Fraud Detection & Prevention: How to Identify the Right Solution?
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Let’s cut to the chase. If your business is online, chances are, fraud is a concern. In the United States alone, businesses lost over 4 billion USD to cybercrime in 2020. As more and more people begin using their devices for daily tasks such as grocery shopping and ride-hailing, the avenues for bad actors to commit fraud would be amplified.
Attacks can take several forms, ranging from payment fraud and fake accounts to promo abuse. In fact, fraud and abuse have become so sophisticated that business owners may not even realize it’s happening. This is where fraud prevention solutions come in. They leverage big data, machine learning, and artificial intelligence to help businesses fight fraud. It’s a must-have for any company hoping to protect themselves and their users.
Common types of fraud and abuse
Fraud has different faces and affects businesses differently. Here are some of the common types of fraud you should look out for:
• Account takeovers: Bad actors steal user credentials (often through techniques such as social engineering and phishing scams) to log into existing accounts and conduct malicious activity. This includes making fraudulent purchases and stealing personal data.
• Fake accounts: Fraudsters use stolen or falsified information to create fake accounts. These are often used as a gateway to conduct fraudulent activity such as payment fraud and promo abuse.
• Payment fraud: Phishing scams and data breaches are used to steal and resell credit card credentials. These credentials are then used for unauthorized transactions, which can lead to chargeback losses for merchants.
• Promo & referral abuse: Fraudsters use tools such as bots and emulators to exploit referral and promotional incentives at scale. This results in unsuccessful campaigns and wasted resources on non-genuine users.
The best features for fraud detection and prevention
A good fraud prevention solution should enable a seamless customer experience and keep fraud out. It should proactively identify fraudulent and malicious behavior to stop fraud before it happens. The fraud prevention solution should also help prevent losses from malicious activity. Some key features to take into account are:
• Customizable risk levers: You need to be able to customize how risk is determined depending on the nature of your business. For example, an e-commerce platform may take the use of emulators more seriously than a gaming company. Being able to decide what is considered as risky behavior is essential for an effective fraud prevention system.
• Compliance with security standards: Businesses need to make sure the solution they adopt is compliant with their own company’s security standards. They should be SOC 2 and ISO 27001 certified, just to name a couple. Another example is for businesses accepting payments online, the fraud prevention solution should also be PCI-DSS accredited.
• Machine learning: Solutions need to use a combination of supervised and unsupervised machine learning to enable accurate fraud detection. Supervised learning harnesses data from past transactions to identify signs of fraud while unsupervised machine learning is used to recognize emerging fraud trends that haven’t been seen before. Having a global network of threat patterns will also help in enhancing unsupervised machine learning.
• Powerful dashboard: Fraud detection often involves the use of data visualizations. Having a dashboard made up of user friendly and accessible visualizations is a must for any fraud prevention solution as they are used in detecting fraud patterns. A powerful dashboard makes it much easier to interpret complex data and conduct link analysis.
Main challenges of fraud detection and prevention
Employing a fraud detection and prevention solution doesn’t necessarily make all your problems go away. Here are some things to look out for:
• Consumers want a frictionless experience: In an ideal world, you would be able to employ several layers of customer checks before allowing a transaction to go through. But these days, convenience is king. Having too many security checks and stages of authentication could drive customers into the arms of competitors.
• Needs to be tailored to each individual business: Fraud can affect businesses in such different ways that there’s no one-size-fits-all solution. A fraud prevention solution that can’t be customized to your company’s needs may not be as effective as one that is tailored specifically to your business.
• Staying up to date: Fraud tools and techniques are growing more sophisticated every day. A solution that works one day may not work the next. Risk teams need to ensure their fraud detection technology has the capacity to stay up to date with current and future fraud trends.
Types of fraud detection and prevention systems
There are several ways you can implement a fraud prevention system. Here are some of them:
• In-House: You may choose to build your own fraud prevention solution. This gives you more control over risk decisioning and less concerns over data privacy. But it also requires considerable resource investments such as risk expertise and development teams that not all businesses would have capacity for.
• Built-In: Many payment gateways and service providers have their own fraud prevention software. They use historical data and machine learning to determine whether transactions are fraudulent or not, and block users who have previously committed fraud. But a built-in solution may not be a good fit for every type of business, and some may find the system doesn’t provide enough visibility into the decisions and recommendations it makes.
• End-to-End: This solution is usually offered by a third party provider. The benefit of this approach is that maintenance is taken care of by the provider, and the solution is scalable since it’s often cloud based.
• Hybrid: A multi-layered approach is the option for you if what you’re looking for is a combination of build and buy. A company may choose to hire a third party provider to provide expertise in areas they are not well versed in even after investing resources.
What to look for in a fraud detection and prevention solution
Along with determining how you want to integrate the fraud detection solution, your business should also need to decide what type of solution they want to implement. This includes factors such as the ease of use, pricing model, and how customizable the solution is. Companies should also ensure the solution is compliant with data protection standards, and take note of the support available and methods of integration. Given the increasing fraud threats, it’s high time companies integrate fraud prevention solutions into their platforms.