As consumers prepare for unbeatable deals and retailers and fintechs prepare for record sales, the scale of fraudulent payment activity is greater than ever. Market data shows a worrying rise in various forms of payment fraud, posing a major challenge to the security of financial transactions during the holiday shopping season, which kicks off with the famous Black Friday.

At a time when digital payments and online shopping have become an integral part of consumer behaviour, cybercriminals are exploiting vulnerabilities in payment systems. The changing threat landscape emphasises the need for a sophisticated understanding of payment fraud in the run-up to the busiest shopping day of the year. Signicat, the pan-European leader in digital identity solutions, provides a comprehensive overview of the current state of payment fraud and highlights the technological advances designed to thwart fraudsters’ efforts. With Black Friday approaching, the call for increased surveillance and proactive measures to ensure secure transactions is louder than ever.

Rising losses from online payment fraud

Payment fraud has a profound impact on end customers and businesses and creates a complex web of consequences for the entire financial system. When end customers fall victim to payment fraud, it not only jeopardises their financial well-being, but also undermines trust in digital payment systems. Stolen credit card data or unauthorised transactions can lead to financial loss, identity theft and a pervasive sense of vulnerability. In addition, the time and labour required to resolve fraudulent activity is often a significant inconvenience for consumers.

According to 2020 data from Juniper Research, retail losses due to fraudulent transactions are estimated to exceed €188 billion ($206 billion) between 2021 and 2025, with online shopping being the leading cause of fraud. According to a new report by the same company, estimated fraud-related losses between 2023 and 2028 amount to €330 billion ($362 billion), with more than €34 billion in 2023 and €83 billion in 2028.

“With fraud on the rise, ensuring security and compliance at every stage of the process is a major challenge for businesses. This applies, for example, to transactions such as payments in many businesses, including the financial sector, fintech, digital marketplaces and retail. During peak shopping periods such as Black Friday or the Christmas holidays, the number of transactions increases sharply, so the severity of attacks on consumers or businesses also increases during this time,” says Asger Hattel, CEO of Signicat, a leading provider of digital identity solutions. “We see that our customers, especially Buy Now, Pay Later providers or payment companies, are no longer just focussing on compliance, but are constantly looking to increase the level of transaction security and build trust with the end user,” he adds.

Education and technology: key allies

On the other hand, companies face multiple challenges when fraud infiltrates their payment systems. In addition to the direct financial losses incurred in compensating affected customers and investigating fraudulent incidents, companies also have to deal with the damage to their reputation. A high-profile payment fraud incident can undermine customer confidence and potentially damage a company’s brand and customer loyalty in the long term. In addition, organisations must invest significant resources in implementing and continually improving security measures, diverting funds that could otherwise be used for innovation and growth initiatives. The symbiotic relationship between end customers and businesses emphasises the urgent need for robust and adaptable anti-fraud measures that create an environment in which both parties can conduct secure and trustworthy financial transactions.

Unsurprisingly, consultancies around the world are recommending the use of technologies such as fraud prevention platforms based on machine learning or artificial intelligence, as they can effectively combat phishing by recognising fraudulent patterns and cannot be manipulated.

Signicat emphasises the importance of modernising and securing certain processes with the latest technological advances that fraudsters have no control over, such as two-factor authentication through facial biometrics. “Many organisations in the financial sector rely on their systems or password-based two-factor authentication to protect their customers. At Signicat, we believe that the future will be more password-free and that authentication through facial biometrics or electronic IDs, which are much more difficult for fraudsters to forge, will become more widespread,” adds Hattel. Signicat also emphasises the importance of educating and informing end users about possible attacks and how to detect them.

The future is wallet-related

“Payment transactions are one of the most important use cases for the EU’s European Digital Identity Wallet initiative, in which four large-scale pilot projects are to demonstrate the possibilities. Once the EU wallet is launched, it will undoubtedly play a key role in combating fraud at European level. The proof of identity on which the wallets will be based will provide unrivalled security for both end users and the businesses that rely on the use of the wallets,” says Jon Ølnes, Head of Development and thought leader at Signicat.

Online identity verification during a transaction can take various forms. Verification can be both persistent security offered by various government identification systems and on-the-fly verification that utilises identification networks and data orchestration-based services. eWallet systems can also provide verified statements that can be used to definitively identify a user, according to Juniper Research in its report “Combatting Online Payment Fraud”.

There is no doubt that digital identity solutions are key to combating fraud. A recent Total Economic Impact™ (TEI) study of Signicat, commissioned by Forrester Consulting, showed that Signicat’s digital identity solutions can reduce fraud costs by 75% by lowering fraud rates. This is certainly encouraging for the market and emphasises the importance of relying on technology solutions that meet both local and global regulatory requirements.