Managing Online Payment Fraud Efficiently

Banking has become digital. The payments sector has been especially impacted by digitization. But with the growing use of digital payments, fraudsters have found a new avenue for success. According to a 2022 payment fraud study, merchants spend an average of 10% of eCommerce revenue on fraud management.

Every merchant and business needs to manage payment fraud to mitigate losses. Constant payment fraud even acts as a red flag for the organization. Preventing payment fraud can even help organizations scale at the right pace.

One of the biggest challenges of fighting online payment fraud is that interconnected networks are complicated.

Every single transaction could be a potential attack point for the organization. Regardless of the threat, an organization has to provide a seamless payment experience.

There are a lot of moving parts that customers have to care about, such as interfaces, websites, apps, and back-end services. On top of all of this, additional services such as ID verification, authentication, transaction monitoring, and more.

Banks need to be highly careful about the ever-changing nature of the payments industry, and the new techniques being used by fraudsters. Maintaining a safe and seamless payment environment for customers is becoming increasingly challenging.

Fortunately for banks and financial service providers, preventing payment fraud doesn’t need to be super complicated, expensive, or time-consuming. The best way to move forward is to take a risk-based approach that covers your specific needs and aligns with your organizational goals.

Knowing Your Customers is Crucial

Regulated industries have been struggling with fraudulent transactions. Since they have to fight fraud all the time, they have better fraudulent transaction handling. Businesses in these industries have well-established procedures to identify customers and understand the risks that come along.

KYC procedures are made to design and prevent money laundering and offer intelligence into the nature of the customer. You need to know who the customers are, and if they are real.

KYC happens during the customer onboarding process. You need to ensure that fraudsters can’t even create an account. While these processes tend to weed out fraudsters, they can also hurt genuine customers. Your fraud prevention process should not create unnecessary friction in the customer onboarding process.

You absolutely need to implement seamless, effective ID verification solutions. It is the first-ever step in managing payment fraud.

Understanding Payment Flows

While it is possible that every single transaction is fraudulent. Businesses still need to monitor, flag, and analyze transactions to provide ongoing intelligence and add another level of risk management.

As payments are becoming faster, the increasing speed of payments requires faster payment information processing. Latest innovations such as real-time payments will require solutions that are incredibly sophisticated.

Financial institutions need solutions that can help them understand who their customers are, and whether the information provided to them is accurate or not.

In the EU, legal obligations require strong customer authentication for multiple transactions. Two-factor authentication such as confirming a text, email, or in-app notification, is an authentication technique that businesses can deploy.

A new verification method has come out called 3D Secure 2.0, and it is backed by all the major credit card providers.

Some other dynamic fraud detection tools same as transaction monitoring can also help in risk mitigation. Some online fraud mitigation processes can help in:

  • Spikes in activities
  • Exceeding thresholds
  • Out-of-area or unusual cross-border activities
  • Changing purchase patterns
  • Consumer alerts
  • Credit reports
  • IP address discrepancies
  • Fraudulent patterns

Integrate Security into the Process

Managing payment fraud should be a natural part of the process. It should not feel like an additional task that you have to manage. Security is a crucial part of running a successful digital company and it contains a lot of factors. If there are a lot of weak points in your security, that’s the place where fraudsters will target.

There are some methods and solutions that every business needs to have to prevent fraud:

1. Tokenization

The best way to protect customers from a data breach is to tokenize the information. In the case information is stolen, it won’t mean anything to anyone other than the transaction and the retailer. If the retailer is hacked, the hackers won’t be able to gain anything from all the data.

What’s even better is that the Payment Card Industry promotes this practice and it works with almost all existing POS systems. It replaces the actual 16-digit credit card number with a 16-digit token. It doesn’t add anything to the payment process, and it cuts down on compliance costs.

2. Encrypt the Information

For all major retailers, end-to-end encryption is a great option to prevent fraud. PCI standards don’t allow storing credit card information after a transaction, and converting that data via an algorithm protects the data while still allowing authorized use. But you need to keep one thing in mind: encryption is an expensive process that doesn’t work well for small and mid-sized companies.

4. Address Verification

Currently, all the eCommerce address verification checks are done using the Address Verification System (AVS). AVS can check the address on the credit card file to the data provided by the customer.

AVS checks the zip code and the street number of a billing address and it compares those numbers to the zip code and street number of the credit card owner. Visa, MasterCard, and American Express support AVS in the U.S., Canada, and the UK.

But, the AVS isn’t perfect. Customers could have moved to a new location, or they may be ordering things online for someone else. In these situations, the AVS just falls apart. What works better is the address verification solution offered by DIRO. DIRO address verification can verify customer addresses straight from government sources, thus eliminating the risk of payment fraud.