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How to Detect, Manage, and Prevent SaaS Fraud

To protect your SaaS business from fraud, first understand the common types of scams, then set up security measures to stay aware of your customers’ activities. It’s a must-have strategy, and to prove that, LexisNexis’ study shows that fraud costs merchants an average of 1.32% of their revenue. Follow the list of strategies below and implement some measures. Preventing fraud could save you thousands, if not millions, of dollars.

Step 1

Different Types of SaaS Fraud

Familiarize yourself with the various types of fraud that can occur in the SaaS industry – it is a necessary first step in establishing effective detection and prevention protocols. Below, check a table summarizing various types of fraud, including their descriptions, examples, and potential prevention methods.

 

Type of Fraud

Description

Impact on SaaS Business

Prevention Strategies

Examples & Case Studies

Trial Fraud

Users create multiple accounts to exploit free trials.

Potential revenue loss from legitimate customers, skewed user data.

Trial limits, email verification, phone verification, IP address tracking.

In 2023, a SaaS startup discovered that a single user had created over 100 accounts with the intent of abusing the free trial model, resulting in a significant loss of potential revenue.

Subscription Fraud

Fraudsters use stolen credit card information to sign up for subscriptions

Lost revenue, increased chargeback fees, damaged reputation.

Strong customer authentication, address verification, CVV verification, fraud detection mechanisms.

In 2020, Sift reported a 109% increase in subscription fraud attempts.

Refund Fraud

Customers request refunds for services they used and never intended to pay for.

Lost revenue, increased operational costs

Strict refund policies, thorough investigation of refund requests, fraud detection mechanisms.

The National Retail Federation estimates that refund fraud costs retailers $15.7 billion annually.

Chargeback Fraud (aka Friendly Fraud)

Customers dispute charges they know are legitimate to get their money back.

Lost revenue, increased chargeback fees, potential termination of merchant account by payment processors.

Clear refund policies, excellent customer service, chargeback process and protocol services.

A study by Chargebacks911 found that 86% of chargebacks are fraudulent.

Affiliate Fraud

Affiliates use deceptive methods to generate commissions.

Financial loss due to illegitimate commissions, damage to brand reputation.

Strict affiliate agreements, regular monitoring of affiliate activity, fraud detection tools.

In 2021, a SaaS company uncovered an affiliate fraud scheme that involved generating fake leads and clicks, costing the company thousands of dollars in illegitimate commissions.

Account Takeover Fraud

Fraudsters gain unauthorized access to legitimate user accounts with the intent to act illegally.

Unauthorized access to sensitive data, financial loss, reputational damage.

Two-factor authentication, strong password policies, suspicious activity monitoring.

In a 2022 report, Microsoft revealed that attacks had increased by 300% in the previous year.
Step 2

Verify Your Customers' Identities

Once you understand the various kinds of fraud that exist and how they can be used against you, you can start implementing security measures.

 

Before you allow shoppers to sign up for your service, make sure they are who they say they are. Here’s how:

 

  • Collect basic information: Make their name, address, phone number, email, and payment details required fields.
  • Double-check the details: Use tools and services that verify the data is legitimate.
  • Set up two-factor authentication (2FA): By requiring users to enter a code from their phone in addition to their password, you’ve added an extra layer of security.

 

Remember, the goal is to create a multi-layered defense system that makes fraudsters unlikely to succeed.

Step 3

Monitor Your Customers’ Behavior

Once a customer signs up for your service, regularly check on their activity. Keep an eye out for unusual patterns to aid in the detection of potential fraud. 

 

Analyze customer behavior to identify anomalies that may indicate fraud:

 

  • Are they suddenly buying a massive amount of data?
  • Are they using an abundance of different payment methods? 
  • Are they creating multiple accounts from the same computer? 

 

These could be signs that something is going on. For example, if a customer suddenly starts making purchases that are different from their usual habits, it could be a sign of account takeover fraud.

 

Set up real-time alerts that send you notifications when something appears questionable. These are triggered by factors such as failed login attempts, significantly large transaction amount or changes made to customer account details. By exploring the information revealed in the alerts, you can help prevent fraudulent activity.

 

You can also look closely at your chargeback data to understand the source. For example, if you see a large amount of chargebacks due to unrecognized charges, analyze your customer authentication process. By reviewing your chargeback data, you can see where the weaknesses in your fraud prevention process are and mitigate those going forward.

Step 4

Tools to Prevent Chargebacks

Chargebacks occur when customers dispute a payment, which creates a set of protocols for businesses.
There are tools to combat chargeback fraud, using methods like fraud scoring and verification and other techniques to validate transactions. 

 

But if you’re considering a more hands-off approach, give some thought to partnering with a Merchant of Record (MoR) like PayPro Global. They will act as the seller of your product, handling payment processing, taxes, compliance and much more. This will save you time and resources, allowing you to focus on growing your business. 

 

Here’s why you should consider the use an MoR for chargeback prevention:

 

  • Built-in fraud prevention: MoRs like PayPro Global have fraud prevention systems already in place, leveraging the technologies to detect and prevent fraudulent activities and transactions.
  • 3D Secure (3DS): MoRs offer 3DS in countries where it’s obligatory, which adds an extra layer of security by requiring customers to authenticate themselves with their bank before completing a purchase. At the same time, MoRs can also enable 3DS worldwide per vendors’ request.  
  • Chargeback management: MoRs handle refunds and chargeback disputes on your behalf, saving you time, money and resources.

 

So which option is right for you?

 

→ If you’re tech-savvy and want more control, the DIY approach might be a good fit for you.

→  If you prefer a hands-off approach and want to save time and resources, an MoR can save you a lot of effort. 

Step 5

Educate Your Customers

Consider your customers as a part of your fraud prevention strategy for your SaaS or eCommerce business. So keep them informed about the latest security threats and updates to your security procedures. Teach them how to protect their accounts and spot scams. Remind them to use strong passwords, avoid sharing personal information, and report any suspicious activity immediately. This will help them stay vigilant and proactive in sharing the responsibility of protecting their personal information.

Example

When your users first create their account, be sure to say hello by sending an email with tips on security. Include a link to your policy along with any additional info that will help prevent fraud.

Remember

When your users first create their account, be sure to say hello by sending an email with tips on security. Include a link to your policy along with any additional info that will help prevent fraud.

Conclusion

To prevent SaaS fraud, it’s important to remember it must be a consistent and ongoing effort. By understanding the many types of fraud, implementing security measures, observing shopper behavior, educating your customers, and staying informed, you can significantly reduce your risk of falling victim to fraudulent activities.

 

PayPro Global offers fraud prevention management if you are in need of services for your SaaS or ecommerce business. We offer a comprehensive suite of payment processing and fraud prevention tools and other applicable services to help you protect your business and your customers. Contact us today to learn more about how we can help you keep your SaaS business and your customers safe.

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