Don’t Let Fraud Losses Surprise You
Whether you're in the beginnings of starting up your business or the heady days of growing it, one often neglected part is the operational headaches and risks you face as you scale. In particular, if your online business serves many customers and accepts payments on that platform (e.g., Uber, Kickstarter, Constant Contact), you should be thinking about fraud risk and how exposed your platform might be to this risk. Here are five tips to ensure you're not surprised by fraud losses:
1. Know your enemy. First, you have to understand whom the enemy of your platform or marketplace is. You might not realize that there are lots of different kinds of fraud and loss, including merchant identity fraud, merchant credit risk and buyer identity fraud. Most likely, you'll be concerned with collusion fraud. What this means is someone setting up a merchant or fundraiser account with a fake or stolen identity, then using stolen credits and fake buyer identities to pay their own merchant account. They get the money and disappear, and you're stuck with the charges.
2. Have simple tools in place to start. One of the first things you can do is actually pretty traditional. Using a vendor like Experian, Equifax or LexisNexis, you can validate that your user's identity is a real one that matches their database. If needed, you can also check their business credit and history.
3. Use social data as your secret weapon. To get more advanced, you should consider social data. It's easy enough to do a social search based off an email address — you can see whether someone has a Facebook or LinkedIn profile and whether it matches a verified email address they gave you. A long-established social profile that matches their name and email address is an asset they have that's difficult for a fraudster to synthesize.
4. Practice risk management. Managing payment risk protects you against losses from chargebacks. It also improves the trust in your platform by weeding out bad merchants that lead to bad buyer experiences. Trust and excellent buyer experiences reduce churn and accelerate growth.
5. Don't wait. Fraud is unlike most business phenomenon because it's highly nonlinear. You can have zero fraud one week and be in an all-out attack the next. One company found that its fraud attack was being spurred by a fraud blog post explaining how you could make a quick $500 off its site. Don't let this happen to you.
Even if you don't see any fraud today, you need to have at least basic defenses and a rapid response capability in place to be prepared. Of course, alternatively, there are many providers whom you can use so that you don't have to take on this burden yourself.
So, while you might not undertake all five of the tips above, the important thing is to start thinking about the possibility and putting in place some measures to assure the trust and safety of your online platform.
John Canfield is the vice president of risk for WePay, a payments API provider.