• Elene Bazhenova, Payment Expert at Exactly.com


• 26.07.2023 11:15 am
#OpenBanking

E-commerce has experienced unprecedented growth in recent years, revolutionising the way we shop and do business. 

However, this digital landscape comes with its fair share of risks, particularly in the form of fraud. In 2020, UK consumers suffered over £1 billion of financial fraud, made up of unauthorised card payments (£574.2m) and authorised push payment (APP) scams (£479m). Similarly, the Global Fraud Trends 2023 study discovered that among 1,900 businesses, 59% recorded a rise in online payment fraud, while just over half (51%) said the same about account takeovers.

A similar number pointed to a surge in promotion abuse (52%) and refund abuse (53%), while 40% claimed to have experienced an increase in customer fraud. Over half (52%) of UK respondents said friendly fraud had increased. Promotions abuse was also up, meaning that customers were benefiting from online promotions more than they should, often by creating multiple accounts. Refund abuse was similarly on rise when consumers take advantage of generous refund policies, leaving the business to cover excess costs such as processing and delivery/returns. Whilst a few customers taking advantage doesn't sound too bad, the long-term effects can leave businesses with eye-watering hidden costs.

The evolving world of fraud

Thankfully, the emergence of open banking has paved the way for more robust mechanisms that prevent e-commerce fraud. Open banking refers to the secure sharing of financial data between banks and authorised third-party providers through application programming interfaces (APIs). By leveraging this innovative approach, businesses and consumers alike are reaping the benefits of enhanced security and protection against fraudulent activities. 

The differing methods of fraud and the tactics used by fraudsters are constantly evolving and advancing, so to understand the significance of open banking in combating e-commerce fraud, we have to recognise these ever-evolving tactics. With the rise of online shopping, fraudsters have become increasingly sophisticated, employing methods such as identity theft, account takeover, and phishing scams. This has turned the once revolutionary world of online banking into a digital minefield that poses threats to both consumer and business alike. 

How is open banking fighting against e-commerce fraud?

Open banking has emerged as a transformative force in the financial industry, offering a more secure and efficient way to manage transactions. By allowing authorised third-party providers to access customer data securely, open banking fosters innovation and competition. It provides consumers with greater control over their financial information, giving the consumer their long desired ownership of their own data, and allows for more personalised financial services. This secure data sharing through APIs enables enhanced verification and authentication processes, ultimately bolstering the fight against e-commerce fraud.

Traditional methods of identity verification, such as relying solely on static information like usernames and passwords, are increasingly susceptible to hacking and impersonation. Open banking employs the use of dynamic data points, such as real-time transaction history and financial patterns, to authenticate individuals more effectively. This multi-factor authentication significantly reduces the likelihood of fraudulent transactions, safeguarding both consumers and businesses.

Open banking facilitates real-time transaction monitoring and anomaly detection, providing an additional layer of protection against e-commerce fraud. By leveraging access to financial data through APIs, businesses can analyse transactional patterns and identify suspicious activities. Cutting edge technology comes into play as machine learning algorithms and artificial intelligence play a vital role in this process by identifying irregularities, such as sudden large transactions or multiple purchases from different locations, which may indicate fraudulent behaviour. Open banking facilitates rapid detection of these anomalies and allows for immediate action, such as suspending or investigating suspicious accounts, preventing further fraud.

The rise of the payment gateway

Another crucial aspect of open banking in combating e-commerce fraud lies in strengthening payment security. By leveraging open banking APIs, businesses can implement secure payment gateways that authenticate customers' identities before processing transactions. These gateways utilise strong customer authentication methods, such as biometrics or one-time passwords, to ensure the legitimacy of the transaction. Additionally, open banking facilitates secure payment initiation, eliminating the need for consumers to share their sensitive financial information with multiple online retailers, thus reducing the risk of data breaches and unauthorised access. 

Many more businesses are beginning to grasp the benefits of open banking and secure payment gateways, with the number of businesses joining the new era of financial security surpassing seven  million.

In this digital age, the implementation of open banking not only safeguards financial transactions but also encourages innovation and competition among financial service providers. As businesses and consumers embrace the advantages of open banking, the vision of a secure, fraud-resistant e-commerce landscape becomes a reality. With continued advancements in technology and a collaborative effort between stakeholders, open banking is set to revolutionise the e-commerce space, ensuring safer transactions and fostering trust among all participants.