The most common fraud threats for individual payment methods

With payment methods becoming more than just a needed service, Neil Govender, Fraugster's Head of Client Solutions, discusses the impact of different payment fraud models and other factors influencing payments nowadays

There are over 200 types of payment methods available worldwide. With so many options to choose from, merchants and payment service providers (PSPs) are now seeing a significant shift in the ecommerce landscape. Payment is becoming a consumer brand, moving up in the value chain from a utility to a preference, and it is influencing where customers buy.

Customers are also showing loyalty to their preferred payment type. A recent study by PPRO showed that 44% of online shoppers have admitted to abandoning a purchase if their favourite payment method is not available. Therefore, payment method preference has become such a fundamental aspect of the customer’s journey that it is now time to add a sixth step to the traditional 5 Stage Buyer Decision Process model. 

This is why both merchants and PSPs must build a credible, competent strategy around providing all preferred payment methods for their customers. However, with each new payment option that is enabled, the surface area of attack increases. Now, the goal is to provide choice and cater to customer payment preferences without sacrificing security. And the best way to ensure secure transactions is to understand the unique threats that come with each payment method.

The most popular payment methods – the risks

Credit cards

Percentage of online payment mix by selected markets – Japan 65%, Australia 52%, the UK 50%, Brazil 45%, Nordics 40%, France 36%, North America 33%, Benelux 20%, Germany 12% 

Fraud factor – card theft is a common issue with this payment type. One of the major impacts can come in the form of chargebacks. Not only can a merchant lose both the shipped item and the cost charged, but the fees and fines associated with repeat chargebacks can also run into the thousands.

E-wallets 

Percentage of online payment mix by selected markets – China 54%, Italy 35%, North America 30%, Spain 32%, the UK 31%, Germany 25%, Australia 22%, Benelux 10% 

Fraud factor – account takeover (ATO) attacks are a danger to look out for, with fraudsters gaining access to a user’s login information. This costly issue can also result in high chargebacks. 

Buy Now, Pay Later (BNPL) & payment upon invoice 

BNPL – percentage of online payment mix by selected markets – Sweden 23%, the UK 14%, Germany 10%, Benelux 8%

Fraud factor – one of the main fraud tactics for BNPL is synthetic identity fraud. This is when a fraudster signs up for a BNPL account using a real identity that has been constructed from multiple data points combined with false information – name, surname, shipping address. his is one of the fastest-growing types of fraud and can result in large revenue losses.

Payment upon invoice – percentage of online payment mix by selected markets – Germany 22%, Nordics 21%, Benelux 10-15%, the UK 1%

Fraud factor – a fraudster can organise goods to be shipped to one address and the bill sent to another. The fraudster receives the delivery, but an unsuspecting bystander receives the notice for payment. This means that the merchant loses out on the goods before they ever get paid.

Direct Debit

Percentage of online payment mix by selected markets – Benelux 50%, Malaysia 47%, Belgium 19%, Mexico 16%, Germany 25%, Nordics 20%

Fraud factor – many online entities (businesses and public institutions) have their bank details open for public view on their website so that visitors can pay directly. However, fraudsters take this public bank account information and use it as a billing account. Then, they use their desired pick-up address for shipping.

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 end payment comes in the form of cash. This can bring with it the risk of money laundering. The direct cost to merchants is that scammers may purchase something online, pay with cash, 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.

Providing payment method preference without opening yourself to unacceptable fraud risks

The best practice for accurately evaluating payment method risk comes down to a process known as data enrichment. Once a customer makes a purchase attempt, 20-60 basic data points are then sent to a risk management system, where thousands of additional data points are uncovered and connected. This additional information provides the insight required to make an informed decision on the validity of a given transaction and mitigates against fraud.

For more high-risk transactions, it is recommended that additional checks be implemented to maximise approval accuracy and save legitimate purchases. This could come in the form of a one-time password (OTP) or device ID check.

The merchants and PSPs who can strike a balance between catering to preferred payment preferences while also providing scalable security measures will be the ones who find cross-border success.

This article is part of the Payment Methods Report 2021 – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods in scope for 2021, as well as best practices for checkout optimisation and customer conversion by addressing digital transformation, security, and localisation. 

About Neil Govender

Neil Govender is Fraugster’s Head of Client Solutions and has held roles in Fraud Analytics as well as technical and managerial roles at Mastercard, among other fintech companies. Neil’s main focus is on providing the most innovative and successful fraud prevention strategies and solutions to both merchants and PSPs, so they can minimise the risk and impact of fraud.

About Fraugster

Fraugster is an AI-based payment security company that enables ecommerce businesses and global payment companies to intelligently manage the impact of fraud on their business. We support our customers to reduce false positives, the total cost of fraud, and improve checkout experiences.