3 new fraud risks that come with alternative payments

To meet high customer expectations and compete in a post-pandemic commerce ecosystem, it’s important for brands to prioritize customer experience (CX) and allow a variety of quick and easy payment methods. Brands that fail to streamline the customer experience and put such measures in place are at risk of falling behind those that do.

But aligning with the adoption of these new payment methods will require tackling the objections and potential issues that come with them—and unfortunately, those issues can quickly add up.

The rapid adoption of alternative payment methods has opened companies up to fraudulent opportunities. According to Javelin Strategy & Research, there’s been a 35% increase in fraud attempts since before the pandemic.

The common types of alternative payment

42% of global transactions use alternative payment methods, and this number is set to increase. In fact, online purchasing is predicted to account for 95% of purchases by 2040, which will undoubtedly bring a wealth of new and interesting ways to pay as the global shopping landscape shifts online. 

At the moment, there are four popular alternative payment methods:

1. Digital payments: Payments made via electronic methods where no cash is exchanged. This includes paying online via credit card, debit card, or through a third-party app like PayPal or Stripe.
2. Digital wallets: Financial accounts where consumers can store cards or funds and use them to make payments from any device. Think Apple Pay, Google Pay, and other mobile-stored wallets. 
3. Buy now, pay later: There’s been a recent influx of installment payment options like Klarna, which have proven to be particularly popular with Gen Z consumers and credit-shy Millennials. 
4. Bank transfers and direct debits: Perhaps the most traditional of the alternative payments, this is where consumers transfer money directly from one bank account to another with no cash involved. 

The fraudulent opportunities that come with alternative payment methods

The various methods listed above are relatively new to the payment world. Some are more modern than others, and there’s often confusion about the risks associated with them. This is understandable when you consider the anonymity of the internet and how people can hide behind a screen.

Unfortunately, the uptick in alternative payment methods has led to a rise in fraudulent transactions since it’s harder to prove the identity of someone online.

Here are some of the most common fraudulent opportunities we’re seeing take over the online payment world.

1. Digital payment fraud

This is one of the most common fraudulent activities that can wreak havoc on a business. Essentially, customers place an order with a merchant but later contest the charges, resulting in a chargeback or claim for the merchant.

If the customer has already received the product or service, the brand loses out on the money that’s given back to the customer, as well as the shipping costs and any other costs involved.

Such fraudulent activity is particularly disastrous for brands that sell intangible products or services because many payment services don’t offer protection for them.

2. Digital wallet fraud

Fraudsters using stolen credit card information isn’t a new thing. But fraudsters stealing credit card information and storing it on their phones is a new phenomenon.

The introduction of digital wallets makes it easy for criminals to keep card information without having the physical card in hand. This means they can use their phones to commit fraudulent purchases until the card’s original owner wises up to their antics.

3. Anonymous fraud activity

These new alternative payment methods haven’t been around long enough for companies to understand the real risks (and benefits) involved with them.

Most companies have strong policies for cutting checks and making Automated Clearing House (ACH) payments, but very few have expanded these policies to include alternative payments. As such, there is ample room for fraudsters to carry out criminal transactions and steal the payment information of other customers.

How to reduce fraud on alternative payment methods

Don’t let the wave of fresh fraud risks get in the way of growing your business. For most merchants, the benefits of having a number of payment options for customers far outweigh the risks. Customer experience is crucial today, particularly when most purchases are online.

Instead of avoiding alternative payments altogether, here’s how you can put precautions in place to reduce the risk of fraud while still creating an enjoyable customer experience.

• Outline: Create and highlight new policies that cover alternative payment methods, as well as the protocols customers should go through if they encounter  any issues.
• Validate: Identify and validate customer identities before they’re able to make a purchase. You can do this by encouraging them to confirm their personal details, two-step verifications, or sending a code to another device. 
• Partner: Team up with an ecommerce expert who can help examine your payment process and identify potential fraudulent opportunities. ClearSale identifies risks and tightens up the verification process to guarantee only legitimate sales go through.

Plan for and prevent fraudulent activity

Alternative payments are a must for businesses that want to reach a wider customer base. They can improve the customer experience and help shoppers create a streamlined buying journey.

However, they bring with them their own risks. The increase in digital payments since the coronavirus pandemic has led to an increase in fraudulent transactions via digital wallets and payment methods. The key: Be aware of the potential fraud opportunities that come with these methods and put precautions in place to avoid criminal actions.

ClearSale is part of the Oracle PartnerNetwork (OPN) program.