As payment methods become more than just a necessary service, Neil govender, Fraugster’s Head of Client Solutions, discusses the impact of different payment fraud models and other factors influencing payments today
There are over 200 types of payment methods available around the world. With so many options to choose from, merchants and payment service providers (PSPs) are now witnessing a significant change in the e-commerce landscape. Payment becomes a brand of consumption, moving up the value chain from utility to preference, and it influences where customers buy.
Customers are also loyal to their preferred payment method. A recent PPRO study found that 44% of online shoppers admitted to abandoning a purchase if their preferred payment method isn’t available. As a result, payment method preference has become such a fundamental aspect of the customer journey that now is the time to add a sixth step to the traditional 5-step purchase decision process model.
This is why merchants and PSPs need to develop a credible and competent strategy around providing all preferred payment methods to their customers. However, with each new payment option activated, the attack surface increases. Now the goal is to provide choice and meet customer payment preferences without sacrificing security. And the best way to ensure secure transactions is to understand the unique threats that accompany each payment method.
The most popular payment methods – the risks
Percentage of the online payment mix in certain markets: Japan 65%, Australia 52%, United Kingdom 50%, Brazil 45%, Nordic countries 40%, France 36%, North America 33%, Benelux 20%, Germany 12 %
Fraud Factor – Card theft is a common problem with this type of payment. One of the main impacts can take the form of chargebacks. Not only can a merchant lose both the item shipped and the cost billed, the fees and fines associated with repeat chargebacks can run into the thousands as well.
Percentage of online payment mix by selected markets – China 54%, Italy 35%, North America 30%, Spain 32%, United Kingdom 31%, Germany 25%, Australia 22%, Benelux 10%
Fraud Factor – Takeover account (ATO) attacks are a danger to watch out for as fraudsters gain access to a user’s credentials. This costly problem can also lead to high chargebacks.
Buy now, pay later (BNPL) and pay by invoice
BNPL – percentage of online payment mix by selected markets – Sweden 23%, United Kingdom 14%, Germany 10%, Benelux 8%
Fraud Factor – One of the primary fraud tactics for BNPL is synthetic identity fraud. This is when a fraudster opens a BNPL account using a real identity that has been constructed from multiple data points combined with false information – name, surname, delivery address. It is one of the fastest growing types of fraud and can lead to significant loss of income.
Payment by invoice – percentage of online payment mix by selected markets – Germany 22%, Nordic countries 21%, Benelux 10-15%, United Kingdom 1%
Fraud Factor – A fraudster can arrange for the goods to be shipped to one address and the invoice to be sent to another. The fraudster receives the delivery, but an unsuspecting passer-by receives the payment advice. This means that the merchant loses the merchandise even before it is paid for.
Percentage of the online payment mix by selected markets – Benelux 50%, Malaysia 47%, Belgium 19%, Mexico 16%, Germany 25%, Nordic countries 20%
Fraud Factor – Many online entities (businesses and public institutions) have their bank details open to the public on their website so that visitors can pay directly. However, scammers take this information from public bank account and use it as a billing account. Then they use the desired pickup address for the shipment.
Cash on delivery
Percentage of online payment mix by selected markets – Brazil 18%, Thailand 15%
Fraud Factor – this payment method may involve ordering online. However, the final payment is made in cash. This can lead to the risk of money laundering. The direct cost to traders is that scammers can buy something online, pay in cash, and then request a refund to be transferred to a completely separate account. Merchants can also be vulnerable to other indirect costs like shipping and returns.
Provide a payment method preference without exposing you to unacceptable fraud risks
The best practice for accurately assessing payment method risk comes down to a process known as data enrichment. Once a customer makes a purchase attempt, 20 to 60 master data points are then sent to a risk management system, where thousands of additional data points are discovered and connected. This additional information provides the information needed to make an informed decision about the validity of a given transaction and mitigates the risk of fraud.
For higher risk transactions, it is recommended that you implement additional controls to maximize approval accuracy and record legitimate purchases. This can take the form of a one-time password (OTP) or device ID verification.
Merchants and PSPs who can strike a balance between meeting preferred payment preferences while also providing scalable security measures will be the ones who will find cross-border success.
This article is part of the 2021 Payment Methods Report – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods being considered for 2021, as well as best practices for optimizing payment and converting customers to addressing digital transformation, security and localization.
About Neil Govender
Neil govender is responsible for Fraugster’s client solutions and has held positions in fraud analysis as well as technical and managerial positions at Mastercard, among other financial technology companies. Neil’s primary goal is to deliver the most innovative and effective fraud prevention strategies and solutions to merchants and PSPs, so they can minimize the risk and impact of fraud.
Fraugster is an AI-powered payments security company that enables e-commerce businesses and global payments companies to intelligently manage the impact of fraud on their businesses. We help our customers reduce false positives, reduce the total cost of fraud, and improve payment experiences.