How Payment Service Providers Can Reduce Fraud Risk for Merchants

The global e-commerce market has experienced exponential growth in recent years and is expected to reach a market volume of $6.3 trillion by 2027. However, with the number of transactions and customers ordering through e-commerce sites increasing every day, the risk of fraud also increases.

With a multitude of growing concerns for consumers and merchants, payment service providers play a key role in helping merchants mitigate the risk of fraud.

What new risks are emerging?

We have seen a rise in card-not-present (CNP) fraud in recent months and years, with the method expected to grow by 40% by 2026. Regulatory interventions such as Secure Customer Authentication (SCA) in Europe have gone some way to reducing the risk, but CNP chargeback fraud remains a key challenge, especially for merchants dealing in high-value physical products such as electronics or jewellery.

Risk minimization methods

The three most important ways to mitigate the potential risk of merchant fraud are to leverage the power of data, maintain regulatory compliance, and leverage the latest technology.

• Harnessing the power of data – Both merchants and payment providers collect vast amounts of data every day – whether it’s about how users interact with websites and apps, the specific payment methods that are most popular in each region, the most popular time of day to shop, or something else. This data is key to fraud prevention measures, as it can be used to inform strategies by identifying patterns and anomalies, for example. It’s important for merchants and payment providers to work closely together to collate this data and create a more informed, accurate picture.

• Maintaining Solid Compliance – Especially as the space continues to change, we see industry standards and regulations evolving and being introduced regularly. Paying close attention to these nuances of regulation is key to combating fraud, as they often inform best practices. Understandably, merchants often lack the expertise or know-how of payments and financial regulation, so their payment service providers can play a key role in helping them navigate the changing regulations, offering guidance and adapting services accordingly. This collaboration is even mandated by some regulations, such as the PSR refund requirement for APP fraud and the Payment Services (Amendment) Regulations 2024, which require merchants and suppliers to work together to ensure compliance and leverage the new regulations to their business advantage.

• Use of technology – As we see more technological advancements in the financial space, we also see a rise in emerging fraud detection technologies, particularly AI and machine learning. AI can be used to detect patterns, anomalies, and unusual behaviors in the vast amounts of data collected by merchants and their payment providers. The technology also has the ability to predict potential fraud in advance, assign risk scores to specific scenarios, and authenticate identities. The proactive nature of AI allows for real-time detection and adaptation to potential threats. However, collaboration between humans and technology remains key to fraud mitigation, and both parties should work together.

There is one key theme that runs through all risk mitigation strategies: collaboration. Specifically, collaboration between merchants and their payment providers

Payment service providers can be trusted allies and strategic partners because they provide merchants with the necessary tools, expertise and support to navigate the often complex and ever-changing e-commerce environment.

Collaboration between merchants and payment providers has the potential to change the course of the e-commerce landscape by reducing the financial pressures and risks faced by individual merchants, while also increasing transparency and protection for customers. Leveraging the vast amounts of data they collect, closely monitoring regulatory changes, and keeping up with cutting-edge technology, while working closely together, can enable merchants and payment providers to create a safer, more robust e-commerce ecosystem for all.