Payment Fraud Prevention 101: A Complete Guide


    In this era of online wonders, where digital shopping reigns supreme, eCommerce business owners need to be savvy in guarding their virtual storefronts from the lurking dangers of fraud. Get ready to dive into the world of payment fraud prevention, as we walk through this ultimate playbook against financial mishaps and reputation pitfalls.

    Payment Fraud and How to Stop It

    Payment fraud is everywhere, whether in card not present transactions or in person. Merchants need to know exactly what to look for and what tools are available to help them fight back. The good news is that there are ways to prevent payment fraud from destroying your business.

    In this article, you'll learn:

    • What fraud prevention and fraud detection is (and isn't).
    • How to prevent fraudulent transactions.
    • The benefits of real-time fraud protection.
    • The negative impacts of false declines and chargebacks.
    • How machine learning can enhance fraud protection.
    • How you can put together a strategy that works.

    By comprehending the ins and outs of your fraud prevention program, you'll be equipped with the tools to keep your business safe and sound. After reading this blog post, you'll learn exactly how to detect and stop fraudsters with a comprehensive strategy.

    First, let's explore the definitions of fraud prevention and fraud detection so the stage is set to answer the more important question: how does fraud protection work?

    What Is Payment Fraud Prevention?

    Payment fraud prevention is the collection of activity that you employ to protect your business and your customers from fraudsters. This could be an in-house strategy that includes deploying fraud rules and performing manual reviews, or it could be an outsourced strategy to a third-party fraud prevention company that enables fraud-free commerce to happen on your website in real time.

    Whether your business has an internal team or a third-party fraud prevention team can mean the difference between an optimal transaction approval rate or an inflated false decline rate.

    To be clear, that's not an indictment of your internal fraud-fighting team members! The reality is that modern detection and prevention of fraud is a very difficult task to accomplish. Listen to our very own executive, Hrishi Talwar, talk about this exact topic on the Modern CTO podcast.

    Why? Because fraudsters are using more sophisticated tactics, and they're doing it full time. As a result, fraud prevention departments need to use sophisticated fraud mitigation strategies, such as machine learning, graph analysis, and more. The vast majority of businesses just don't have the resources to dedicate to the payment fraud problem.

    And by "resources," we're talking about employees, a technology stack, and continuing education to keep the fraud team on the cutting edge of solution strategies.

    At the end of the day, you're the captain (or the captain's advisor) of your eCommerce ship, and a solid financial fraud prevention program is your trusty compass. It guides you through the digital waves and helps you navigate the treacherous waters of online transactions.

    What Is Payment Fraud Detection?

    Payment fraud detection is the process(es) dedicated to uncovering and exposing payment fraud attempts, account takeovers, or any other fraudulent activity. This could be the process of manually reviewing transactions or it could be an advanced, real-time graph analysis looking at transactional and cardholder data.

    Whatever the detection method, the end goal is to eliminate the risk of payment fraud for your business and for your customers. Fraudsters use several different methods to obtain cardholder information such as credit card and debit card numbers, personal identifying information (PPI), and important financial information.

    So, it becomes important for businesses who sell online to adopt the very best payment fraud detection strategy. Now, you might wonder, "What is the very best strategy to adopt?" Your business is not a one-size-fits-all venture, and your fraud protection strategy shouldn't be either.

    For some businesses, a risk scoring solution works well. For others, identity verification is the tool of choice. However, for the overwhelming majority of businesses who are serious about mitigating the risk of fraud, an omnichannel approach is the very best strategy to adopt. We'll explore this comprehensive approach in detail throughout the rest of this article.

    Payment Fraud: Detection + Prevention = Protection

    Fraud detection and prevention strategies are necessary in the battle against card fraud. But, as standalone methods, they'll miss the mark for most online sellers. Think of it this way:

    1. If you can detect fraud, that doesn't necessarily mean you're equipped to prevent fraud.
    2. If you can prevent fraud, that doesn't necessarily mean you're equipped to detect fraud.
    3. If you can detect fraud and prevent fraud, you're equipped to protect your business against payment fraud.

    Let's consider a hypothetical example. Imagine a website that sells shoes, and let's assume that the business uses only an in-house, rules-based strategy to prevent credit card fraud. Pretend that this imaginary business has implemented a rule that automatically declines transactions from a cardholder outside of a city where they normally transact.

    An online shopper on vacation visits the business's website, adds a few pairs of shoes to the virtual cart, and goes to check out on the payment page. Even though this cardholder has alerted their bank, the card issuer, that they'll be out of town on vacation, the merchant's fraud rule declines the transaction. As a result, the business:

    • Missed a sale.
    • Declined a good customer.
    • Created friction during the checkout process.
    • Earned a bad review from the would-be customer.
    • Suffered reputational damage online.

    You've just witnessed a false decline in action. What are false declines? False declines are good transactions that are mistakenly declined in an effort to stop fraudulent transactions. Unfortunately, it happens far too often in every market across the globe.

    Even though this scenario was only an example, it happens everyday in the real world. Businesses who have an online presence create a cascade of negative events that can all be traced back to an underwhelming fraud protection strategy. They think they're preventing fraud, but in reality they're preventing revenue.

    Now that we've discussed the elements of a comprehensive fraud protection program, it's time to delve into the nuts and bolts of some specific fraud prevention methods. These are your secret weapons against potential fraudsters. From robust authentication protocols to cutting-edge technology, we're arming you with the knowledge to safeguard your eCommerce haven.

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    The Power of Real-Time Protection

    In the age of digital business, staying vigilant against suspicious activity is crucial. Just as you wouldn't leave your physical store unattended, you should proactively monitor your digital store at all times. Real-time protection is your superhero sidekick, alerting you to potential threats before they can cause harm.

    Artificial Intelligence (AI) and Machine Learning (ML): Your Dynamic Duo

    Have you ever dreamt of having AI and ML as your business partners? Well, in the world of fraud prevention, this dream is possible with the right partner. These cutting-edge technologies analyze patterns, detect anomalies, and provide insights that keep fraudsters at bay. Consider them your digital superheroes, working behind the scenes to protect your eCommerce kingdom.

    Even the best machine learning models need to be trained on real information to make them effective at fighting payment fraud. That's precisely where graph databases and tabular data comes in. We've mentioned it briefly in this article already, but it's worth calling out again: most business owners focus on their products and/or showcasing those products for potential customers. What business owners don't have the time or resources to do is compile billions of data points, develop a machine-learning model, train the model, and implement the model as a fraud prevention system.

    Graph Analysis: The Sherlock Holmes of Fraud Prevention

    Just like Sherlock Holmes unravels mysteries, graph analysis deciphers complex relationships in your eCommerce data. It uncovers hidden connections and patterns that might otherwise go unnoticed. By harnessing this powerful tool, you're not only preventing fraud but also gaining a deeper understanding of your business landscape.

    We wrote a blog post all about graph analysis in fraud prevention. Be sure to check it out and bookmark it as a resource for yourself or your team in the fight against fraud!

    Did you know? Vesta is the only fraud-fighting company with more than 25 years of experience. So, when we say our decision science team analyzes billions of data points to uncover fraud rings--you can bank on it. In fact, we'll show you how it works. Get in touch with us today!

    Fighting Back Against Chargeback Fraud, Identity Theft, and Other Fraud Types

    As an eCommerce merchant, you'll undoubtedly come across the threats of chargeback fraud and identity theft. What is chargeback fraud? Chargeback fraud occurs when a customer fraudulently disputes a transaction, while identity theft involves unauthorized access to personal information. Fear not – with a proactive strategy that leans on the right measures in place, you can minimize these risks.

    Be sure to get your free copy of our eBook, The eCommerce Guide to Chargeback Management.

    We already know that fraud rules alone aren't an effective strategy. But, what if you could use fraud rules paired with machine learning to make your rules smarter? That's what Vesta's award-winning decision science platform is all about in the fraud-fighting space!

    Merchants have a few options when it comes to fighting back against payment fraud. The list below is not comprehensive, but these are the most common strategies. If you're still not sure what might work best for you, we've got an infographic for you.

    • In-house - This strategy is when merchants and online stores/eCommerce websites handle payment fraud themselves. They might have an internal manual review process or use fraud rules. As we've seen, fraud rules that aren't driven by lots of really good data usually decline more good transactions than necessary. And internal manual review processes can add friction to the customer experience.
    • Third-party - This strategy is when online businesses partner with a fraud prevention company to handle the fraud fighting. If you decide to go with this option, you should know that not all fraud prevention companies are built the same! We would advise you to find a partner that uses identity verification, machine learning, fraud rules, and chargeback indemnification. Most vendors don't check all of those boxes like Vesta does, so shop carefully! 
    • Payment processing solution - This strategy is when eCommerce businesses use the built-in solution that comes with their payment processor or payment service provider (PSP). Be aware that the fraud solutions built in to payment services usually aren't more robust than address verification. To learn more, read our blog post about fraud prevention for payment processors.

    Now that you're equipped with a wealth of knowledge, it's time to build a tailored strategy that includes steps to prevent fraud. Think of it as your personalized battle plan against fraudsters. From robust authentication processes to real-time monitoring, your strategy should encompass every tool and technique needed to keep your eCommerce ship sailing smoothly.

    Get in touch with us today for a 100% free consultation about what would work best for your business. We'll walk you through similar use cases and point you to the right strategy. Click below!

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    Conclusion: Your eCommerce Fortress

    There you have it, fellow eCommerce trailblazers – a comprehensive guide to fraud prevention that empowers you to protect your business and customers. Remember, with the right tools, strategies, and a dash of technology, you can confidently steer your eCommerce ship through the digital seas, secure from the tides of fraud and mischief.

    So, dive into the realm of fraud prevention armed with AI, machine learning, and a treasure trove of insights. Your eCommerce fortress awaits – ready to defend your prosperity and maintain your reputation as a trusted online merchant.

    Stay vigilant, stay secure, and keep thriving in the world of eCommerce!



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