There’s a dangerous combination of factors that have led to the pervasiveness of payment fraud we see today. Between the growth of the SaaS industry, the increase in volume of digital payments, and the ever-evolving sophistication of fraudulent techniques, businesses are unfairly forced to be in perpetual defense-mode, drawing up their own battle plans to protect themselves and their customers.
The impact of payment fraud on software companies
Payment fraud can come in different shapes and sizes, but each criminal technique has the potential to bring harm to the businesses targeted. LexisNexis® Risk Solutions recently reported that every $1 lost to fraud ends up costing businesses an average of $3.99, leaving them with consequences four times larger. But the impacts are more than just financial — they typically boil down to these:
- Operational costs and revenue loss
- Damage to the customer experience
- Harm to brand reputation
- Customer distrust and potential attrition
Better payment fraud management is within reach for all businesses. In this blog we’ll cover:
- Common types of payment fraud
- Payment fraud management strategies
- How you can protect your customers
Common types of payment and credit fraud that can harm software companies
As long as there is commerce, fraud is here to stay. While an unfortunate reality, we can focus on recognizing some of the common payment and credit fraud techniques that software companies can experience today. Fraud is often categorized into two different groups: fraud risk and credit risk. Understanding the forms fraud takes will help your business better identify vulnerabilities and put risk mitigation techniques in place.
Account takeover fraud
Account takeover fraud is a type of payment fraud that occurs when a fraudulent actor gains access to a user’s online account and steals payment and other personal identifiable information (PII) to then take funds or make purchases. For software companies, this type of fraud can be particularly damaging. Your customers trust that as subscribers to your software, their accounts and associated information are under your protection. A breach like this can erode that trust and bring harm to your overall brand reputation.
Identity theft or subscription fraud
Most software companies operate on a subscription model and receive regular monthly or annual payments for their customers’ use of services. These transactions are generally card-not-present, where a physical credit card isn’t swiped, dipped, or tapped — rather, recurring payments are processed digitally and automatically. This can create an opportune setting for criminals.
When a fraudulent actor obtains and uses stolen credit card and billing information from an individual or business to falsely set up an account with a software company, this is considered subscription fraud. What’s particularly cunning about this type of fraud is that the fraudulent payment may go unnoticed by the victim of the stolen credit card information, depending on the amount charged and how often the credit card owner checks their accounts or statements.
Phishing attacks or social engineering
Phishing scam artists have become more prolific than ever. With the use of emails, texts, and voice messages, fraudulent actors use deception to collect payment information and other PII. Criminals who are particularly skilled at this method are also known as social engineers, capable of carefully manipulating their victims into giving them the sensitive information they seek.
In the case of software companies, there are a couple of ways this can unfold. The first is the potential for an internal team member to fall victim to a phishing attack. If a criminal is able to identify and act on a weak spot within your company, your whole operation could be impacted by a data breach. A successful phishing attack could mean all of the stored data of your customers and their payment information could be up for grabs, leaving you to deal with the aftermath of the financial and brand damage.
In a second scenario, a masterful fraudulent actor may impersonate your brand and directly contact your customers, tricking them into ‘updating their payment information’ or ‘taking care of an outstanding payment’.
Chargeback fraud
A tactic of credit fraud sometimes known as ‘friendly fraud’, the impact of chargebacks has a way of sneaking up on companies. Chargebacks occur when a customer disputes a charge, typically with their card-issuing bank, and as a result, the funds are returned to them, at the expense of the business that initially processed the transaction. While many chargebacks are granted for legitimate reasons, it becomes fraudulent when a customer receives the service promised and still files a dispute with false claims. For example, they may allege they’ve been charged after canceling the service, to essentially get that service or product for free, after it’s already been rendered or delivered. Chargebacks can lead to hits to your bottom line — not only are you required to pay back the disputed amount to the customer, but chargebacks also typically come with fees and penalties imposed by your acquiring bank.
Best practices for protecting your business from payment fraud
As a business, the prevalence of fraudulent payment attempts and the potential for damaging outcomes can seem overwhelming, but you certainly don’t have to feel unequipped. With these strategies, you can invest in a more comprehensive approach to protecting your business and your customers.
Use data and monitor customer behavior
When it comes to identifying unusual behaviors or patterns, you can use customer payment and activity data to your advantage. If something seems off, give it a second look. Monitoring for suspicious activity with the help of fraud detection automation tools can also be particularly effective against chargebacks. By keeping an eye on customers with frequent chargebacks, you can evaluate the causes and prevent fraudulent disputes. Tracking and documenting any and all fraudulent activity can help you become more vigilant in identifying threats.
Implement authentication methods
While not the ‘end all be all’ in security measures, authentication methods are an effective piece of the puzzle for building a strong defense. Plus, many customers have grown accustomed to the very minor login disruptions of this practice. By requiring your subscribers to log into their accounts with multi-factor authentication and biometric authentication, like fingerprint detection and facial recognition, you can authorize true users and thwart fraudsters from engaging in account takeovers.
Educate your employees
Education is one of the strongest defenses against criminal activity. Fraudulent actors become more and more sophisticated by the day, and staying informed of the latest threats to software companies and customers can help you anticipate and prevent their next move. When it comes to phishing especially, education becomes absolutely critical. Empower your teams with the ‘payments street smarts’ and knowledge to detect, report, and prevent attacks — and don’t ever stop. Fraud never sleeps, and as it evolves, so should the education around it.
Partner with a payments provider who can help keep you protected
There’s strength in numbers and leaning into the partnership with the right payments provider can help fortify your defense by offering access to security resources you may not have, which can complement your strategy. A strong partner will work with you to help you understand your threats and your compliance requirements, and implement the payment fraud management strategies and technology to keep you and your customers secure.
Secure payment acceptance methods, expert consultation, and PCI compliance management are all services offered by Payrix, an Embedded Payments solution from Worldpay from FIS. Payrix is a leading PayFac®-as-a-Service partner who takes on the risk, underwriting, fraud, and compliance responsibilities of being a payment facilitator, so you don’t have to. Should your software company be targeted by fraudulent actors trying to activate accounts or subscriptions with stolen identification, Payrix has the underwriting expertise and technology to detect and take action against those behaviors.
How to help protect your customers from payment fraud
Just like you, your subscribers have their own businesses to protect. If their busy days don’t leave time to focus on fraud management, or the resources aren’t available to them, you can be a strategic partner, guiding them on a path to better payment fraud management.
Help educate your customers and enable them to build a defense
Payment fraud can look different for your customers than it can for your software company. This is especially true if your customers are accepting card-present transactions that can be vulnerable to tactics like card skimming. As their software provider, you can play an important role in helping your customers understand their threats and develop a strong defense. As you spend time educating your own teams about the potential impact of fraudulent activity, take it a step further — discover what your customers are commonly up against and provide the support they need. By educating yourself, you can then educate your customers, thus positioning yourself as a reliable advisor and go-to resource they can trust.
Ensure your partner can offer a simple and effective security program to your customers
Empowering your customers with education goes even further when you can also offer best-in-class tools that can actually protect them. Payrix and Worldpay from FIS now offer SaferPayments, payment protection solutions for businesses. Offered as basic or fully managed services, you can help protect your customers and give them peace of mind with features including these:
- Powerful security tools
- Breach assistance
- PCI compliance management support
- Reduced PCI scope (if using point-to-point encryption)
- Always-on, expert support
Providing the best experience to your customers includes ensuring your software and their payment information is protected. Defending your business against payment fraud is an ongoing responsibility but with the right strategies and partnerships in place, you can take control of your payment fraud management and keep your business and customers safe and thriving.
