costs that may harm the business in the long run. That’s why it’s no surprise that for 44% of financial professionals online payment fraud is the biggest concern.
Another good means of reducing card fraud losses in Europe was the implementation of EMV and 3D Secure, combined with Strong Customer Authentication.
Benefits of Fraud Management
As you can see, the whole process requires highly effective data mining techniques. If you care about your company’s credibility and your customers’ personal data security, fraud management is a must.
On top of that, there are plenty of other fraud prevention benefits:
Fraud Management Is a Complex Thing
Take note that online fraud touches both consumers and businesses. If you reject a legitimate purchase, you risk account churn, but if you don’t prevent customers from becoming crime victims, you will have to face customer trust and loyalty loss. So, keeping pace with shifting industry norms and fraud trends, will give you a competitive edge.
As we have more choices and greater convenience, we’re shopping online more than ever, so you need to adopt a proactive approach towards fraud management. It’s impossible to block 100% of true fraud, so you should focus on implementing multi-factor authentication that will protect your business on various levels.
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