Preventing digital payments fraud: A comprehensive guide for eCommerce stores

As the number of online transactions is ever increasing, so is digital payment fraud. Merchants in the United States lose billions of dollars annually as a result.

Yet, eCommerce merchants that take advantage of digital fraud best practices actively reduce their likelihood of encountering financial and reputational losses. What’s more, they also significantly reduce the risk of legal consequences. 

Continue reading to explore what digital payment fraud entails, its various types, and the best practices for preventing it.

Understanding digital payments fraud

Broadly speaking, digital payments fraud refers to unauthorized or deceptive activities aimed at stealing or misusing payment information and financial data through online transactions and digital platforms. Specifically speaking, digital payments fraud can take multiple forms:

• Phishing: Scammers impersonate legitimate organizations to deceive individuals into revealing sensitive information such as usernames, passwords, and credit card details through emails, messages, or counterfeit websites.

• Card skimming: The illicit copying of debit or credit card information using specialized devices during legitimate transactions, enabling fraudsters to create counterfeit cards or make unauthorized purchases.

• Account takeover: Unauthorized access to a user's online financial account, granting the fraudster the ability to make transactions, alter account details, or withdraw funds.

• Payment interference: Manipulating the payment process to redirect funds from the intended recipient to a fraudulent account by hacking or exploiting system vulnerabilities.

• Friendly fraud: When a legitimate customer fraudulently disputes a charge with their bank after receiving goods or services, aiming to obtain a refund while retaining the purchased items.

• Chargeback fraud: Abuse of the chargeback process by consumers who reverse legitimate transactions by claiming non-receipt of goods or services.

This list extends to include identity theft, Card-Not-Present (CNP) fraud, virtual card fraud, and payment processor fraud. If it seems like an overbearing challenge to effectively prevent each form of digital payment fraud, know that next-generation fraud mitigation solutions are available. 

The rise of digital payments fraud in eCommerce 

Two out of three adults across the globe transact digitally. This number rises to 89% in the United States. Amid the billions of yearly eCommerce transactions, billions of dollars are also lost to digital payments fraud. 

Merchants are expected to lose a total of $343  billion to online payment fraud between 2023 and 2027. Globally, 34% of merchants experience first-party card fraud alone. This problem is particularly consequential in the United States, with the U.S. accounting for 42% of global eCommerce fraud. Without next-generation payment fraud mitigation strategies and technologies, merchants risk reputational and legal consequences — on top of the significant financial consequences. 

The impacts of digital payment fraud: Financial, reputational, and legal 

It’s common for merchants to experience financial losses due to digital payment fraud. Reputational damage is also common. In certain instances, merchants can find themselves in legal disputes that further consume precious resources. 

Financial 

Digital payment fraud can lead to direct losses from unauthorized transactions, often resulting in chargebacks that not only reverse the sale but also incur additional fees from payment processors. For example, each chargeback can cost a merchant between $15 to $100, depending on the provider. 

Beyond immediate losses, frequent fraud incidents can lead to higher transaction costs as banks and payment gateways impose stricter security requirements and higher fees to cover the increased risk.

Reputational  

On a smaller scale, digital payments fraud can lead to negative reviews and word-of-mouth. On a larger scale, digital payment fraud can lead to a public relations crisis. In both instances, merchants suffer from decreased customer trust and loyalty — particularly given the high-trust, sensitive nature of handling customers' financial information and transactions.

Legal

Legal disputes from digital payment fraud can arise for various reasons: failure to secure customer data, non-compliance with payment industry regulations, misrepresentation of products or services, negligence in monitoring and reporting suspicious activities, and others. 

Legal disputes are both costly and reputationally damaging, often resulting in merchants spending years navigating complex legal processes, incurring substantial legal fees, and striving to restore their reputation in the market. 

Preventing digital wallet fraud: 4 best practices 

You can reduce the financial, reputational, and legal risks associated with potential digital payments fraud and online financial crime more generally by adopting the following best practices. 

1. Implementing strong authentication and verification processes

The core authentication and verification processes to consider are multi-factor authentication (MFA), biometric verification, and secure password policies.

• Implement MFA to add an extra layer of security by requiring users to provide multiple forms of verification, such as a password and a one-time code sent to their mobile device or email.

• Adopt biometric verification to ensure that only authorized individuals can access their digital wallet by utilizing unique biological traits like fingerprints, facial recognition, or iris scans. 

• Enforce secure password policies to compel users to create complex, unique passwords that include a mix of letters, numbers, and special characters. 

2. Utilizing fraud detection tools and technologies

The market currently offers a range of fraud detection tools and technologies. These include machine learning-based analytics, real-time transaction monitoring, behavioral analysis, and geolocation tracking. Moreover, consider solutions that offer device fingerprinting, risk scoring systems, anomaly detection systems, tokenization, and secure payment gateways.

One fundamental technology for preventing digital payment fraud is next-generation POS systems. Consider POS systems that incorporate mitigation features, including end-to-end encryption, EMV chip technology, contactless payment capabilities, tokenization, and real-time transaction monitoring.

3. Securing customer data

You can secure customer data in a variety of ways: 

• Implementing end-to-end encryption to protect data during transmission,
• Using tokenization to obscure sensitive information.
• Regularly updating software to patch vulnerabilities.
• Conducting periodic security audits and vulnerability assessments.
• Restricting access to customer data through role-based access controls and least privilege principles.

As a first step, it’s important to have a thorough understanding of your regulatory requirements. By their nature, adherence to financial regulatory bodies 

4. Preparing for chargebacks and disputes 

Most chargebacks arise from fraudulent transactions, merchant errors, or unmet customer expectations. To mitigate these risks, you can implement chargeback prevention strategies. These include providing accurate and detailed product descriptions, using clear and recognizable merchant descriptors, and maintaining high standards of customer service.

Additionally, preparing for chargebacks involves keeping comprehensive transaction records, clearly outlining your return and refund policies, and closely monitoring chargeback patterns. By utilizing next-generation payments software, you can effortlessly identify the root causes of chargebacks and develop targeted strategies to address them.

Sekure Payment Experts: Gain access to next-generation digital payment fraud protection

Sekure can match you with a POS system that is not only equipped with next-generation fraud mitigation technologies, but also tailored to your specific business needs — we ensure the best rates on the market.
Once you’re matched with the most suitable POS solution, Sekure provide ongoing, five-star support. Click here to read what merchants are saying about Sekure.