Navigating the Evolving Alternative Payments Ecosystem

Consumers are increasingly choosing alternative payment sources when purchasing goods and services—and fraudsters are finding ways to exploit these methods undetected. Although traditional credit card transactions still reign supreme, the increasing adoption of alternative payments, including cryptocurrency, digital wallets, mobile payments, gift cards, and store credits, is creating opportunities for various vectors of attack. As more consumers switch over to these alternative payments, businesses will need to reevaluate their fraud prevention strategies to keep up with the evolving payments ecosystem.

To dive deeper into this developing landscape and understand what merchants are up against and how they can prepare, Sift had the pleasure of participating in Merchant Fraud Journal’s recent webinar, Digital Trust & Safety: Combatting the Evolving Complexities of Payment Fraud. During the live event, Bradley Chalupski, Editor-in-Chief at Merchant Fraud Journal moderated the panel with Jane Lee, Trust and Safety Architect at Sift, and fraudster-turned-fraud-prevention-consultant and founder of Dispute Defense Consulting, Alexander Hall.

“With all of these alternative payment methods that are increasingly used and increasingly important to consumers, fraudsters are going to find the loopholes and find the ways to exploit these new methods that we as a fraud prevention community are not currently prepared for,” says Chalupski.

Chalupski explains how it’s always harder to play defense than it is to play offense, with fraudsters constantly trying new moves to skirt around merchants and fraud prevention methods. But from what his publication is hearing after talking with businesses, this problem is not being addressed enough.

Businesses are unequipped to handle alternative payment fraud

Merchant Fraud Journal recently published data from a survey conducted of its readership. The independent publication asked fraud prevention leaders at some of the world’s leading brands how they currently evaluate the risk of the changing payments landscape. The results shine light on how companies are approaching the current situation and some of the blind spots they have in their future plans.

The publication asked fraud leaders about their current plans for alternative payments adoption, reporting that more than 25% of fraud prevention leaders plan to expand the number of payment methods they accept over the next two years, with only 6% saying they would definitely not expand to additional methods. Fraud leaders know they must start to prepare for a world where equal emphasis is placed on non-traditional vectors of attack, but many are unprepared to manage the growing threat at present.

When asked about their ability to handle e-commerce fraud from sources other than credit cards, merchants largely expressed a lack of effectiveness within their fraud prevention efforts, with only 26% of leaders reporting their tactics as being “very effective.”

Surprisingly, despite the combination of increasing threats and unpreparedness to handle them effectively, 86% of e-commerce fraud leaders invested the most in preventing credit card fraud, with 0% focusing the most on store credit cards, crypto, or checks. 

This data shows that fraud leaders continue to under-invest in preventing fraud from alternative payment sources that are increasingly being adopted. In fact, these sources are shown to only continue to grow in popularity in the future and account for a larger percentage of fraud attacks merchants will need to combat.

“The generally accepted concept behind fraud is that it’s all centered around stolen credit cards that are exchanged on the dark web. And granted, yes, there’s a high volume of that. I’m here to shed light on the fact that I would say 80% of the methods that I participated in had nothing to do with stolen credit cards,” says Hall.

Hall goes on to explain that there are many methods to commit fraud other than using credit cards, citing how valuable checks can be to fraudsters. “The difference between a simple piece of paper and a check is a MICR (Magnetic Ink Character Recognition) line. That’s a $40 purchase,” says Hall.

Uncovering the new Fraud Economy ecosystem

Fraud vectors have evolved from siloed incidents to a much larger, interconnected network of fraud known as the Fraud Economy, with the majority of abuse vectors serving as means to an eventual payout. There are hundreds of vectors within account takeover, content abuse, and payment fraud that fraudsters can leverage to exploit merchant systems, and they’re all intertwined.

Historically, the fraud prevention industry has been laser-focused on tackling the issue of chargebacks, but it’s important for merchants to break out of that narrow mindset and see fraud for the broader ecosystem of which it’s a part. The reality is that e-commerce fraud goes way beyond credit card fraud, and the sooner that businesses come to terms with this evolving landscape, the better prepared they can be to fight it. 

Lee coined the term “one-dimensional fraud” to talk about these one-to-one approaches to catching fraud: “One-dimensional fraud is easy to catch. It’s easy to detect whether a credit card was stolen. You get that response back relatively quickly from your payments processor. But now, when an account is taken over to use a stored payment method, that now becomes a little trickier to catch.”

How to stay ahead of payment fraud

To help businesses struggling with how to tackle such a mountain of a problem, Hall has developed a four-step process for combatting various fraud vectors: identify, monitor, automate, and repeat. It’s first crucial to identify all your transfers of value, not limited to just credit cards, that your business processes. Next, monitor and take note of fraudulent characteristics such as shipping addresses, billing addresses, and IP addresses that may have been used multiple times at large volumes. This will give you an indication of how prevalent your fraud problem is and how these fraudsters are infiltrating your system. In order to manage high abuse volumes, it’s essential to turn to more efficient modes of automation, such as a fraud prevention vendor. 

By turning to a fraud prevention service, like Sift, you can cut down on time-consuming manual review processes and tap into a robust network of data sources to help catch these fraud vectors. The Sift Digital Trust & Safety Suite uses patented, real-time machine learning to detect various types of abuse, enabling merchants to refine, scale, and streamline operations. Sift also leverages a global merchant data network to identify fraud trends so that even small merchants benefit from shared flagged information and accounts, allowing more businesses to detect and stop fraud before it happens.

Watch the webinar to get more insights on alternative payments and tips on how you can protect and grow your business with Digital Trust & Safety.