The global e-commerce market is expected to reach a market volume of $6.3tn by 2027. But, with increased volume comes increased risk too. In this fight against fraud, payment providers have a critical role to play in helping merchants to reduce their risk of fraud.

Here are the rising fraud risks in the space, and how merchants can work alongside payments providers to better mitigate these.

Rising risks

Card-not-present (CNP) fraud, in particular, poses a significant challenge, with losses expected to surge nearly 40% by 2026, reaching a global value of more than $28.1bn. Despite regulatory interventions such as Secure Customer Authentication (SCA) in Europe, chargeback fraud as a result of CNP payments, remains a key risk, especially for merchants dealing in high-value physical products like electronics or jewellery.

As online transactions continue to grow, safeguarding against fraud becomes paramount for merchants.

The power of data

With each and every transaction, merchants and PSPs gather a wealth of information, including customer preferences, common purchasing behaviour, average transaction cost and more. This data is a crucial tool for combating fraud, as it can be used to identify any abnormalities in purchases, as well as any emerging trends or even new risks.

The data merchants collect themselves via their own purchases, in combination with the vast amounts of data PSPs gather across their client base, can deliver the insights needed to bolster fraud management capabilities. If merchants and PSPs work together, to combine these two data sets and share insights collaboratively to accurately and effectively inform fraud mitigation tactics, the industry as a whole is in a much better position to combat the rising levels of fraud.

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Robust compliance

Ensuring compliance is another critical pillar in the defence against fraud. Stringent regulatory frameworks are fundamentally in place to protect against any illicit activities, from any parties involved in transactions.

Payment providers play a pivotal role in helping merchants meet these requirements, as they can guide merchants through complex regulatory processes and advise on necessary improvements, while also continuing to adjust and adapt their own services to ensure close adherence to guidelines.

Across Europe, there are multiple upcoming regulation changes, such as the introduction of a new reimbursement requirement for Authorised Push Payment (APP) fraud by the PSR, and the upcoming Payment Services (Amendment) Regulations 2024, which enables PSPs to delay payments processing in situations where fraud is suspected. Merchants will need to work closely with their payment provider, to not only ensure they are abiding by new rules, but that they make the most of them for the business and see them as an opportunity rather than a hindrance.

Leveraging technology

As the financial services and payments space becomes more technologically advanced and new capabilities emerge, we’ve seen fraud detection and prevention methods also becoming more sophisticated and advanced.

Machine learning (ML) and AI, in particular, have emerged as key tools for preventing fraud and illicit activities. In fact, many financial institutions are already leveraging AI for fraud prevention in transactions, for use cases such as:

  • Recognising patterns and anomalies in data
  • Analysing user behaviour to detect unusual activities
  • Predicting and preventing fraud based on data trends
  • Assigning risk scores to transactions for further analysis (human analysis)
  • Using biometric authentication to verify identities.

At their core, AI and ML allow PSPs to identify even the most subtle indicators of potential fraudulent behaviour, with precision that isn’t possible with human analysis alone. This proactive approach to fraud prevention empowers merchants to identify potential issues in real-time, and quickly adapt to emerging threats.

However, AI and ML shouldn’t be solely relied upon. Human-machine collaboration is the most effective way to mitigate fraud risks.

Reducing fraud risk through collaboration

Reducing fraud risk for merchants requires a collaborative approach with their payment providers, who can serve as trusted allies and strategic partners. They equip merchants with the tools, knowledge and support necessary to navigate the often complex e-commerce landscape.

This collaboration can turn the tide, reducing pressure and financial risk on individual merchants and driving greater transparency for customers. By harnessing the power of shared data, compliance measures, risk monitoring, and cutting-edge AI and ML technology, merchants and payment providers can decrease risk and create a safer, more resilient eCommerce ecosystem for all.

Oleg Stefanets is Chief Risk Officer at payabl.