Forecasting Fraud in the Ever-Changing Payments Industry
2019 has been the most costly year in the history of online fraud. 2020 is projected to be even worse. Fraud is on the rise, and with it, chargebacks.
The future of online payments is full of possibilities for consumers and merchants alike, but those who rush in to the latest and greatest payment innovations without shoring up their anti-fraud defenses may quickly find themselves with an unmanageable chargeback problem on their hands.
All chargebacks are best avoided, but some chargebacks are worse than others. It can be deeply disappointing when somebody you thought was a good customer turns around and hits you with a friendly fraud chargeback, but at least with proper documentation you can fight and win against those chargebacks. Merchant error chargebacks may be unwinnable, but at least with the right analytic approach you can learn valuable insights from them.
The worst chargebacks are true fraud chargebacks—they’re precisely the sort of thing chargebacks were invented for, so you can’t expect to fight them and win.
Most of the time, they don’t present much in the way of learning opportunities, either, as fraud can originate offsite in ways that are completely beyond a merchant’s control. What can a merchant do when a fraudster takes a full set of payment credentials posted to the dark web and uses it to make purchases?
The answer isn’t “nothing,” but your options are quite constrained at that point, and you certainly can’t expect to fight and recover the chargeback. The only effective method of fighting true fraud chargebacks is prevention.
The Future of Payments—and Fraud
Visa recently commissioned a report from Forrester Consulting about the recent changes to the card payments industry. Titled “Understanding the Evolving Payments Landscape,” the report observes that digital and mobile payments are increasing all over the globe, and will continue to do so in the years ahead.
The downside of this digital payments revolution is in the opportunities it presents for fraudsters.
Any time a new technology gains widespread adoption among consumers, fraudsters immediately get to work finding ways to exploit, abuse, and twist it to serve their criminal ends.
Of the industry leaders and experts surveyed by Forrester, 61% believe that new payment technologies increase their exposure to fraud. Mobile payment apps and peer-to-peer payment platforms were singled out as new technologies of particular concern.
Don’t look to the cybersecurity sector for comfort. Some of their studies suggest that card-not-present fraud will grow by as much as 14% over the next four years, with losses topping $12 billion by 2020.
What Are Merchants Supposed to Do?
There isn’t much middle ground for merchants to take out between embracing new technologies and all the potential for fraud that comes with them, and sticking to the older, more secure, increasingly obsolete methods of payment processing. Merchants who choose the latter path will assuredly lose out on sales and new customers.
The only choice for merchants who want to grow and thrive is to follow the payments industry into the future, and do everything they reasonably can to protect themselves—and their customers—from fraud, identity theft, and other forms of cybercrime.
The Characteristics of Highly Effective Fraud Prevention Tools
Effective fraud prevention can feel like engaging in a technological arms race with cybercriminals—because that’s basically what it is.
Fraudsters are constantly searching for (and finding) vulnerabilities to exploit whenever a new app or platform that handles payment data hits the market.
Many fraudsters are sophisticated coders who can quickly create tools and bots that automate the process of locating and utilizing security flaws, sometimes on a massive scale.
Keeping the software you use patched and up-to-date (and making sure that your third-party providers do so as well) is one facet of an overall anti-fraud strategy, but it isn’t sufficient.
When fraudsters come to you with stolen credit card numbers that they obtained from breaches elsewhere, it hardly matters whether your own systems are secure.
To stop fraud at this point, you need anti-fraud tools that can detect and block fraudulent purchases in real time. The best anti-fraud tools use some combination of the following methods:
- AVS/CVV verification. One of the simplest ways to block stolen cards from being used is to require software matching of the CVV number and address.
- 3-D Secure. Authenticating the buyer’s identity through the card network can add a small speed bump to your checkout process, but it works.
- Device fingerprinting. By reading the unique indicators of a buyer’s device and browser, known fraudsters can be identified and indicators of suspicious activity can be more easily discerned.
- Velocity checking. Fraudsters tend to use stolen cards as often and as frequently as they can before they’re shut down. Tools that have visibility into recent card usage can spot this telltale sign of fraud.
- When the credit card billing address is hundreds of miles away from the location of the buyer’s IP address—or when a buyer is using a proxy server to conceal their location—that may indicate fraud.
- Fraud scoring. The key technology underpinning all of the above is a fraud identification algorithm, bolstered by machine learning, that “scores” the various red flags that may be picked up to determine whether an incoming order is fraudulent or not.
While no merchant can ever realistically expect to be 100% safe from online fraud, the right tools in place can and do realize significant improvements. Our analytics have shown that in certain circumstances, anti-fraud tools can reduce a merchant’s likelihood of being victimized by card-not-present fraud by as much as 90%.
When you take into account both the direct and the indirect cost of chargebacks, it becomes clear that fraud prevention tools are a necessary investment, especially in a payments landscape where new mobile and peer-to-peer platforms are on the rise and fraud is expected to expand along with them. With a policy and plan for fighting illegitimate chargebacks, the right analytics to prevent avoidable merchant error chargebacks, and a reliable arsenal of anti-fraud tools, merchants have a complete three-pronged approach for stopping chargebacks of all varieties.