What is the cost of payment fraud?

In this article we will explain the true cost of payment fraud, what’s driving the rise and why your business should invest in fraud prevention in 2023 and beyond.

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August 24, 2023
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What is the cost of payment fraud?

When it comes to the cost of fraud, there’s more to lose than just transaction value. Your business also risks chargeback fees, monitoring programs and merchandise replacements, so it’s important that you know how to protect your brand from common and costly fraudulent activities.

This page will explain the true cost of payment fraud, what’s driving the rise and why your business should invest in fraud prevention in 2023 and beyond.

What is the cost of payment fraud?

According to Juniper Research, merchant losses due to payment fraud are expected to reach $362 billion between 2023 and 2028. A 2022 survey found that 59% of financial institutions reported an overall increase in fraud rate compared to the previous year. Another survey found that 52% of companies with at least $10 billion in revenue experienced fraud of some kind, with the most expensive attacks costing over $50 million for one in five of those organizations.

Payment fraud is more widespread than ever because more transactions are being made online which fraudsters can attack. Also, technological advancements such as machine learning have increased the scale at which fraudulent attacks can be implemented.

The total cost of fraud can be accumulated in a number of ways. First off, lost goods and merchandise due to fraud is a significant concern, with the global revenue loss attributed to fraud estimated at 3.6%, especially for high-value transactions. 

Merchants face significant operational difficulties due to the increasing incidence of payment fraud, notably, responding to chargebacks and customer care leads to wasted time and resources. As a result, merchants not only lose revenue from the sale but also incur additional chargeback fees and potential penalties. Chargeback fees are one of the most common costs of fraud, with merchants being charged anywhere from $15 to $100 per chargeback. Exceeding a certain threshold can result in enrollment in an excessive chargeback program, incurring further monthly fees.

For merchants that use manual reviews to detect fraudulent transactions, these are even more time-consuming and may overwhelm review teams, leading to unnecessary delays and approvals. 

What is driving the rising cost of fraud?

The implementation of Strong Customer Authentication (SCA) has been instrumental in combating online fraud. Visa data reveals that the adoption of EMV 3D Secure has tripled since the beginning of 2021, leading to a notable 28% reduction in card-not-present fraud. 

However, to fully understand the true rising cost of fraud, we must acknowledge that not all online transactions undergo SCA verification. Certain exemptions exist, such as transactions involving entities outside the EU, fixed-amount subscriptions, merchant-initiated transactions, and low-value transactions below €30. 

Consequently, ecommerce merchants outside the EU – and those handling significant flows from such transactions – may encounter higher levels of fraud attempts.

Likewise, the rise in Account Takeover (ATO) fraud can be attributed to the growing availability of data on the black market – made easy by the use of malware and bots to extract information from an increasing selection of sources and channels. If the ATO has gone undetected, it is much easier because transactions from genuine accounts have been initiated.

Below, we discuss the main driving forces behind the rising cost of fraud in greater detail.

Ecommerce and retail channels

With the continuous rise of ecommerce sales, increasing online payment fraud is expected. When your business expands into new markets, you face the challenge of safeguarding against fraudulent activities originating from new sources, channels and payment methods, such as digital wallets or buy-now-pay-later. To tap into these international markets, you need platforms that can seamlessly handle various alternative payment methods (APMs) specific to each region, which may pose risks if you don’t have the right fraud detection tools in place.

When it comes to payment fraud, ecommerce merchants face a variety of tangible costs. These include chargeback fees resulting from disputed transactions, the loss of inventory due to fraudulent orders, obligatory refunds to affected customers, increased customer service expenses, and potential legal fees and compliance costs.

Once you’ve dealt with the payment fraud itself, you may incur further costs like investments in security tools for detection and prevention, damage to your reputation that impacts sales and customer trust, operational disruptions, potentially heightened transaction fees from payment processors, and the expenses associated with managing data breaches if fraud leads to security compromises. To mitigate these costs, we recommend that you prioritize robust fraud prevention measures and risk management strategies.

Learn moreA guide to fraud monitoring

Mobile payments

In 2022, 28% of consumers reported being a victim of digital wallet fraud. One common tactic involves fraudsters reaching out to consumers, claiming they accidentally sent them money and requesting its return. They use stolen credit cards linked to their wallet to make the payment, and after you transfer the money back, they quickly switch to their own card details, leaving you with a reversed transaction and loss of funds. 

Another method is when criminals impersonate customer support, sending phishing links to gather your customers’ digital wallet credentials. The card issuers may later reverse these transactions, or the customer may request a refund, resulting in costly chargeback fees for your business.

Buy Now Pay Later (BNPL) fraud

The BNPL micro-loan system aims to reduce security friction during the checkout process, allowing customers to complete their transactions quickly without thoroughly considering whether they can afford it. However, this approach results in fewer security checkpoints throughout the user journey, making it easier for fraudsters to compromise accounts and perform fraudulent activities. 

When it comes to fraud disputes, BNPL providers have full liability, which should be an incentive to keep fraud rates low. For merchants, we recommend that you screen your BNPL transactions (many merchants don’t) so you’re aware of your true fraud levels.

Learn more: BNPL fraud

What is the impact of payment fraud on merchants?

The cost of fraud goes beyond financial losses – it can damage your reputation, destroy customer trust and slow down your conversion rates: 

  • Customer costs: Payment fraud can damage your reputation and the trust customers have in your business, which may cause customers to seek more secure alternatives.
  • Financial costs: Fraud may deter potential buyers or repeat customers, causing a drop in conversions and missed sales opportunities. You may incur further financial strains from regulatory bodies who impose fines or issue compliance directives.
  • Legal costs: Fraud-related data breaches may lead to violations of data protection laws like GDPR, exposing your business to legal consequences, including costly legal action from affected parties seeking restitution.

To help your business combat these costs, we’ll demonstrate the biggest benefits of fraud prevention…

Why is fraud prevention important for merchants?

Reduce chargeback costs

Chargebacks are one of the most common costs of payment fraud. However, efficient fraud prevention leads to a decrease in unauthorized transactions and subsequent chargebacks, saving your business from revenue losses, fees, lowered bank authorization rates, and potential enrollment in monitoring programs.

Boost authorization rates for smooth transactions

Improving authorization rates is essential for seamless customer experiences and reduced cart abandonment. With effective fraud management and risk mitigation measures in place, you can increase your company’s approval ratio, allowing more transactions to go through successfully and maximizing revenue potential.

Minimize reserve account requirements 

Reducing fraud risks and chargebacks demonstrates to payment processors that your business is less risky. As a result, payment processors may relax reserve account requirements, freeing up funds and improving cash flow for your business.

Improve customer trust and satisfaction

Preventing fraud not only safeguards customer data and loyalty points, but also fosters a stronger sense of trust and satisfaction among your customers. By prioritizing their security, you can strengthen your relationships with customers and ensure a positive experience, leading to long-term loyalty.

Avoid costly monitoring programs

By avoiding these programs, such as the Visa Monitoring Program, your business can steer clear of increased fees, fines, and potential loss of payment processing capabilities, ensuring smooth operations and financial stability.

How to reduce the cost of fraud in your payments strategy?

Reducing the cost of fraud can prove challenging, particularly with chargebacks and manual reviews to deal with. It’s not free, either. Most small businesses in the US spend 6% of their annual revenue on fraud prevention measures, while mid-sized companies typically spend up to 11%.

However, these costs are worth the investment. They not only help protect your business from costly fraud attacks, but often help increase your long term ROI. 

Below, we’ve explained the best ways to keep fraudulent costs down within your business…

Fraud prevention systems

Implementing a robust fraud detection system is crucial to identifying and preventing fraudulent activities in real-time. By continuously monitoring transactions and analyzing patterns, a reliable fraud detection solution can quickly flag suspicious transactions for further review. This proactive approach helps prevent fraud before it escalates, reducing the financial impact on your business.

Staff training and awareness

Educate your employees about recognizing suspicious behaviors, transaction patterns, and potential red flags associated with fraud. While it may incur additional costs for your business, regular training empowers your staff to take proactive steps and escalate concerns when necessary, contributing to a vigilant fraud prevention culture.

Offer ID verifications

We recommend introducing robust Identity Verification (IDV) and Know Your Customer (KYC) procedures, which involve verifying customer identities through official documents and data, ensuring the legitimacy of transactions and deterring Account Takeover (ATO) and identity fraud attempts.

Authentication methods

Authentication methods add an extra layer of security to your payment processes, making it more challenging for fraudsters to gain unauthorized access. We recommend multi-factor authentication (MFA) or two-factor authentication (2FA) to verify user identities before authorizing high-risk transactions. 

You should also implement EMV 3D Secure (3DS) for online transactions, enhance security by requiring additional authentication steps, further deterring fraudulent attempts. In fact, Checkout.com is the first global end-to-end payments provider to become 3DS 3.2.1 certified.

AML transaction monitoring

Anti-Money Laundering (AML) transaction monitoring involves scrutinizing transactions to detect any suspicious activities related to money laundering or other illicit financial activities. By setting up AML transaction monitoring systems, your business can identify and report potentially fraudulent or illegal transactions, therefore reducing the risk of being involved in criminal activities and avoiding associated penalties.

Machine learning

Machine learning algorithms can bolster your fraud detection efforts by identifying complex patterns and anomalies that may go unnoticed through traditional rule-based systems. Integrating machine learning into your fraud analytics process enables your system to adapt and improve continuously, making it more adept at detecting emerging fraud trends, and reducing false positives.

Fraud rules

These rules can be based on transaction values, user behavior, geographical locations, and other relevant factors. Regularly updating and refining your fraud rules allows your business to stay agile and responsive to evolving fraud tactics, and therefore keep the cost of payment fraud down.

Learn more: The regions with the highest credit card fraud

Fraud prevention with Checkout.com

The best way for your business to avoid the costs of fraud is to implement the appropriate security measures. Checkout.com's Fraud Detection Pro tool is a comprehensive solution that empowers your business to implement protective barriers, including fraud rules, AVS mismatch checks, and risk rules for effective fraud detection and prevention. 

With our flexible tool, you can customize fraud rules, verify addresses to detect mismatches and adopt risk-based strategies to identify and mitigate fraudulent activities, ensuring a secure payment processing environment.

Talk to our sales team for more information on how Checkout.com can help your business stay ahead of fraudsters.

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August 24, 2023 9:38
August 24, 2023 9:38