Combatting Payments Fraud: Strategies for Effective Prevention and Detection

Fraud poses a significant threat to the payments industry, resulting in substantial financial losses for both businesses and individuals. As per Statista, In 2022 alone, global e-commerce losses due to payments fraud were estimated at $41 billion U.S. dollars. Further, according to Juniper Research, the global cumulative merchant losses from online fraud is expected to exceed $363 billion U.S. dollars. The growth is fueled by an increase in e-commerce transactions. Cybercriminals exploit online payment fraud, engaging in deceptive or unlawful transactions through various fraudulent tactics like phishing, business email compromise, or account hijacking.

Online payments, particularly card-not-present transactions in e-commerce, are vulnerable to fraud. Unlike card-present payments, where physical cards are used, card details alone are sufficient for card-not-present transactions. This makes it easier for fraudsters to exploit, as verifying the buyer's identity becomes challenging for merchants.

Effective fraud prevention requires a shift in strategic thinking. Balancing fraud control and customer experience is crucial, as stricter controls can impact the customer journey. To combat fraud effectively, companies must develop a comprehensive strategy aligned with customer experience, identity controls, cost optimization, and business value. This strategy should be integrated with enterprise priorities and performance metrics, ensuring a holistic approach across the entire ecosystem.

Build a strong reputation for their robust fraud capabilities so that potential wrongdoers are dissuaded from attempting fraudulent activities in the first place.

Build/integrate with a monitoring system that can proactively monitor emerging threats and evaluate control effectiveness. This enables them to enhance controls against fraud while minimizing unnecessary friction for legitimate customers.

With growing significance, strong customer onboarding and authentication necessitate a fraud technology stack that enables agile, iterative testing of various fraud checks, including test control. Financial institutions or banks can combine various payment accounts validations such as account verification coupled with address verification (AVS), card verification value validation (CVV2), and account name inquiry before authorizing any payment. Starting from October 14, 2023, Visa mandates that U.S. issuers support ANI requests to effectively tackle account takeover fraud and authorized payment scams.

Organizations employ machine learning algorithms and leverage abundant data to significantly enhance the precision of fraud detection. One of the typical approaches is to use risk score and risk rule.  Their objective is to minimize false positives (noise) and the potential of overlooking fraudulent transactions (false negatives).

Dispute handling is the last step of the complete ecosystem. Friendly fraud, the prevalent form of e-commerce fraud, involves customers intentionally disputing purchases made with their cards for refunds. As per Statista, around 40% of global online merchants encountered such attacks in 2021. Top-tier institutions employ a fully automated, end-to-end approach for fraud claims, utilizing decision engines with calibrated red and white flags. 

Fighting fraud must be a top priority for CEOs across all industries. Advanced attacks can severely impact even large organizations and undermine customer trust. As smaller startups and fintech firms grow, they too become susceptible targets. Organizations must transition from reactive and isolated fraud mitigation to a proactive, customer-centric, integrated, and adaptive approach. This entails leveraging AI/ML, actionable analytics, and technology to enhance customer experience and implement advanced authentication.