While the convenience of online payments is undeniable, they are accompanied by inherent risks. Would-be criminals are always lurking in the most unlikely places, just waiting for their moment to pounce and take advantage of unsuspecting victims. Risk management is, therefore, an important aspect of online business. This involves not only analyzing suspicious activities and identifying potential risks but also designing and implementing controls to mitigate such risks when they occur. 

Payment service providers (PSPs) like Zota, who work in the digital payment space, remain constantly aware of these threats and spend a lot of time, money, and resources mitigating them. Partnering with the right PSP is, therefore, a great step to take in protecting your business. 

What is fraud?

Payment fraud refers to any false or illegal transaction that can happen on the Internet. Cybercriminals usually steal someone’s money, personal property, or sensitive information. Fraudulent activities naturally pose a significant threat to businesses and consumers, leading to financial losses and reputational damage.

The risk of financial loss for one of the parties involved in a payment transaction can arise from wrongful or criminal deception. The risk is that a transaction cannot be properly completed because the payee has no legitimate claim against the payer. Online payment systems are susceptible to various forms of payment fraud, including identity theft, friendly fraud, and clean fraud, each presenting unique challenges. 

What are the different types of fraud?

1. Identity theft

Identity theft refers to a situation where someone carries out a fraudulent transaction while pretending to be someone else. Instead of creating a whole new identity, which takes time and effort, online criminals steal a person’s information or bank details. They then use this fraudulent identity to make purchases. This form of fraud not only leads to financial losses but also undermines the trust and confidence of consumers in online payment systems.

2. Friendly fraud

Friendly fraud occurs when a legitimate cardholder disputes a charge with their issuing bank, claiming that they did not authorize or do not recognize the transaction. In such cases, the customer keeps the product and still benefits from a refund, hence the name ‘friendly fraud.’ Despite the initial appearance of legitimacy, friendly fraud results in chargebacks and financial losses for businesses.

3. Clean fraud

Clean fraud is a sophisticated form of fraud where stolen card details are used for online transactions without triggering suspicion. In such cases, criminals closely monitor and analyze a company’s in-house fraud detection protocols and systems and use stolen payment information to maneuver around them. This is one of the hardest fraudulent activities to detect, as perpetrators meticulously mimic legitimate transactions, making it challenging to recognize and prevent such activities.

What is a chargeback?

Chargebacks can appear very similar to traditional refunds, but there is one very relevant difference. Rather than contacting the business for a refund, the client asks the bank to forcibly take money from the business’s account. An investigation follows, and if the bank feels the cardholder’s request is valid, funds are removed from the merchant’s account and returned to the client. 

Chargebacks, in addition to being costly, can damage business reputations. An excessive number of chargebacks can lead to closed merchant accounts, effectively killing the business. Chargebacks do sometimes happen for legitimate reasons, and so the use of know-your-customer principles to ensure there is no fraudulent activity can substantially reduce or eliminate chargebacks. 

Data breaches

Data breaches refer to unauthorized access to sensitive payment information, such as credit card details and personal data. Often resulting from cyberattacks or internal vulnerabilities, data breaches represent a significant threat to the security and integrity of online payment systems and can have far-reaching consequences. The compromise of such confidential data can lead to identity theft, financial fraud, and reputational damage for both businesses and individuals.

Payment card data security

The security of personal data is a growing concern. Criminals are always looking for ways to obtain this type of information from different sources. A vulnerable point of compromise that fraudsters have identified is the financial data collected during card acceptance. If these issues occur in large and regular numbers, this can disrupt settlements and result in fines, loss of licenses, and legal implications with local authorities.

The Payment Card Industry Data Security Standard (PCI DSS) is a globally mandated standard supported by card schemes to enhance the security of credit and debit card data. This certification is required for every business accepting credit and debit cards, online or offline. The PCI DSS deals with data leak prevention (DLP) and the exposure of credit card details and other sensitive information to the wrong parties. It also regulates the storage of credit card databases and other vital information.  

Advanced security measures and the vital role of Risk Teams

Companies must implement robust procedures and systems to monitor potential fraud. Employing advanced security measures, including robust encryption, tokenization, and multi-factor authentication, is crucial for safeguarding online transactions. Utilizing sophisticated fraud detection tools and real-time transaction monitoring can help businesses identify and mitigate fraudulent activities promptly. These measures help protect sensitive data and mitigate the risk of unauthorized access.

It’s crucial for Risk Teams to have excellent quantitative and analytical skills and the ability to apply those skills across a variety of business processes. Such professionals must always be aware of processing activity while inspecting and spotting any out-of-the-ordinary issues. For advanced approaches, Risk staff may even enter specific transactions, attempting to make an on-the-spot analysis of the transaction and identifying if it may be fraudulent.

Understanding online payment risk is essential for businesses and consumers to navigate the digital payment ecosystem safely. By addressing these issues and implementing robust risk mitigation strategies, businesses can uphold the integrity of online transactions and foster trust among consumers and partners. 

If you have questions about how to transform your online business and take it to the next level, our dedicated team is here to help.