Best Fraud Prevention Practices to Protect Against Fraud and Disputes

Fraud is an enormous detriment to your business. In 2022 alone, worldwide losses to payment fraud topped 41 Billion. Robust defenses to safeguard revenue are necessary—or you may see fraud losses cut into profits.  

But how can you protect yourself? We compiled a comprehensive list of fraud prevention best practices. Use these strategies to limit fraud and avoid chargebacks.    

1. Payment Security

Your payment system manages millions of financial transactions. That gives fraudsters the incentive and space to enact scams. Protect ground zero—right when your customer makes a payment. Here are some payment security best practices:

• Achieve compliance: Regulations such as Payment Card Industry Data Security Standard (PCI-DSS) and General Data Protection Regulation (GDPR) outline how you must handle sensitive payment and personal information. You will fix numerous weak points just by following these standardized security frameworks.
• Build a secure gateway: Protect consumer payment info at rest and in transit. That means using things like encryption, tokenization, and HTTPS.
• Vet vendors: Your payment security is only as strong as the payment gateway you use. Look for trusted providers with secure APIs.
• Use firewalls and anti-virus: Limit malicious traffic and viruses that can enter through the network.  

2. Authentication

Fraudsters can hack, breach, and take over customer accounts. Once inside, they have a base where they engage in further malicious activity. You must protect these accounts so only the correct user can access your systems. Use the following authentication practices to act like a "security gate":

• Multi-Factor Authentication (MFA): Only permit users who present more than two or more authentication factors that confirm they are who they say they are.
• Biometrics: Require unique physical characteristics for all user recognition.
• Single Sign On (SSO): Adopt one high-quality user credential to reduce login friction and centralize authentication.  
• Require strong passwords: Use passwords with 12 characters and a mixture of symbols, letter cases, and numbers.
• Adaptive details: Authorize based on additional account details such as common locations, IP addresses, devices, etc.

3. Monitor

Fraudsters may attack at any time and in novel forms. Failure to detect an intrusion can result in extensive financial damage. Protect your systems by installing 24/7 digital "watch guards":

• Behavioral and historical analysis: These tools assess suspicious customer patterns to detect the work of fraudsters (e.g., stolen cards or hacked accounts).
• Alerts: Employ a warning tool that offers immediate intrusion detection. Alert solutions can limit the damage from numerous threats (e.g., malware, insider attacks, etc).
• Risk scoring: Use digital tools that assess user activity and assign risk levels (e.g., indicators of chargeback fraud). If certain behaviors pass a preset threshold, the tool limits the user or takes automatic preventative action (like requesting more verification).
• Suspicious transaction tracking: Use tools that measure unusual patterns within transactions, such as high-velocity requests, large orders, rushed orders, and multiple orders.‍

4. Verification

Fraudsters can imitate, spoof, or impersonate users. With just some stolen data (like a compromised password), they can sail past your primary authentication defenses. That's why it's a good idea to confirm the identity of each user as they make a financial transaction.  Here are some verification best practices:

• Validate payment info: Confirm that all inputted payment data matches known records. Collect data such as addresses, credit card numbers, security codes, names, emails, etc.
• Use KYC protocols: Know Your Customer (KYC) helps limit corruption and money laundering. Follow the required standards and qualify the purpose of all customer payment actions.
• Use verification tools: Employ helpful tools such as 3DSecure, Card Verification Value (CVV), Address Verification Service (AVS), CAPTCHA, and One-Time Passwords (OTPs) to verify the user.  
• Confirm orders: To limit chargeback and delivery fraud, engage in physical order verification. Collect signatures, proof of delivery, shipping receipts, etc.  ‍

5. Communication

Users can fall victim to scams or fail to follow security policies. Or they may engage in fraud by accident (a practice known as friendly fraud). Good communication practices are crucial for shoring up one of the weakest points in your defenses: your customers.  

• Write clear billing descriptors: Ensure all business details are correct and easy to read to limit confusion and prevent unnecessary chargebacks.  
• Offer accessible Terms of Service (TOS): Write a legible yet robust TOS for high-level transparency.
• Provide a wealth of customer data: The more educated the customer is, the more they can partner with you to keep everyone safe. Include data whenever possible (receipts, tracking info, confirmations, etc).
• Engage in omni-channel communication: The more customer touch oints, the easier it is to deflect fraud (before it happens). Invest in multiple channels (email, social media, chatbots, phone, etc).  
• Invest in customer service: Good customer service reps can limit numerous instances that would likely result in friendly fraud (e.g., using refunds, supporting customers who are victims of fraud, escalating instances of friendly fraud, etc).

6. Fraud Detection

Fraudsters evolve. They continue to engage in increasingly sophisticated schemes. You will need proactive defenses that adjust to these new attacks (rather than passive and static strategies). Here are some well-known fraud detection best practices:

• Fraud profiles and blacklists: Build profiles to limit users that exhibit common patterns of fraud. Blacklist known fraudsters.  
• Update security systems and patch: Engage in regular audits. Security reviews can uncover unseen vulnerabilities. Update and patch these problem areas in preparation for the latest scams.
• Incident response plans: Have a response plan that limits the fallout of a breach (e.g., have tools that contain intruders, build ready-made system restores, etc).
• Use novel fraud detection tools: Integrate high-quality software that uses innovative cybersecurity and fraud prevention strategies (e.g. artificial intelligence, machine learning, blockchain, etc).
• Employee training: Teach employees how to identify, block, and report instances of fraud.

"The amount of money lost to fraud is truly staggering, but it is possible to do something about it," says Klipboard Founder, Draven McConville. Companies can significantly reduce the risk of fraud with the right tooling. Pairing these fraud detection strategies with comprehensive chargeback management provides security for the business and its customers.

7. Data Security

Financial transactions involve collecting data. That data has value and attracts criminals. Here are some best practices to secure private information:

• Database and network security: Use novel tools to protect data. That can include data masking, network segmentation, endpoint security, and encryption.
• Backup: Perform regular backups so you can restore data in the event of a corruption or breach.
• User restrictions and internal controls: Assign permissions on who can access or manipulate all data.  
• Physical security: Protect physical servers with security guards, environmental controls, barriers, and surveillance.

8. Chargeback Management

Both criminals and honest customers can abuse the chargeback process for fraudulent gain. These actions are hard to identify as they include both false and honest claims made for various reasons. Here are some best practices for limiting chargeback fraud:  

• Employ chargeback alerts: Use tools that detect customer patterns with a high likelihood of becoming chargeback fraud.
• Collect evidence: You can fight and win false disputes, but only if you have proof. Collect all evidential data.
• Use chargeback management tools: Numerous solutions offer robust, tailor-made strategies with the latest technology (e.g. AI) to best handle chargebacks. Integrate these tools for comprehensive protection for the entire chargeback cycle.
• Root cause analysis: Engage in data analysis to determine which areas of your business operations cause the most chargebacks and can stand for improvement.
• Automate: Chargeback defenses are a drain on your resources. Chargeback teams with limited resource support are less likely to prevent (or win back) false claims. Automate whenever possible.  

Conclusion

The fraud economy is ever-evolving. Implementing verification protocols and advanced fraud detection tools strengthens defenses, while comprehensive chargeback management ensures efficient dispute handling.Chargeflow’s automated solutions, combined with these best practices, provide a comprehensive approach to protecting your business. By staying proactive and informed, you can significantly reduce the risk of fraud and chargebacks, ensuring a secure shopping experience for your customers. And if you need support with your fraud prevention strategy, contact a fraud expert at Chargeflow.