7 Ways to Stop Online Payment Fraud and Chargebacks

Posted by Modo on May 20, 2019 1:06:00 PM



Learn how to identify and stop fraudulent transactions for your eCommerce store. Includes seven practical approaches to help you maximize genuine transactions and prevent chargebacks for online merchants.

How to Prevent Payment Fraud and Chargebacks for Your eCommerce Store

Payment fraud is a huge issue for online merchants. In the race between the growth of eCommerce sales and the growth of eCommerce fraud—the criminals are pulling into the lead.

If you want to succeed and thrive in the world of online sales, fraud prevention should be a focal point of your sales and payment strategy.

The question is, just where do you start? With so many areas to think about, how do you find the right payment solution to help keep fraud to a minimum and reduce the sting of chargebacks?

Fear not. We’ll be your security guards as you navigate the minefield of payment fraud.

The Size of the Online Payment Fraud Problem

A quick look at the statistics shows just how big this problem is getting:

  • According to Experian, online shopping fraud attacks rose by 30 percent in 2017 compared to 2016.That’s nearly twice the growth rate of eCommerce sales, which increased by 16 percent over the same period.
  • China and Venezuela were the sources of the most overseas eCommerce attacks.
  • 92 percent of fraudulent online transactions in 2017 were carried out using a credit card.
  • Invespro reports that online retailers suffered estimated revenue losses of $6.7 billion in 2016 due to chargebacks. Since then, chargebacks are rising by around 20 percent a year.

It might seem like there’s little you can do to fight the tide of fraud, but nothing could be further from the truth. Some planning and forethought, combined with the right approach and fraud prevention technology, can drastically reduce your fraud exposure and make you a much less attractive target.

7 Fraud Prevention Tips to Help Protect Your Online Store

You know you need to take online fraud seriously. Check.

You know you need to put some time and effort into reducing your risk for fraud. Check.

You need some tips for how to maximize fraud prevention and protection. Check.

1. Make Fraud Detection Software Part of Your Payment Stack

Online fraud is an arms race between the criminals and the organizations that are trying to stop them. Banks, card networks, payment providers, and startups are all working hard to identify and prevent fraud, which means there are plenty of companies out there with technology solutions.

These businesses move fast, too. The advent of artificial intelligence, machine learning, and smart algorithms means they’re pulling on hundreds of data points to establish if a transaction is likely to be fraudulent or not. Typically, fraud detection software will analyze dozens of areas including:

  • The pattern of purchases of a specific buyer.
  • The pattern of purchases of a specific card or payment type.
  • The value of an individual transaction.
  • The value and quantity of numerous transactions over time.
  • Previous fraud or chargebacks.
  • Aspects of your online store.
  • Aspects of the customer including location, demographics, and other information.
  • The details of the transaction, including billing and shipping addresses, type of product, and more.
  • Risk factors by industry, niche, location, and more.

Fraud prevention algorithms are excellent at “pattern matching” — seeing if particular behavior matches a baseline for fraud. Fraud detection software will establish whether a specific transaction is likely to be fraudulent and can combine that with various other parts of your payments stack and organizational partners to automatically accept or reject a specific transaction.

You can build fraud detection software into your payments stack for more effective fraud prevention.

2. Use Address Verification System Codes to Confirm Billing Addresses

An AVS code allows your payment software to match the billing address entered by a customer to the address that the credit card issuer has on file. If the addresses don’t match, you can reject the transaction or forward it on for additional verification.

3. Use Card Verification Codes to Reduce False Credit Card Acceptance

All debit and credit cards have a three or four digit number, normally printed on the signature strip on the back of the card.

This is a card verification code (variously known as a CVC, CVV, CVV2, etc.) is used alongside other details to prove the card is in the physical possession of the person making the purchase. Because it’s hard to fake or spoof these card verification codes, it’s a really useful way to prevent fraud.

4. Be Extra Vigilant if Credit Card Billing and Product Shipping Addresses are Different

Almost all fraudulent transactions will have different billing and shipping addresses, so this is an important comparison for establishing risk. It’s also important to note that many legitimate transactions have different addresses too, so this should be just one factor in accepting or rejecting a payment.

If the shipping address is to a freight forwarder or shipping company, that’s a strong indication the transaction is not legit!

5. Compare the IP Address of the Transaction to the Billing and Shipping Addresses

An Internet Protocol (IP) address is a unique way of identifying a specific device on a network, and they’re often tied to specific locations. A person using a browser in the same location as a shipping or billing address can be a good indication the transaction is a genuine one. If a purchaser uses a “Proxy Server” or “Virtual Private Network” to hide their real IP address, you’ll want to examine the transaction in detail.

6. Be Aware that Super-Sensitive Fraud Prevention Can Create Too Many False Positives

Every online merchant wants to prevent fraud, but it can be easy to go too far. If you crank every fraud prevention setting up to the maximum, you can stop genuine, legitimate customers from making purchases. This is known as a “false decline” or “false positive,” where a valid transaction is falsely identified as fraudulent.

Stay on top of this by carefully monitoring your accepted and rejected transactions, especially if a legitimate customer has to try several payment methods before one is accepted.

7. Chargeback Prevention and Monitoring

Chargebacks happen when a fraudulent transaction goes through successfully, and a legitimate customer who had their card details stolen registers the charge as false with their bank or card network. This is one of the most powerful ways to understand and train your fraud detection technology, because these are the issues it did not identify and stop. Be sure to gather details of chargebacks and use them to inform security settings and your fraud prevention efforts.

These seven fraud prevention tips will go a long way to rejecting fraudulent transactions and reducing your chargebacks. As with any new technology or approach, introduce them in a planned and methodical way, track the results, and tweak things further until you get the fraud prevention profile you need.

Topics: Fraud prevention tips, Chargeback prevention for merchants, Payment fraud, Fraud prevention