With October being security awareness month and the holiday season fast approaching, there’s no better time to talk about fraud and how to set yourself up to reduce risk. In this blog post, we’ll explore different types of fraud, their warning signs, and effective ways for your business to protect against fraud.
What is fraud?
Fraud costs merchants more than an estimated $20 billion every year per the 2022 fraud trends report by Lexis Nexis. But beyond that sky-high number, there are numerous ancillary impacts that fraud can have on a business, like increased customer churn, lower credit card authorization rates, network and operational costs, and damage to the brand due to customers being incorrectly flagged as fraudulent actors.
Before we dig into the details, let’s take a step back and review what exactly fraud means in the context of online payments. First, remember that fraud essentially refers to a fraudster using someone else’s credit card number or credentials to make unauthorized purchases. When the actual account holder discovers the fraudulent transaction, they’ll initiate a dispute with their bank—that’s known as a chargeback.
When a bank determines that the flagged transaction was in fact fraudulent, the account holder’s charge is overturned. The result? The account holder pays nothing, and the business is responsible for the transaction amount. On top of that, the business is also responsible for any additional fees associated with the dispute. If your business has been the target of fraudulent actors, you know just how quickly these costs can add up.
This type of fraud is also known as a “false negative”—that’s fraud that goes undetected before it goes through and before a dispute occurs. That’s probably the type that comes to mind for most retailers when they think about fraud. But, there’s another consequence of fraud detection that can also have serious impacts on your bottom line.
This second issue is known as a “false positive.” These transactions are legitimate, but they’re incorrectly blocked by fraud detection. When a customer attempts to buy something, but a fraud-detection system stops the transaction from going through, the business loses a sale and suffers reputational damage.
Ultimately, both false negatives and false positives are costly. That’s why it’s so important to have the right system in place to help prevent fraudsters from causing serious harm, and to help ensure legitimate customers have a great user experience.
Fraud during the holiday season
As the holiday rush goes into full swing, merchants across the board experience greater traffic and order volumes. Bad actors can take advantage of the increase in traffic, hiding their fraudulent transactions in the herd of holiday orders. Merchants often don’t discover these fraudulent transactions until months later, if at all. Getting stuck with the bill for these fraudulent orders they fulfilled is especially challenging if it was a subscription that fulfilled multiple orders.
The move to mobile shopping (over 70% of transactions during Black Friday/Cyber Monday on Shopify last year were on mobile) has also added ways to access sensitive data by hacking a customer’s mobile device or taking control of their mobile wallet.
Know the warning signs to spot fraud
One of the keys to catching fraud is to comprehend the story of a given order based on the many signals that come with any transaction, and identify the warning signs early.
For example, we know that new customers are typically riskier than repeat customers. As discussed above, however, there are some cases in which a fraudster hijacks a customer’s account. A sudden increase in order value, new products purchased that are atypical, and changes to the billing address, email address, shipping address, IP address, or credit card number (especially if any of those changes are connected to other fraudulent orders) are all signs to look a bit closer. Another warning sign to be aware of is when different customers are all shipping to the same address, especially if it’s not a residential address.
An IP address not being close to the billing address or delivery address could also be a red flag and warrant closer attention. An email address that has uncommon strings of characters or numbers could also be a sign of fraudulent activity.
Ultimately, warning signs are simply that and are not a guarantee something is fraudulent. Customers purchase products under a variety of circumstances, so weighing the costs of stopping a fraudulent order versus turning down a legitimate customer is important.
How Recharge helps prevent fraud
At Recharge, we know that fraud prevention and data protection are crucial to a healthy business, and we’re committed to engaging in practices that protect our transactions. Some of the ways we do that are by protecting data at rest and in transit and implementing strong access controls to ensure that only authorized individuals can access sensitive data. We also log and monitor any suspicious activity and follow secure coding best practices.
To prevent account takeovers, Recharge secures our customer portal links and grants access to legitimate customers with tokens that expire. We do not directly store any card-holder information, and leave that to our trusted partners like Stripe who help ensure sensitive information is stored securely.
Set yourself up with Stripe before fraud occurs
The challenges businesses face in fighting fraud aren’t easily solved. But with Recharge and Stripe, businesses have an excellent defense. Through Recharge’s partnership with Stripe, a financial infrastructure platform, you have access to Stripe’s powerful fraud-prevention system, Radar.
Radar uses Stripe’s global network of customer data and billions of payment data points so that you can make real-time decisions about potentially fraudulent purchases—helping you keep your business safe and reduce the risks and costs associated with fraudulent activity and the friction that can drive customers away.
Radar by Stripe has helped several businesses increase security and fight fraud, including AdBlock, a Stripe Radar customer and one of the most popular ad blockers worldwide with more than 60 million users.
“We were on the cusp of losing the ability to process payments due to the number of fraudulent transactions—that’s when we started using Stripe Radar. With Radar, we were able to programmatically fight fraud and institute fine grained ways to fight back against card testers.”
–Matt Maier, CEO, AdBlock
Even if a card is new to your business, there’s an 91% chance it’s been seen before on the Stripe network. This uniquely positions Stripe to accurately detect fraud and train advanced machine learning models. Stripe uses those models to automatically block many high-risk payments. In fact, Stripe decreased disputes by 26% for businesses using Radar.
With solutions provided by Recharge and Stripe, merchants can rest a bit easier and focus on the holiday rush without worrying about the complications of screening orders or potentially losing revenue to false positives or fraudulent activity. Our solutions enable merchants to focus on their core business.
If you’d like to learn more about Recharge and Stripe, and how we integrate to provide best in class solutions, visit our page and get started today.