Data security is a major issue for businesses, and the threat of transaction fraud should be taken very seriously. Preventive measures to stop transaction fraud before it can occur must be in effect in order to give customers the peace of mind that their data is safe and protected. There are many strategies businesses can use to take action against payment processing fraud and ensure PCI security standard compliance.
The world of payment processing has changed dramatically in recent years due to the rapid development of new payment methods, changing consumer preferences, and technological innovations in POS systems of all types. However, as these advanced payment technologies are adopted and consumer payment preferences evolve, hackers and fraudsters continue to look for hidden loopholes and unsecured back doors they can exploit for their own malicious goals. The risk of transaction fraud is real, and businesses absolutely must take preventive action to protect sensitive payment data.
Fortunately, there are many different types of protection that can be utilized by businesses to provide a safe and secure transaction process for customers. Implementing a combination of technological measures and internal business processes to block malicious attacks and secure customer data needs to be a top priority for any company, but how does transaction fraud even occur in the first place? Understanding the nature of transaction fraud is important, as is knowing what kind of risks are associated with it from a business perspective.
What Exactly Is Transaction Fraud?
Quite simply, transaction fraud is the unauthorized use of a stolen method of payment to make purchases. Fraudsters can obtain the payment details of legitimate customers in many ways, including the physical theft of credit cards or debit cards, or gaining unauthorized access to an online customer account. Transaction fraud can also take the form of unauthorized chargebacks, where scammers would make a purchase and then proceed to submit for a refund with the intent of obtaining goods and services for free.
Fraud is not limited to only purchases, however. It can also occur with theft of gift cards, illegitimately-obtained loyalty program points, and even creating multiple new accounts to take advantage of free trial offers or sign-up bonuses that are intended to be one-time rewards.
The Negative Impacts of Transaction Fraud on Businesses
The most immediate effects of transaction fraud on the business are lost revenue and lost inventory. Depending on the value and frequency of fraudulent transactions, the total loss associated with fraud can vary substantially. Loss of profitability due to fraud can quickly add up if left unchecked, hindering the business’ ability to achieve growth objectives and causing strategic plans to go off track.
The total impact to the business and the affected customers extends into other areas as well. Every instance of transaction fraud erodes the reputation of a business, customers become wary and less likely to purchase in the future. This negatively influences your company’s competitive position in the market and opens the door for competitors to pull customers away from you. The psychological impact of transaction fraud on the minds of customers is significant, and once the damage is done it can be extremely difficult to repair it.
Overall, transaction fraud directly cuts into the profitability of a business and weakens brand reputation, so it’s absolutely critical to take appropriate precautions to protect customer data and block fraudsters from succeeding in their efforts. In fact, the requirements for businesses to protect customer payment data are strictly defined in the Payment Card Industry Data Security Standards (PCI DSS).
How Do Businesses Maintain PCI Compliance?
The complete list of PCI DSS requirements is quite extensive, and we recommend all businesses review the entire document at the pcisecuritystandards.org website. However, all the finer details are categorized into one of 12 main requirements. These 12 categories are as follows*:
- Install and maintain network security controls
- Apply secure configurations to all system components
- Protect stored account data
- Protect cardholder data with strong cryptography during transmission over open, public networks
- Protect all systems and networks from malicious software
- Develop and maintain secure systems and software
- Restrict access to system components and cardholder data by business ‘need to know’
- Identify users and authenticate access to system components
- Restrict physical access to cardholder data
- Log and monitor all access to system components and cardholder data
- Test security of systems and networks regularly
- Support information security with organizational policies and programs
5 Ways to Ensure Secure Payments and Prevent Transaction Fraud
To provide the greatest level of security and protection against transaction fraud it is necessary to consider multiple different approaches. A combination of hardware, software, and business processes yields the best results. Let’s explore 5 of the most effective strategies that savvy businesses are employing to guard against transaction fraud.
1 – Utilize Modern Payment Processing Encryption and Tokenization Technology
When transactions are processed through the point-of-sale system, the payment information is digitally transmitted through multiple recipients to conduct the verification, authorization, and approvals needed to complete the payment. If the payment data is intercepted by thieves, it could be used to create fraudulent transactions. Modern POS systems utilize encryption technology to encode the transaction data so that it can only be deciphered by the intended recipient’s system.
In addition, each transmission is sent with a unique digital signature, referred to as ‘tokenization’. Tokenization causes the payment data to be valid for only a single individual transaction, rendering it useless for anyone who attempts to use it to make additional fraudulent payments. Combining encryption and tokenization ensures that when payment data is transmitted, it is unable to be used for anything other than the original legitimate transaction.
2 – Leverage Multi-Level Authentication Protocols for Online Payments
Businesses who process transactions online never actually see the customer or their payment card. There must be digital identification methods employed to verify the authenticity of transactions and prevent stolen payment details from being used. Authentication steps such as confirmation of customer PIN codes, SMS verification prompts, and card CVV number checks are all examples of how businesses can make it much more difficult for data thieves to have all the necessary verification data to complete a transaction. Fraudsters generally take the path of least resistance, so implementing multi-level authentication is an effective way to ward off transaction fraud attempts.
3 – Ensure Fraud Detection Software Always Stays Up-To-Date
Maintaining firewalls, anti-virus tools, and other types of fraud prevention software is another vital part of protecting customer data and business systems against malicious attacks. These software tools should always be kept up-to-date with the latest patches and releases to stop hackers in their tracks. Ultimately, it’s far better to stop transaction fraud before it can even occur, so investing in powerful data security software is a wise decision for all types of businesses.
4 – Thoroughly Train Employees on Fraud Detection and Preventive Practices
While technological measures such as encryption and authentication are essential, it’s also important to recognize the critical role that your employees play in preventing losses due to transaction fraud. Proper training and regular education updates can help employees quickly spot the common warning signs of illegitimate transactions so they can be halted before progressing any further. The earlier you can catch a fake transaction, the less impact it will have on your business. Warning signs like suspicious addresses and strange purchasing behaviour on long-term customer accounts can be easily identified if your team is trained on what to look for.
5 – Closely Monitor Sales Trends and Conduct Audits to Identify Anomalies
Businesses who deal in very high volumes of orders may not be able to manually catch each and every instance of transaction fraud as they occur, but careful analysis of trends can lead you to identify the sources of fraud that may otherwise be overlooked. For example, fraudulent transactions that demonstrate patterns in things like the product types being purchased, the addresses listed on orders, or payment methods being used can narrow your focus and pinpoint problem areas. These problem areas can then be corrected or security measures put in place to prevent future similar instances from occurring.
Leveraging these five strategies will help your business minimize the risks associated with transaction fraud, but there’s one more element to consider that can elevate each one to even greater effectiveness. Choosing the right payment processing provider for your business gives you the resources and tools you need to create the most secure transaction experience.