Fraud prevention tools are systems and software solutions to help merchants avoid accepting fraudulent purchases on their online shopping websites. Simply put, fraud prevention software analyses a number of factors in an online transaction and calculates the risk of that transaction being fraudulent or not. The transaction may then be declined or flagged for manual review.
E-commerce has seen rapid growth in the last few years. The Covid-19 pandemic in particular was a huge disruptor to brick-and-mortar retail and caused a huge surge in online shopping. With this boom of course came an even bigger boom in online fraud.
Credit card fraud has always been an issue in both physical and online shopping, however, the industry has been seeing very large jumps over the last few years. As an example, a report in 2021 by the Federal Trade Commission in the USA found that credit card fraud increased by 44% between 2019 and 2020.
For online merchants, credit card fraud means chargebacks, loss of revenue, higher payment processing fees, penalties, and possibly even losing the services of payment providers. Not to mention reputational damage. In this day of social media and review sites, it is very easy for disgruntled fraud victims to give merchants some bad press. And if your existing and potential customer base sees your online store as a place where fraud is prevalent, well that’s just bad for business.
Online fraud prevention tools offer a way of reducing instances of credit card fraud on a merchant’s e-commerce website, therefore avoiding the resulting chargebacks. There are a great many different types of fraud prevention tools, and they usually have several layers of functionality.
Although actual algorithms, technology and techniques are trade secrets for obvious reasons, there are multiple techniques that fraud detection software can use, either in combination or as stand-alone services.
Geolocation technology looks at the physical location of the device at the time of making the transaction. This could be by means of analyzing the IP address of the internet connection or even using a device’s GPS and wi-fi network location. The location could raise a flag, for example, a card registered to a French cardholder being used in a transaction in Lagos Nigeria could be suspicious. If a merchant finds that they have a consistently high rate of fraud attempts from a particular region, they could decide to blacklist orders from that area entirely. Of course, people do travel and automatically declining a transaction based on this alone could result in a false positive.
A common technique to mask the location of a device is by using a proxy server. Proxy piercing technology is designed to see through a proxy address to find the device’s actual location.
Address Verification Service
While geolocation looks at where a device actually is physically located, Address Verification Service (AVS) looks at the delivery address versus the address on file of the cardholder.
Almost all devices used to access the internet have some form of unique identifier, such as the smartphone ID or a computer MAC address. Even routers have unique numbers. Identifying the device used in a transaction can help to reduce types of fraud such as account takeover fraud and even blacklist known offenders of friendly fraud. Companies such as Google use this type of technology frequently and request verification from a user whenever a new device is used to access an account.
Time is not a cybercriminal’s friend. Once a legitimate cardholder discovers that their card information has been stolen and possibly used, they will have the card canceled. So criminals try to spend as much as possible as quickly as they can before the card is blocked. Velocity checking looks at the speed and frequency of transaction attempts by a specific card or even a device.
Data Sharing and Blacklists
These tools reference information on various databases, for example, to check if a card used has been in previous chargeback disputes. This can help reduce friendly fraud.
In machine learning systems real-time or near real-time data is fed into models based on common red flag trends, and the software adjusts its decision-making process in regards to approving or declining a transaction. ML systems improve over time with an increase in data.
MFA systems require additional input from the purchaser to complete transactions. This could be in the form of OTPs, verification emails, or even biometrics. If the additional step is not completed then the transaction will be declined.
Post Checkout Behaviour
These tools look at what the user does after completing a purchase, such as website visits and subsequent transactions. If subsequent user behavior is suspicious then the merchant can be advised to cancel the transaction themselves and refund the card, instead of being subjected to the chargeback process. This can also stop the dispatch of inventory on a fraudulent transaction
Fraud scoring tools look at multiple indicators and data points and then generate a composite risk score for that transaction. The score can be used to approve, reject or refer the transaction to the merchant for manual review.
Fraud prevention tools can be very valuable to merchants in reducing chargebacks and the associated headaches that come with them. Many of them also come with chargeback insurance, which means that if there is a chargeback on a transaction that the tool approved the merchant may not carry the liability for the chargeback. Terms and conditions of course will apply.
These tools are just one aspect that merchants should consider using in their anti-chargeback and security strategy. Merchants should bear in mind that these tools only help to combat certain types of fraud – they offer practically no protection against other types of fraud such as friendly fraud or family fraud. They are not 100% foolproof, nothing is, and they can and do generate false positives.
At Baer’s Crest we know that reducing chargebacks and maintaining customer confidence are extremely important to merchants. Talk to us about payment and security solutions for your business.