Payment Gateways: Detect and Prevent Online Fraud
Payment gateway fraud is one of the most common reasons for revenue loss.
Explore what gateway fraud is and how to deal with it in this article.
One of the common issues e-commerce merchants regularly encounter is payment gateway fraud. Left unattended, this problem can have devastating consequences for both the establishment and its clients. To avoid that, companies implement various fraud detection and prevention strategies.
However, navigating this process without basic knowledge of payment gateway mechanics and fraudulent tactics is challenging. In this article, we explain what a payment gateway is, how it works, and what payment gateway fraud is. Additionally, we will describe the most common strategies of payment fraud and elaborate on online payment fraud detection and prevention solutions to help you protect the reputation and profit of your establishment.
What Is a Payment Gateway?
A payment gateway is essentially software that processes online payments via credit card. This software analyzes and authorizes data given by customers and performs payment, ensuring the seller receives revenue. Previously, payment gateways were very much like terminals for online payments. However, after some time, most payment gateway companies switched to merchant activity exclusively, unwilling to compete with global payment processors. Nowadays it is impossible to imagine online purchases without payment gateways — these tools are common among all online stores and subscription service platforms.
What Is Payment Gateway Fraud?
Payment gateway fraud is a fraud that occurs when unreliable customers (fraudsters) use stolen credit card information to make purchases online. Though stealing one's credit card information unnoticeably is an intricate process, this type of fraud is widespread. In a situation with payment gateway fraud, there are two victims: the first one is the legitimate cardholder whose information was stolen and used to make an online purchase, and, of course, the merchant. When the legitimate cardholder notices an unknown transaction from their bank account, they issue a chargeback operation.
Chargeback operation is a reversed transaction the bank performs upon approving such a request. There are a number of reasons why chargeback is harmful to businesses:
- When a chargeback is issued, the seller doesn't have an opportunity to protect their finances and must return the "stolen" sum.
- The merchant is the one who gets charged for the chargeback operation. Thus, not only does the seller lose revenue, but they must also pay an additional processing fee.
- Frequent payment gateway fraud raises the number of issued chargebacks, negatively affecting the company's reputation. The reputation of an unreliable business becomes a serious obstacle to creating strategic alliances with other companies, attracting new customers, and retaining regular ones.
Payment gateway fraud is a big enough problem by itself. However, it also becomes a catalyst for many other issues that endanger the company's development and cause major profit losses. Finding strategies to prevent gateway fraud is a crucial task for any business, new and experienced, big and small.
Common Forms of Payment Gateway Fraud
Previously, we described one of the most common payment gateway fraud tactics. However, that's not the only one. Fraudsters implement several other tactics that are no less harmful. Learning about them is important to build efficient payment gateway fraud defense mechanisms that will prevent fraud from occurring and later recurring in the future.
Here, we describe the main gateway payment fraud strategies the fraudsters use to gain their benefit.
Phishing
Phishing payment fraud occurs when fraudsters steal personal information through online conversations. In cases like that, fraudsters pretend to be workers of reliable establishments — such as an online store manager or a bank employee. Using various tactics, these people convince legitimate cardholders to share their bank account information and later use this information to make illegitimate purchases.
Phishing fraud detection can be quite a challenging task. After stealing the customer's information, fraudsters can keep records on the cardholder's bank account for a long time and use them later when the scammed person forgets about the fraudulent online conversation. To avoid phishing, it is necessary to:
- Never disclose personal information to third parties
- Check the legitimacy of the source that requests your bank account information first
- Never press on suspicious links, and regularly update your data on popular phishing tactics
If you become a victim of phishing, contact your financial company as soon as possible to find a solution to your problem and open a new bank account.
Identity Theft
Another popular strategy of gateway payment fraud is identity theft. This type of payment fraud occurs when scammers steal personal information such as Social Security numbers, credit card numbers, etc. Fraudsters can do that in various ways:
- Hack people's devices
- Steal people's wallets with credit cards
- Cause data breaches in the establishment's system to get the personal information of its clients
Such online payment scammers accumulate data and later use it to make illegitimate transactions and place orders online. The solution to identity theft fraud is to store client data securely and implement strategies to prevent leaks through unauthorized access. It is also essential to notice suspicious payment activity and blocklist customers noticed in payment fraud to prevent the situation from recurring.
Chargeback Fraud
While most types of fraud require stolen data, chargeback online payment fraud doesn't. In cases of chargeback fraud, also known as friendly fraud, scammers pretend to be legitimate customers who purchase in the online store. Later, when scammers receive goods or services from the merchant, they issue a chargeback through their financial company and get refund money for their online purchase back while still using the product they ordered.
In case of chargeback fraud, the seller loses revenue and gets charged additional transactional fees. This type of payment fraud is extremely damaging to the company's budget; that's why many establishments invest both time and monetary resources in chargeback prevention automatic solutions and tactics. Fraudulent tactics constantly evolve. Therefore, learning about new fraud trends regularly is necessary. Analyze your data to identify recurring patterns and periodically look up educational material on new fraud trends to ensure better protection of your finances and the company's good name.
How to Detect Gateway Fraud
Payment gateway fraud detection is not an easy task. However, there are several strategies that make the detection of fraudsters easier, ensuring the prevention of monetary losses. Now, let's look through the common tactics that will help you identify fraudulent activity and enhance your payment gateway fraud management.
Compare the Details
One of the most noticeable red flags in gateway purchase fraud is suspicious customer information. For instance, legitimate purchases usually use the same billing, IP, and shipping locations; different locations might suggest fraudulent activity. Another detail you should pay attention to is the shipping address: some markets are known for scammers, so requesting additional verification for orders from certain places might be a wise decision. This is quite an efficient solution for payment gateway fraud detection. However, it only works when scammers implement simple payment fraud strategies.
Notice Patterns
Noticing patterns is a simple solution, which, however, requires regular data checks. You can effectively detect payment gateway fraud by analyzing information on your customers: the IDs, emails, addresses, etc. By noticing recurring details, such as names and devices, you can successfully identify and blocklist scammers, ensuring the legitimacy of payments and boosting your fraud prevention system.
Flag Large Transactions
Individuals who perform payment gateway fraud try to pull off the largest transactions possible before they get detected. In case of large sum online payment fraud, the merchant, who is required to refund the losses, can suffer significant damage. Therefore, to avoid such an issue, it is important to flag large transactions. Set a limit that automatically flags transactions over a particular amount: this will make identity theft and chargeback fraud prevention significantly easier.
Invest in Chargeback Prevention Services
A chargeback detection service is one of the best solutions a merchant can implement to protect their establishment from payment gateway fraud.
Chargeback fraud prevention applications automatize the process of payment fraud detection and notify sellers about suspicious customer activity. These tools effectively
prevent chargebacks and keep your rate as a merchant high, helping your establishment to grow.
Payment fraud detection and prevention are necessary for securing the establishment's profit. By developing payment gateway fraud prevention strategies and investing in applications that detect fraudulent activity, you not only defend your reputation as a seller but also enhance your efficiency as a company, becoming a strong competitor in the ecommerce field.
How Payment Gateways Can Prevent Fraud
Since we discussed fraud detection in payment gateway strategies you can implement, it's time to talk about online payment fraud prevention mechanisms the payment gateways offer. Here, we explain how payment gateway tools can effectively prevent online payment fraud issues and secure your company's finances.
Address Verification System
AVS is a practical anti-fraud solution that efficiently minimizes the risk of gateway payment scams. During the purchase, customers must provide the system with their billing address. The AVS system checks whether this address corresponds with the address from the issuing bank. If addresses differ, payment gateway software can send a request for cardholder identification to the issuing financial company. This feature will minimize the risk of gateway payment fraud by making scammer detection easier.
Card Verification Value
Card verification value, also known as CVV, is a 3-digit code on the other side of every credit card. Payment gateways require this code to perform transactions. Without them, scammers can't proceed with the purchase. Thus, the card verification mechanism becomes an effective solution against simple gateway payment fraud.
Device Identification
Device identification works similarly to identity detection: the payment gateway system detects devices (computers, phones, etc.) that frequently visit your site and identifies gadgets previously noticed in fraudulent activity. Device identification payment gateway mechanism helps merchants uncover fraudsters with multiple stolen identities, becoming a practical solution against many online payment scams.
Payer Authentication
The payer authentication mechanism is one of the best solutions for identity theft gateway payment fraud. This feature helps legitimate cardholders create a safe PIN code that customers must use during checkout to prove their identity. Without this code, scammers can't proceed with a purchase; thus, businesses' and cardholders' money is kept secure.
Risk Scoring
Another good fraud prevention solution is risk scoring. Many payment gateways allow merchants to detect possibly fraudulent transactions through statistical data. After detecting a risk of fraudulent activity, the system implements a fraud prevention mechanism and sends the merchant a request to verify the purchase. This feature helps sellers identify and avoid potentially dangerous transactions, protecting the company's well-being.
Databases Access
Many payment gateways provide merchants with wide fraud databases, including information about fraudsters, their tactics, stolen credit data, new online payment fraud trends, etc. By analyzing this information, sellers can enhance their defense against gateway fraud and prevent financial losses. This feature is a practical solution that helps sellers globally, allowing new, inexperienced businesses to avoid scammers even without their own fraudster database.
Payment gateways are convenient tools that help customers perform online payments with fraud protection, ensuring the security of cardholders' and merchants' finances. By implementing additional online payment fraud detection strategies, you can enhance this instrument's efficiency, helping your company minimize issues caused by payment gateway fraud and improve your customer service.
Conclusion
Payment gateway fraud is a common, frustrating occurrence in the ecommerce world. Neglecting this issue might have serious, even devastating consequences for the business. Finding strategies to prevent payment gateway fraud and investing in the tools that can help minimize fraud cases is essential. Analyze your data regularly to identify patterns, detect fraudsters and their common tactics, and periodically search for additional information on fraud protection. Enhance your defense system continuously to ensure your company's stable progress and profit security. Do not hesitate to partner with fraud protection companies like Germius to enhance your payment fraud detection and prevention mechanisms and secure your reputation.
