Online payment fraud has become one of the biggest worries in the digital payments age. It makes merchant fraud prevention a top concern for merchants worldwide. As well as financial loss, credit and debit card fraud also damages a business’s reputation and compliance status.
Let’s define merchant fraud prevention and how it works. Discover how to prevent fraud and the best practices for dealing with suspicious transactions.
What is merchant fraud prevention?
Merchant fraud prevention covers the process and systems used to protect ecommerce transactions. It’s used to detect, stop, and mitigate fraudulent payment activities. The growth in the use of ecommerce platforms worldwide has led to increased fraud attempts that aim to exploit vulnerabilities in card processing.
It is a crucial step in fraud prevention for merchants that helps to protect businesses and their revenue. It also ensures that cardholder data is kept safe, as part of a robust payment infrastructure.
Good fraud prevention solutions are required for any ecommerce business. It is particularly true where the payment gateway processes card-not-present (CNP) transactions.
Common types of merchant fraud
Fraud comes in many forms, which increases the difficulty in trying to prevent fraudsters from obtaining customer information or funds. The main types of fraudulent activity are as follows. Understanding them allows us to implement effective merchant credit card fraud prevention.
Chargeback fraud
Also known as friendly fraud, this is where a customer disputes a transaction that they know was legitimate. The fraudulent activity in this case is that they want to receive a refund while keeping the product or service they bought.
Effective fraud protection is needed, as chargeback fraud has a direct financial impact on merchants. They need to pay the chargeback fee and may incur other expenses when investigating the claim, as well as suffering reputational damage.
To lower the risk of this type of ecommerce fraud, merchants should use multi-factor authentication as a form of chargeback protection. This puts the emphasis on the customer to prove their identity early in the process. The Address Verification Service (AVS) and Card Verification Value (CVV) code are also worthwhile for effective fraud management.
Advanced fraud protection tools, including machine learning-based fraud scoring mechanisms, flag suspicious transactions. Manually checking and detecting potential credit card fraud can help lower fraud rates.
Transaction laundering
It is where criminals use online payment processors on a merchant’s account to pass money from illegal sources. It can lead to major compliance issues and substantial regulatory fines for the ecommerce merchants and any credit card company that fails to spot it in time.
The financial losses and reputational damage can be stopped through intensive transaction monitoring. Any significant change in the size or volume of card transactions can be spotted by machine learning tools as a way to signify fraudulent activity.
Account takeover
The fraudulent activity here is based on the fraudster taking over a merchant account. It allows them to carry out fraud by manipulating transactions. It can lead to financial loss for the ecommerce merchant, who could even get blacklisted as a result.
New fraud trends like account takeover fraud can be identified and stopped through multi-factor authentication using strong methods. The merchant also needs to monitor transactions to spot suspicious transaction data.
Identity fraud
Stolen credentials and financial information are used to create fake merchant profiles and commit fraud using legitimate cardholder data and their payment data.
This type of ecommerce fraud has a major impact on the merchant’s reputation and the trust their good customers have in them. Detecting fraud like this is best done using real-time checks that verify the identity and stop any high-risk signals.
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Why merchant fraud prevention matters
The financial impact of fraudulent transactions can be seen in numerous ways.
Chargebacks cost merchants money, as fraudulent transactions quickly add up.
Lost revenue. Without robust fraud detection measures, online transactions can result in direct financial losses. It can also lead to future revenue losses if customer trust is eroded.
Higher processing fees. Without a solid approach to fraud detection and prevention, an ecommerce business may face higher processing fees in the future.
Apart from the financial need to block fraudulent transactions, failure to do so may lead to compliance issues. PCI DSS and AML regulations require businesses to verify the user’s identity and protect their information from data breaches.
The customer experience is crucial in ecommerce. A loss of trust or damage to the business reputation is extremely damaging. This means that fraud prevention solutions are more necessary than ever.
Early fraud detection is cheaper and more effective than trying to recover funds from unauthorized purchases or other fraudulent activity after the fact.
How merchant fraud prevention works
Ecommerce fraud protection needs to be implemented across multiple stages to be effective.
Data collection
This part is the fraud intelligence stage. It involves gathering transaction data, device details, and behavioral signals to determine whether anything is suspicious.
Risk scoring
Using ecommerce fraud prevention tools, risk levels are based on transaction patterns. It makes the process of spotting payment fraud reliable and consistent.
Machine learning models
These tools are used to identify anomalies and block any suspicious activity. Following the machine learning stage, a manual review is needed to verify flagged transactions.
Continuous monitoring
The continuous monitoring of credit card transactions is a key part of fraud detection and prevention models.
These processes can be carried out effectively by using the following approaches.
3D Secure 2.0 is vital for authentication and for identifying if a stolen card is being used.
Know your customer/business (KYC/KYB) verification ensures that you’ve collected the relevant data for the users of your ecommerce platform.
AI-based fraud detection. With areas like identity theft and other types of merchant fraud getting more sophisticated, AI is proving necessary in stopping payment fraud.
Real-time transaction monitoring. Payment fraud prevention needs to be carried out constantly on every transaction. Doing this intelligently is the only way to stop unauthorized transactions, identity theft, and other fraudulent activity.
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Key tools and strategies for merchant fraud prevention
These fraud protection tools and strategies need to form part of your approach to prevent fraud on an ecommerce platform.
Strong customer authentication using two-factor authentication helps identify stolen credit information and other problems.
Address Verification Service (AVS) for the billing address and CVV code matching for the payment method used.
IP and geolocation tracking to confirm the billing address is accurate.
Behavioral analytics and biometrics are used to spot any unusual credit card behavior as part of fraud protection processes.
Blacklist and whitelist systems are used to indicate the possibly fraudulent customers and those that have been verified.
Chargeback prevention software. The fast-moving nature of first-party fraud and emerging trends means you need to rely on robust fraud prevention software.
A multi-layered approach to security and fraud protection is best. It ensures that you cover all of these bases and can spot any unusual credit card activity at the different stages.
The role of fintech in fraud prevention
Fintech providers use automation, AI, and big data to boost their payment fraud prevention measures. It gives a greater level of fraud detection accuracy and trust in the fraud protection processes.
Reducing false positives while keeping the customer experience smooth.
Why choose Genome for secure payment protection
Genome is a licensed electronic money institution (EMI) that focuses on security, compliance, and fraud prevention for customers.
Fraud protection is carried out effectively using Genome’s built-in protection tools. We offer real-time transaction monitoring and risk analysis to identify unauthorized transactions and other types of payment fraud.
KYC/KYB verification for all users is an effective approach to fraud detection. In addition, the use of 3D Secure 2.0 ensures another layer of payment fraud prevention.
AML and PSD2 compliance is guaranteed, meaning a safer, regulated environment for handling data on your merchant account, or any other account within Genome, while you avoid fraud protection problems.
For businesses with a global audience, our support for multi-currency account usage and SEPA/SWIFT payments removes any possible problems. For merchants, payments can be received into your business account from different countries across Europe.
All done while staying compliant and meeting the latest EU recommendations as well as PCI compliance.
