Fraud Detection for Subscription Services

Customer preferences have shifted from having ownership to gaining experience or instant access. 

This is why the subscription economy has witnessed a surge of 435% in the last decade. People are turning to a range of subscription services like streaming, software, meal kits, groceries, security, smart services and so much more because they are convenient, flexible, offer better choices, and help with cost-saving. 

Though the recurring payments model helps customers keep up with trends, they are more prone to security breaches and fraud as compared to a one-time payment.

This blog briefs you on the security dangers facing recurring payments and how your business can develop a safety shield against them.

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What is subscription fraud?

Subscription fraud is when fraudsters target subscription-based services with a malicious intention to either gain free access to paid services or steal sensitive customers' data to attempt scams.

Because subscription services save customers’ payment data for recurring automated charges, subscription services are more prone to fraud.

Some examples of subscription fraud are - free trial abuse, account takeover, identity theft, payment fraud, fake account creation, friendly fraud, and more.

*rise of subscriptions statistics

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What is the impact of fraud on subscription businesses?

Fraud has a direct impact on a range of business aspects when affected. Here are some examples - 

• Revenue loss - Fake accounts, extended free trials, stolen payment methods and more do not bring in any revenue for businesses.
• Higher operating costs - Fraud management requires a substantial investment in manpower, capital, and resources which spike up operating costs.
• Increased customer churn - Affected customers lose trust and opt out of services in search of a better and safer alternative.
• Damage to brand trust - Security breaches are bad news for brand reputation as existing customers start losing trust and potential users become skeptical.
• Payment processing issues - Frauds end up in chargebacks which come with penalties from payment processors and higher costs.
• Regulatory and legal risks - Frequent fraud attacks get businesses on the regulator’s high-risk radar attracting multiple regulatory and legal risks.

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The most common types of subscription fraud

Being aware of the commonly attempted subscription billing fraud can help you come up with strategies to combat it. Find 7 types of subscription fraud below:

1. Payment fraud

Fraudsters create fake accounts with promos or use stolen card data to access services and resell the availed services at discounted prices. Not only do they access services without paying for them, but they also make extra money from the resale. This is a revenue loss for businesses and results in additional expenses when card owners become aware and file for chargebacks.

2. Account takeover

ATO attacks are when scammers try to break into customer accounts with weak security or steal credentials. When they manage to get access to some user accounts, they purchase extra subscriptions to resell merchandise and pocket the earnings or steal sensitive payment data like stored payment methods.

3. Friendly fraud

Chargebacks and disputes are available for customers to claim wrongful charges. However, customers may sometimes misuse them knowingly or unknowingly and attempt friendly fraud. One such instance of friendly fraud is when customers subscribe for free subscriptions and forget about it. They file for chargeback saying they never signed up in the first place. 

4. Extended free trials

This method is not just limited to fraudsters but also applies to opportunistic customers who want to avail of the services beyond the permissible free trials. They abuse promo offers that include free trials, first-free offers, and more. Customers try to enjoy free services for extended periods, while fraudsters try to resell the merchandise or services to make profits.

5. Account sharing

Customers often share passwords among friends and families, most commonly for streaming services. They may try to abuse this feature if businesses allow sharing passwords leading to loss of revenue. Otherwise, the business might come across as expensive or rigid, leading to a higher churn rate and ultimately business loss. Additionally, sharing passwords also increases the risk of identity and payment data theft. 

6. Chargebacks

The subscription model of setting up and forgetting a purchase was built to make the process frictionless. But, there are multiple other nuances to this process, like forgetting to cancel a subscription or not being aware of new pricing structures. Any automatic unexpected debit leads to customers filing for chargebacks. Dealing with chargebacks is tough and expensive.

7. Third-party partnership fraud

Businesses that grow without geographical boundaries often tie up with local delivery partnerships to improve their delivery reach or experience. These third-party delivery services have weak security systems and become the primary target for fraudsters. Sometimes, genuine delivery orders from overseas are also flagged as suspicious by fraud teams, tampering with genuine customer purchase experience.

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Strategies to reduce subscription fraud risk

There’s no doubt subscription fraud can cause significant damage to your business. The good news is that you can save your business with fraud detection for subscription services. Here are some fraud detection strategies:

1. Maintain transparency

Jot down your terms of service and cost of subscription mindfully and make them public. Send all your customers the terms, billing timelines, and costs associated. You can add additional features like - the option to opt out of services at the end of a free trial or an extra layer of confirmation for a renewal.

Being transparent does not just help you reduce chargebacks, disputes, and financial stress, but also enhances customer experience and satisfaction. 

2. Adhere to genuine subscription practices

Companies that are just starting out may use aggressive marketing tactics to deceive users into subscribing to their services or automatically converting free users to paid plans. Some common practices also include making it difficult for customers to cancel an availed subscription. 

All of these are unethical at most and should be clearly avoided because they tamper with your business reputation and attract chargebacks. 

3. Tighten new account creation security

Free subscriptions and promos for new accounts are great marketing tactics to attract new clients. However, there must be certain limitations and security protocols in place for it like putting a limit to account creation from an IP address or emails. 

No protocols in place may lead to promo abuse, loss of revenue, or security breaches. Also, it would help to add additional security layers for account creation to provide access only to genuine customers. 

4. Improve identity verification

Verifying customer identity is extremely important to stop any fraudulent attempts and ensure recurring payment security. Some great ways to identify and verify who is accessing your services include answering a security question personalized to every user, adding two-factor authentication, and a step for biometric verification.

Fraudsters cannot easily get past these identity verification methods, sparing you a lot of hassle.

5. Leave no vulnerabilities

One major vulnerability to fraud in subscription services is weak passwords. Accounts with weak or most common passwords are easily exposed to ATO fraud. So, it is a nice practice to ensure strong password creation which generally is a combination of alphanumerics with special characters.

Find and prioritize any other factors that can lead to vulnerability in your business. Strategize tactics and implement them effectively to ensure no vulnerability slips past your watch. 

6. Strategize account sharing option

Offering an account-sharing option is a revenue loss for businesses. But, banning account sharing makes it difficult to get new users and sign-ups. So, strategizing the right mix according to your business model will help you with revenue management and fraud prevention.

Limited account-sharing capabilities help businesses like streaming services while banning and putting account-sharing limitations for products like merchandise and learning courses is the right call.

7. Utilize tools where you can

There are multiple tools that offer services like fraud detection, fraud prevention, chargeback management, chargeback prevention, customer communications, and more. They are all equally beneficial in bettering your subscription service-related operational processes and challenges. 

Use them according to your needs and maximize their benefits to make it easy for your employees and customers to stay away from subscription fraud.

8. Enhance customer experience

The conventional method is to find all the opportunities for fraud detection for subscription services. A lesser-known approach is to focus on your customers and listen to their ordeals. A tactic as simple as keeping multiple communication channels open and accessible will prompt your customers to reach out to you first rather than their banks. 

9. Invest in top-notch technology

With all the business and competitive challenges, it can get difficult to also stay on top of the latest fraud prevention advancements and ongoing scams. However, technology like machine learning in fraud detection can do it for you. Invest in such technologies to stay secure.

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Best practices to secure recurring payments

Here are a bunch of best practices for businesses to protect themselves from payment fraud:

• Payment provider - A good payment provider like Payby offers safe and secure recurring payments, smart POS, the latest payment options, robust fraud detection and prevention, and so much more.
• Tokenization - Tokenization replaces payment data that includes credit card details, with a token, offering added security.
• PCI-DSS Compliance - Adhering to compliance guidelines is mandatory and payment providers like Payby follow procedures that ensure compliance.
• 3D Secure (3DS) Authentication - 3DS requires identity verification before every transaction for safe processing.
• AI and Machine Learning - These tools can read through fraudulent behaviors, flag or detect them, and also help prevent fraud.
• Address Verification Service (AVS) - It checks through and verifies the billing address as provided by customers and the one registered with the card issuer to verify identity.
• Strong Customer Authentication (SCA) - This method requires customers to provide two or more verification factors before making a payment, offering heightened security.
• Update security policies - Always audit and update your security policies according to changes or updates, and restrict access to sensitive data. 
• Customer education - Maintain transparency in your business practices and educate your customers on measures they can take to protect their payment data.
• Customer communication - Enable email and SMS notifications for transactions so customers are informed and can duly subscribe or unsubscribe.

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Conclusion

Effective fraud prevention for subscription services helps secure recurring payments, brand trust, customer satisfaction, and your business revenue. 

Above all, your choice of payment provider matters a lot. They have the ability to make or break your recurring payment experience and security. 

Prominent payment gateways like Payby are designed carefully to meet the security needs of your business and customers with a host of online and offline products, helping you maximize business gains.

Get started with Payby today.