Combatting Advanced Payment Fraud: Practical Tips for Merchants

While the payment industry is evolving at an increasingly fast pace, one thing remains ever-present - fraudulent activity. What's more, the tactics implemented by dishonest players keep becoming more and more intricate, prompting businesses to search for solutions that could tackle these higher-grade challenges.

But how does a merchant navigate the wide variety of tech solutions available on the market and find the right option for their business? Not to worry - we’ve done all the hard work for you and determined the main principles that a modern fraud prevention and risk management solution must feature to be effective. Read ahead for all the details!

Current State of Fraudulent Activity in the Payment Industry

The rate of online payment fraud is rapidly increasing, with a 285% rise recorded in 2021 alone. This is attributed to dishonest players taking advantage of the growing popularity of eCommerce and weaknesses in businesses' defenses.

What’s more, fraudsters nowadays are using more sophisticated approaches than ever before. For instance, one of the major current threats for businesses is automated attacks, typically conducted via bots. They enable criminals to easily scale their efforts, as attempting 100,000 account takeovers can cost less than $200, resulting in a success rate ranging from 0.2 to 2%.

Additionally, the payment fraud threat isn’t uniform, as criminals use distinct methods to target different types of businesses. For instance, eCommerce stores, airline ticket sellers, money transfer services, and banks are more susceptible to account takeovers and credential stuffing. In contrast, online marketplaces are mostly targeted by fake accounts and false advertising.

Thus, in this new era of advanced fraud, a fixed, uniform approach is no longer sufficient. To combat dishonest activity, businesses need to implement advanced fraud management strategies that adopt a more nuanced approach. Read on to learn how this can be achieved!

3 Key Principles for Effective Payment Fraud Prevention

While there is no one-size-fits-all approach when it comes to preventing payment fraud cases, there are certain focal points that mustn’t be overlooked when a long-term strategy is created, namely:

1. Remember That Data Is King

To effectively combat the rising threat of cyberattacks, merchants require advanced software with machine learning capabilities that can identify emerging fraudulent trends and utilize network-wide intelligence in real-time.

The solution must be able to access a vast array of data points to learn from patterns of real fraud cases across various sectors and countries. By leveraging these insights, it can better identify and halt suspicious activity at the point of transaction.

Without such comprehensive data insights, merchants are at risk of being vulnerable to new and emerging fraud patterns.

2. Leverage the Power of Customization

In addition to defining their overall risk tolerance, merchants need the ability to tailor fraud strategies to specific segments or criteria. For instance, a returning customer who uses the same IP address and purchases an expensive item is likely to be considered safer than a new customer from a flagged IP address buying something of lesser value.

To address these scenarios, merchants require the flexibility to assign different risk classifications to each transaction and develop customized fraud strategies for each category. Besides, business owners need to know how to differentiate between high-risk and low-risk locations, payment methods, and product codes.

Overall, merchants must have the capability to create security rules that match their business specifics by assigning individual fraud thresholds for different segments and exercising more control over the triggered action when a threshold is not met.

For instance, merchants should be able to choose to accept or decline a transaction, send it to 3DS, or perform a manual review. These actions offer additional options to filter out more potential fraud or, on the contrary, reduce the strictness level to allow more transactions to go through.

3. Fuel Continuous Optimization

Another fundamental pillar required to outsmart modern cybercriminals is the constant optimization of fraud prevention and risk management processes in place. Thus, merchants need to have access to advanced analytics and testing capabilities to fine-tune existing strategies and create new ones.

Generally speaking, an effective tool that could help to achieve this goal would be software that offers highly visual representations of current risk strategies that can be modified by adding, adjusting, or removing components.

In addition, the solution must enable a unified view of all transactions that need manual intervention, along with comprehensive contextual information on why each payment was flagged to save time and improve the accuracy of decision-making.

Moreover, merchants must be able to safely experiment with new rules by testing their effectiveness before deploying them live.

Balancing Between Risk Mitigation & Revenue Maximization

This is partially due to the fact that many modern tools implement strict risk strategies that can create friction during the checkout process. However, instead of being overly defensive, efforts in combating fraud should aim to reduce friction for legitimate customers, which would eventually result in higher conversion rates.

All in all, merchants require solutions that work in conjunction with the customer experience. They should be able to monitor how their risk strategies affect key metrics such as conversion rates, acceptance rates, and compliance with scheme chargeback limits.

Additionally, they must have the ability to perform these assessments within a testing environment while also investigating and identifying the root causes of false positives and false negatives. This process has the potential to yield insights that can be used to eliminate unnecessary anti-fraud measures.