Analytics can form the foundation for fighting payment fraud, mitigating risk and limiting costs.
Fraud can take a significant chunk out of profits for eCommerce and other online operations. For instance, a 2022 report estimated that 3.6% of global revenue was lost to payment fraud.
But fraud costs go beyond the direct losses to include fees, interest, replacement or redistribution, manual reviews, and operational expenses. That same report found that 10% of eCommerce revenue globally goes toward managing fraud.
The fraud fallout extends to intangible, yet crucial, costs, such as reputational damage for companies and lost customer trust.
Analytics can help companies stem those losses by detecting fraudulent patterns in the data online businesses collect.
Gathering Data at Scale
Collecting the right data is the first step toward establishing analytics that can detect and limit fraud.
Data collection systems, regulatory technology solutions, data warehouses and data lakes can streamline collection from disparate sources. Those include account verification processes, transaction monitoring systems, mobile data and suspicious activity reports.
That data can keep businesses secure and on track in fast-moving, complex global markets. But businesses first must overcome the challenges of analyzing the data and gathering actionable insights.
The response to those challenges is in strategies and operations that integrate the different data sources and databases into one model that provides clarity, consistency and improved data quality. Companies can restructure the data to align with analytics requirements, add value to business applications and enable better queries.
The Competitive Advantage of Data Science
Data scientists create, operate and optimize data warehouses for analysis and insights. That work entails analyzing statistics, programming, understanding business requirements and spotting patterns.
Those scientists analyze massive data sets and gather insights that provide the most value to organizations. Spotting anomalies or trends can present new business opportunities and identify fraud threats.
Using Identity Data for Payment Fraud Detection and Prevention
Data analytics plays a vital role when companies choose their identity verification platform. Robust, efficient identity match rates lead to quick, smooth customer onboarding and help companies avoid frustrated customers, higher transaction costs, strain on customer support and lost revenue.
Data analytics also help spot fraudsters and unusual patterns that require further investigation. Ensuring identity data is accurate can stop fraudsters before they create accounts. Companies can also leverage data for ongoing monitoring, such as for transactions that exceed amount thresholds.
When companies evaluate identity platforms, there are key data analytics factors to consider:
- Number of data sources
- Accuracy of data sources
- Variety of data sources
- Data-handling procedures
- Use of artificial intelligence (AI) and machine learning (ML) algorithms
- AI and ML insights from the data
- Data science expertise
As identity technology and data analytics advance, the organizations that gain the most insight into customer activities can build a competitive edge. Those insights can drive performance while closing the door on fraud and protecting customers and the business.
Leveraging eCommerce for 24/7 sales anywhere in the world has positioned online marketplaces for accelerated growth. But with growth comes heightened risk of card-not-present (CNP) fraud.
Criminals are gaining access to sensitive online data through phishing, skimming and hacking. According to a recent study, every $1 of fraud costs eCommerce merchants $3.75, up nearly 20% from 2019.
Many merchants are adopting measures to detect and prevent CNP fraud to protect their business and bottom line.
When a payment becomes a charge-back
From the consumer’s point of view, an online transaction seems fairly straightforward: The consumer provides personal and credit card information and receives transaction confirmation. However, on the back end, there’s a complex payment process designed to mitigate risk.
There are typically six layers in that process:
- The merchant’s bank
- Merchant account
- The consumer’s bank that issues a credit card
- Payment gateway, which is a service that sends the merchant’s eCommerce transaction data to the merchant’s bank
- Payment processor
- A payment network, such as Visa, Mastercard or American Express
Transactions are often grouped and processed in batches. That delay in payment resolution is an opportunity for fraudsters. A fraudulent online charge made on a credit card might not appear on a consumer’s bill for a month.
If the consumer disputes the fraudulent charge, it could lead to a charge-back. The credit charge unwinds itself through the system and ends up on the merchant.
Detecting and preventing CNP fraud
An effective CNP fraud prevention program revolves around risk mitigation. By understanding fraudsters’ techniques and CNP fraud prevention tools, organizations can develop risk strategies that help them mitigate costs while providing enhanced customer experiences.
Know Your Customer
Financial institutions need to know who they are dealing with to assess risk and prevent money laundering. There are strict rules for identity verification to discover if the person opening an account actually exists. Know Your Customer (KYC) requirements are a significant check to see if the person matches a real-world identity and is not synthetic.
Other identity checks that can determine if a customer’s identity is legitimate include:
- Searching the email address
- Calling the phone number
- Confirming the person on social media
A more enhanced KYC program checks various identity data points, including IP addresses and mobile phone numbers. Video KYC enables organizations to use tools such as biometric face verification and real-time document verification.
Various combinations of those identity verification checks typically take place during customer onboarding. They also can be performed on a set schedule or for specific events, such as when an account status or customer information changes.
Monitor your transactions
Legitimate consumers and fraudsters often produce different transaction patterns. Understanding how consumers interact and transact can help organizations spot fraudulent patterns.
Monitoring transactions is vital. While small businesses often can monitor all transactions, larger companies may need a dedicated transaction monitoring program and a fraud detection expert.
Monitoring often includes determining if:
- The customer is new
- The purchase is unusual
- The transaction amount is significantly higher than normal
- There is inconsistent information in the order
- There are multiple orders
- The customer is using a different shipping address
- The orders are coming from a different IP address
Adding transaction limits or flagging higher-cost transactions for manual review can prevent higher-cost fraud cases. Organizations can set transaction limits per transaction or cumulatively.
Meet payment card industry (PCI) security standards
Every transaction and every part of the eCommerce system requires protection. The right tools and security mindset can help merchants achieve that goal.
According to the PCI Security Standards Council, an organization should:
- Build and maintain a secure network to protect payment card information
- Protect cardholder information
- Maintain a vulnerability management program
- Implement strong access control measures
- Regularly monitor and test networks
- Maintain an information security policy
- Pass quarterly remove-vulnerability scans
Adopt additional security measures
An Address Verification System compares the address numbers in a credit card file with the corresponding numbers provided in the eCommerce transaction. A card verification value adds security with three or four numbers that further prove the customer’s legitimacy.
As more consumers make mobile transactions, mobile data points such as geolocation, billing data and device information can provide identity verification. Device identification can be a particularly effective tool for profile matching.
Reduce risks while expanding business
Implementing measures to help prevent CNP fraud and reduce online charge-backs protects organizations and customers. Companies that provide security and positive experiences can gain market share, keep customers happy and make the most of the digital opportunity.
The FedNow℠ Service’s 2023 launch holds the potential to significantly expand real-time payments in the U.S.
The Federal Reserve created the FedNow payments infrastructure to enable people and businesses to send real-time payments through their financial institutions. The goals are for clearing and settlements to happen in near real time and for people to immediately see the transfer in their accounts.
“The FedNow Service will transform the way everyday payments are made throughout the economy,” Fed Vice Chair Lael Brainard said during an August 2022 speech, “bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently.”
U.S. real-time payments overview
As of 2020, there were more than 70 billion real-time transactions globally, with more than 30% growth projected by 2024. India and China lead the way with more than 70% of the transaction volume.
There are other U.S. real-time payment systems, but, as of 2021, they accounted for only 0.9% of U.S. transaction volume. Part of the reason has been a lack of broad coverage across the country.
Still, real-time payments have clear economic benefits. They can improve efficiency, reduce costs, accelerate cash flow and liquidity, and provide payment flexibility.
FedNow will be available to all financial institutions, so it removes concerns about banks and credit unions using competing networks and increases the potential for large-scale adoption.
FedNow use cases
FedNow could cover payment use cases such as:
- Account-to-account transactions
- Bill payments
- One-time disbursements
Many digital payment use cases, such as the gig economy, are better suited for real-time payments. Instead of waiting for a pay cycle, gig contractors can immediately receive money, smoothing out their cash flow.
Immediate settlements also can help people with little or no savings. It can allow them to avoid late fees or overdraft charges when paying bills, send and receive emergency payments in real time, and better manage their money.
For businesses, real-time money management improves financial operations. They can automate payment reconciliation, improve tracking of funds and business-to-business payments, and more effectively coordinate invoices.
How will FedNow work?
Effective real-time payments systems depend on simplicity for users and robust security.
People who use FedNow might not notice a difference from other real-time payments systems. They still will log in to their bank account to initiate the payment. Financial institutions still will provide security, screen the payments, and handle account changes and reconciliation.
The payment transfer between financial institutions is how FedNow fundamentally differs. Under the system, FedNow acts as the go-between for the sender’s and receiver’s financial institutions, validating payment messages and debiting and crediting the appropriate accounts, all within seconds.
FedNow is intended to work alongside other real-time payment systems. It will use the ISO 20022 standard and, initially, cover only domestic payments.
The future of payments
Speed, transparency and payment flexibility are positioning real-time payments for success.
“The journey to real time for payments is an inextricable one and the obvious destination for all payments irrespective of whatever rail they travel on,“ Peter Hazou, Director, Business Development, Financial Services, Microsoft, told ACI Worldwide for its “Prime Time for Real-Time Global Payments Report.”
Real-time payments enable new business models, services and applications. Embedding those services can expand customer relationships and increase profitability.
As people and businesses expand the services they use, Know Your Customer (KYC) will become even more important. Real-time transactions can lead to real-time fraud without proper controls. The FedNow Service Readiness Guide offers insight into how compliance and risk teams can prepare for the new system.
Now is the time to consider how to integrate FedNow and what the longer-term real-time payments road map looks like. Building a plan to innovate as real-time payments take hold in the U.S. can position organizations for growth.