Understanding Pre-transaction and Post-transaction Fraud: Meaning, Prevention & Mitigation

Pre-transaction and post-transaction fraud prevention is critical to your bottom-line as a merchant. Find out what they mean and how you can protect yourself on both sides of the transaction.
by Ronen Shnidman
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Published: November 1, 2023
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Understanding Pre-transaction and Post-transaction Fraud: Meaning, Prevention & Mitigation

Global eCommerce fraud is rising and is expected to cross $48 billion by the end of 2023. North America accounts for more than 42% of fraudulent transactions, and on average, over 1,200 fraud attacks are committed on eCommerce merchants every month in the U.S. alone as of 2022. This is a 50% increase from the previous year’s survey figures.

While these figures do not delve into  the types of fraud that merchants must prepare themselves for, they all essentially fall under two broad categories: pre-transaction and post-transaction fraud. Preventing both is essential to ensure that a business remains fiscally healthy. With technology evolving rapidly, the prevention process is now easier than ever using tools enabled by risk scoring and machine learning (ML).

In this article, we look at what pre-transaction and post-transaction fraud mean, how they differ, and how to prevent them.

Pre-transaction fraud: Meaning & Prevention

Pre-transaction fraud is the total activity that culminates in fraud before a transaction occurs. It is typically committed by third party fraudsters who misuse customers’ card details, which is known as true fraud. Another type of pre-transaction fraud is essentially first-party policy abuse, which is committed by regular customers who abuse promotional offers and subscription trials or share their credentials with unauthorized persons. For example, they may create duplicate accounts, exploit promotional incentives, or attempt re-trials of subscription services. For merchants, these fraudulent attempts imply losses in promotion-derived revenue, failure of subscription models, or losses in general.

Preventing pre-transaction fraud is easy if you can identify miscreants in real time before a transaction goes through. This helps avoid losses in revenue primarily caused by theft, lost business, and customer attrition. Moreover, it also prevents undesirable occurrences such as chargebacks. The trick is to identify who the customer is and ensure that suspicious behaviors are recognized.

Although card issuers are supposed to deny suspicious transactions, because merchants are typically financially liable for fraudulent transactions, they also proactively protect their interests by declining any suspicious transactions. One way to do that is by matching customers’ devices and billing addresses with the pre-transaction data. If they do not match, merchants can contact customers directly before approving a transaction. The easiest way to do this is by using automated tools to identify risks before approving transactions to reduce the need for damage control later.

There are a number of popular solutions on the market that not only block fraudulent transactions but identify transactions likely to be from good customers to prevent too many false positives. Falsely declining legitimate transactions reduces revenue figures and increases attrition of customers, who may be put off by not being able to complete a transaction successfully. Usually, historical transaction data tied to customers and the geolocation from where the transaction is initiated are used to determine order validity, among other technical parameters.

Post-transaction fraud: Meaning & Prevention

Post-transaction fraud refers to fraudulent financial activities that result in merchants’ revenue losses after a transaction has been approved as legitimate. Most often, they’re associated with friendly fraud. For instance, once a transaction occurs, customers may request refunds for several reasons. If they cannot get it immediately, they may file for a chargeback. When a chargeback is requested but not warranted this is known as friendly fraud. Data suggests that 17% of consumers who file for chargebacks commit friendly fraud, usually arising from buyer’s remorse, confusion, or inability to contact customer support.

As a merchant, you may find it challenging to address all such concerns promptly, leading customers to opt for quicker, less-favorable ways like raising disputes to resolve the problem themselves.

As a merchant, you can take various steps to address and prevent cardholder misbehavior after a transaction is approved. These include promptly responding to customer complaints and refund requests and ensuring that their ticket does not escalate to the point of a chargeback claim. However, this requires a concerted effort that includes quick & coordinated responses across the payments, customer support, and logistics teams. Using technology can simplify and automate this. Two such solution providers include:

  1. Ethoca: Its Consumer Clarity product provides real-time information to merchants, issuers and cardholders so that transaction disputes are minimized. Meanwhile, Ethoca Alerts can be used to stop chargeback claims made during a window period of 24 hours by manually issuing refunds as a pre-emptive measure.
  2. Verifi: Verifi Alerts also help stop disputes before a chargeback claim is made during a window period of 72 hours by allowing the manual provision of pre-emptive refunds. The Rapid Dispute Resolution (RDR) product automates this process according to pre-set rules. Lastly, the Order Insight product like Ethoca’s Consumer Clarity provides additional details to issuer call centers and dispute resolution teams to reduce cardholder confusion. Under the new Visa CE 3.0 rules implemented earlier this year, merchants who use Order Insight can also pre-emptively block fraud reason code (Reason Code 10.4) chargebacks where a pre-existing legitimate relationship with the cardholder can be proved based on a number of transaction data elements that are consistent across the current and past transactions with the card in question.

Unfortunately, simply preventing pre- and post-transaction fraud isn’t always sufficient. Circumstances may culminate in undesirable consequences like invalid chargebacks. Over half of North American companies with revenues above $500 million per year lose at least $5 million a year or more to transaction disputes, according to Justt’s 2023 Chargeback Pulse report. For dealing with this mass of chargeback claims, merchants must be prepared with compelling evidence to support efforts to refute invalid claims..

Mitigation: A crucial aspect of the dispute management journey

If you, as a merchant, want to ensure improper and damaging outcomes like invalid chargeback claims are ruled in your favor in the event of a dispute, it’s essential to maintain evidence to prove that you fulfilled your part of the transaction. This is what will help you to protect your interests and safeguard your revenue.

There are specialized tools for this as well that go a step ahead and ensure that credible data related to customers is collected and collated to present your counterclaim effectively. Justt’s chargeback management solution uses machine learning and automation to leverage data points, such as geolocation and device information, customer attributes, etc., to build for you a credible case against chargeback claims. The process is hands-free for merchants, who simply monitor chargeback performance over time through the means of dashboard. Meanwhile, the machine learning and Justt’s team of experts optimize the type of evidence used to argue cases and the format in which it is provided to issuers, continuously improving results to make sure your chargeback win rate improves steadily over time.

To adequately defend yourself from fraud at all stages of the transaction, both pre- and post, you will need some combination of pre- and post-transaction fraud prevention tools as well as a chargeback mitigation solution.

If you want to learn more about the intricacies of payment disputes pre and post-transaction and master the art of fighting chargebacks, follow the Justt blog.

Written by
Ronen Shnidman
Ex-journalist and major fan of fintech and OSINT, I write regularly for leading industry outlets in finance and fraud prevention. Outlets I contribute to include Payments Dive, Finextra, and Merchant Fraud Journal, and I have been cited by PYMNTS.com
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