Jan 5, 2022
Using Blockchain Technology to Prevent Fraud
Enhanced security is a leading benefit of blockchain technology. One of the underlying drivers behind its increasing popularity is its ability to share data in a fast and highly secure way, without any one entity having to assume responsibility for safeguarding the data.
Today we’ll take a closer look at blockchain technology and show how it’s applied by LeisurePay in the fight against various types of payment fraud, including friendly fraud and chargeback fraud.
Unalterable Record of Transactions
Over the last decade, we have learned a lot about blockchain’s potential for enabling cost savings, reducing transaction times, and improving cycle times, real-time transparency, and traceability — especially for touchless transactions. Almost every transaction platform can be enhanced or replaced with blockchain-based technology.
The improved security offered by blockchain is down to its use of a shared ledger to track and approve each component, or block, within a transaction. Each step is represented by a block. These are connected within a secure chain as a transactional record, with each block featuring a timestamp and other identifying data to prove who did what and when.
This shared ledger enables an unchangeable or immutable record of transactions with end-to-end encryption, which helps to prevent fraud and other unauthorized actions. Data on the blockchain is stored across a network of computers, making it nearly impossible to hack (unlike traditional computer systems that keep data on a server).
What’s more, blockchain can address privacy concerns better than conventional computer systems by anonymizing data and demanding permissions to limit access.
Big Players Getting On-Board
Multiple big firms in the financial sector are testing blockchain-inspired systems that aim to make digital transactions more secure and efficient, while a select few, such as Visa and HSBC, have put their own commercial platforms into action. For example, Visa’s B2B Connect platform harnesses a private blockchain, which now helps clients in over 30 markets to make quicker cross-border payments.
Blockchain promises a superior form of protection for an organization’s sensitive data, including banking details and account numbers, outmaneuvering a number of the vulnerabilities involved in sending checks, wire transfers, and automated clearing house payments. BNP Paribas and ING have revealed Contour, a blockchain-inspired system designed to make the $18-trillion trade finance market more streamlined and secure.
These milestone technologies captured headlines across the technology pages when they were announced. What has received less attention, however, is the utility of blockchain in effective payment fraud management.
Blockchain’s Anti-Chargeback Credentials
So what exactly is blockchain’s relevance to the leisure industry? Simply, a high frequency of fraudulent transactions can damage a vendor’s relationships with payment partners, often resulting in account termination. Robust chargeback prevention measures are key to proving your reliability as a partner. Conveniently, LeisurePay helps you reduce chargeback fees and inventory losses by drastically reducing unauthorized transactions.
The secure chain of data approval and transfer represented by blockchain technology can forever change the way information is exchanged. Pressure on customers, merchants, issuers, and acquirers is alleviated. By removing the burden on each of the participants involved in a purchase, most risk is eliminated — providing everyone with a more secure way of conducting their business affairs.
The Time is Right
Anti-chargeback technologies are more necessary than ever, owing to the ongoing worldwide surge in e-commerce activity (reaching $4.9 trillion last year). Online payments are an appealing target for fraudsters as they don’t even need the physical card; they only need the card details, which can be stored digitally. It’s also an easier con for the fraudster to pull off, as it’s more difficult for the seller to verify who is really making the purchase.
The savvier fraudsters know how to avoid leaving a giveaway online trail, and it’s easier for thieves to acquire stolen credit card information. Instead of having to physically steal the victim’s wallet, cyber-criminals can break into a customer database (say an eCommerce site with weak security) and immediately retrieve thousands of credit card numbers. These stolen credit card numbers are widely available for sale on the dark web.
Juniper Research reckons online sellers will lose a total of $130 billion to online payment fraud between 2018 and 2023. Chargeback fees alone can be as much as $50 and are applied even in cases where the chargeback is not upheld! There are lots of hidden costs to chargeback fraud; eCommerce businesses lose a staggering $2.94 for every $1 of fraud from the initial chargeback itself. Not surprisingly, chargeback fraud prevention is fast becoming a priority for nearly all business owners who accept card payments.
According to analysts, 70% of fraud occurs after the Know Your Customer (KYC) stage. That’s why it’s important to detect risky transactions before they’re processed if you want to prevent chargeback-related losses. Of course, that’s not always possible. You also need to stay protected against the most commonly used techniques: fake or stolen documents, compromised accounts, and social engineering.
The sheer scale of the fraud problem is a headache for most businesses. Some companies have taken such a hit to their bottom line that they are willing to consider drastic action. The legality of inserting an anti-chargeback clause into sales contracts is questionable now, considering the strict consumer protections afforded to online customers.
The Root of the Problem: Obsolete Payment Systems
Out-of-date payment systems are the problem. In theory, the issuer of the chargeback rigorously examines each claim filed by a cardholder. In practice, however, banks are under extreme stress due to the stratospheric rise in chargebacks in recent years. They simply lack the adequate resources, personnel, or advanced verification systems needed to handle the claims thoroughly and promptly, let alone get around to stamping the practice out.
Their relative inability to check the legitimacy of each chargeback generates a twofold problem: merchants are reeling from more unnecessary fees and harm to their brand image or credibility, while banks are inadvertently sending out the message that the act of filing a false chargeback has no negative repercussions for the consumer.
What’s at the heart of the ongoing chargeback conundrum is that consumers still have to reveal their financial information to purchase goods and services online. This glaring loophole provides yet more chances to commit fraud.
Fortunately, LeisurePay has harnessed blockchain technology to help customers easily tackle the chargeback threat.
LeisurePay’s Smart Contract Protocol
LeisurePay’s own smart contract innovations square up to the chargeback problem. With our decentralized smart contract protocol (based on Binance Smart Chain), LeisurePay provides a portal where customers can log in to make refund requests or dispute a charge. They are assigned an ID to enable a trust scoring system. If fraud occurs at a suspiciously high level, the consumer will receive a concomitantly lower score.
In our open Dispute Resolution Center, the consumer has a 20% vote weighting, the merchant 20%, and the bank 60%. The bank’s vote is determined by six validators, each with 10% of the assigned weight. These validators are chosen from a qualified and experienced roster of claims assessors, and they earn a fee from each case handled.
The Future of Blockchain in Online Payment Fraud Prevention
Blockchain payment systems are unlikely to be a panacea for fraud, but they should help to greatly reduce it. We expect blockchain to play a significant role in protecting personal data online, the theft of which is a key part of most payments fraud. We also expect networks to become more scalable and interoperable in the coming years. But that’s a conversation for another time.
Like the Internet of the early-1990s, blockchain remains at a relatively early stage of development. Popular services like PayPal, Apple Pay, and Stripe took many years to achieve mainstream adoption, and the same trend applies here. Some commentators still regard the technology as over-hyped. Nevertheless, the financial services industry clearly believes in blockchain’s capacity to build a stronger financial system — and it is willing to invest a considerable amount of time and money working towards that objective.
We welcome you to contact LeisurePay with any questions you have about blockchain, our own smart contract protocol, or other fraud prevention solutions. https://leisurepay.io/
