As more consumers move online for their shopping needs, companies must manage an increasing amount of transactions. When these transactions are made across the web, malicious users have more opportunities to commit fraud.
Whether it’s a chargeback initiated by a customer’s bank or a more complex hack of a customer’s account, businesses must protect themselves from the loss of revenue, but also prevent disrupting operations to review several transactions.
Retailers and ecommerce businesses are turning to financial fraud detection software to prevent unauthorized access to customer and internal data, as well as unnecessary payment declines to separate good orders from bad.
In this guide, we’ll cover:
What is financial fraud detection software?
Financial fraud detection software helps companies sort through orders to identify fraud, false declines and chargebacks, and prevent access to sensitive data as customers complete transactions online or in-store.
Modern financial fraud detection software offers a dashboard to review flagged transactions and manually establish rules to spot common fraudulent buyer behaviors and customize thresholds to trigger further action. Financial dashboards are a core feature of fraud detection software, where users can identify trends in customer behavior and quantify the losses from chargebacks or declined transactions.
A dashboard, as shown in Riskified, shows the ratio of approved versus fraudulent or declined transactions.
Artificial intelligence (AI) is transforming these systems into automated guardians for company data, analyzing several factors simultaneously to quickly understand how customers could undermine the system.
Common features of financial fraud detection software
||Review every online or in-store transaction for fraudulent behaviors, then approve or send them back for manual review.
||Analyze transactions as they occur to spot fraud and manage how the system identifies common problems.
|Internal fraud monitoring
||Perform reviews of internal actions that may be fraudulent to determine if further investigation and monitoring is needed.
|Access security management
||Manage the roles and types of users who can access transactional data to prevent tampering or malicious hacking.
|Custom fraud parameters
||Customize the specific parameters and thresholds the system uses to measure threats of fraud, and establish trigger actions when thresholds are breached.
|Check fraud monitoring
||Identify fraudulent check deposits to take action quickly, and ensure availability of funds for legitimate transactions.
||Collaborate on investigations into fraudulent customer behaviors.
What type of buyer are you?
- Banks and financial institutions: Banks, credit unions, insurance companies, and other financial institutions commonly use financial fraud detection software, either developed in-house or by adopting a third-party system. Because of the volume of daily transactions these organizations conduct, automation is necessary to accurately manage each transaction as quickly as possible to reduce fraud and prevent losses.
- Ecommerce and online retail: The increase in online shopping is leaving ecommerce businesses vulnerable to various types of fraud, such as illegitimate chargebacks or more complex account takeover fraud (ATO) attacks. Most providers of financial fraud detection software offer scalable versions of their systems that are affordable for smaller businesses that need protection.
- Physical stores and in-person services: Aside from online transactions, companies want to prevent fraud in-person as well. While checks are used less for making purchases today, they are still commonly used to commit fraud by forgery, duplication, changing the content of a check, and counterfeiting. Financial fraud detection software allows companies to review all checks for fraud, instead of just high-value checks, using AI and image-recognition technology.
Benefits and potential issues
- Keep good customers, filter out the bad: For companies with a high volume of customers, financial fraud detection software helps to automate the task of reviewing hundreds of transactions in a short time frame. This helps companies weed out customers who attempt fraud or take advantage of their customer service policies, and spend more time optimizing the experience for honest customers they want to retain.
- Increased transaction visibility: The number of successful monthly fraud attempts has grown by 27% for small retailers and nearly 50% for midsize-to-large companies since the beginning of 2020, with a large spike following an increase of online shopping. However, without a dedicated fraud prevention system in place, companies struggle to quantify and combat fraudulent customers.
- Improved customer experience: When retailers manually review transactions, it can cause slower service for their most valuable customers and sometimes ruin their experience. Automated management of transactions not only removes malicious customers, but also allows companies to provide faster, more reliable service to the majority of customers who don’t commit fraud.
Market trends to understand
- Increase in online food delivery leads to more risk: In the first half of 2020, many small restaurants adopted and implemented online ordering systems to retain customers and launch new delivery options. This new initiative has left restaurants vulnerable to multiple types of fraud, including chargebacks, many of which aren’t necessarily on purpose—sometimes customers commit "friendly fraud" in which they initiate chargebacks after receiving food instead of connecting with the restaurant itself.
- Account takeover fraud (ATO) spikes in 2020: Other types of fraud are growing, such as account takeover fraud (ATO), as more consumers shop online. Instead of simple forgeries or chargebacks, a more complex type of hacking is increasing where they access customer accounts to use as their own. Modern financial fraud detection software include features to detect compromised accounts, devices, and changes to personal information that can indicate ATO fraud quickly.
- New 3D Secure 2 offers smoother transactions: A collaboration among several major card companies, including Visa and MasterCard, resulted in the 3D Secure platform, which enables communication of authorization data between businesses, payment providers and banks. Instead of a mandatory review period, this platform sends additional transactional data, such as shipping addresses, device information, and previous purchase histories, to the bank for faster authentication. Most of today’s ecommerce and point-of-sale software integrates with the new 3D Secure 2 platform to provide more security for businesses and a smoother experience for customers.