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Fraud in SaaS: How to spot it and stop it before it costs you money

The threat and impact of online payment fraud has increased in the last few years. Here are some of our tips and best practices for identifying and preventing it before fraudsters cost you money.

The growth in the SaaS sector has given fraudsters more opportunities than ever.  One reason is the growing volume in SaaS payments. Another reason is the technology and methods used by fraudsters has advanced. 

From subscription fraud to chargeback fraud, SaaS companies are particularly vulnerable to fraud because they rely heavily on recurring revenue streams, often from customers they may never meet face-to-face. Fraudulent activity can result in significant revenue losses, as well as erode customer trust and brand reputation.

Many SaaS startups are targeted as they are usually focussed on setting up their business, growing revenue and becoming profitable, overlooking fraud prevention. Many likely lack the knowledge or resources to identify and prevent it.

Established businesses are also vulnerable to fraud - with increased volumes and more numerous and complex fraud vectors. Fraudsters find new ways to target businesses and often create a network to share information about how to navigate fraud measures.

Here are some of our tips and best practices for identifying and preventing fraud.

What kind of fraud are SaaS businesses susceptible to?

There are several types of fraud that SaaS businesses can be vulnerable to, including:

  • Subscription fraud: Occurs when an individual uses stolen or fake credit card information to sign up for a SaaS subscription.
  • Account takeover (ATO) fraud: Occurs when a fraudster gains access to a legitimate user's account by stealing their login credentials, often through phishing or social engineering tactics.
  • Chargeback fraud (also referred to as friendly fraud): Occurs when a customer disputes a legitimate charge and requests a chargeback from their bank, despite having received the goods or services. This can result in a financial loss for the SaaS business.
  • Refund fraud: Occurs when a customer requests a refund for services that were never used or were used fraudulently.
  • Trial abuse fraud: Occurs when a user creates multiple accounts to take advantage of free trial offers or introductory pricing.
  • Affiliate fraud: Occurs when affiliates use fraudulent methods to drive traffic and generate commissions, such as using bots or fake leads.
  • Ad fraud: Occurs when fraudulent ads are displayed, leading to invalid clicks, impressions, or conversions.

How does fraud impact your business?

Fraud can have a devastating impact on your business impact affect a business in multiple ways, both financially and operationally.

Financial impact

When a fraudulent dispute occurs, businesses not only lose the original transaction amount, but also incur additional costs such as chargeback fees and higher processor fees from disputes. What’s more, you’ll have the costs of investigating fraudulent activity, and implementing new fraud prevention measures. These costs can quickly add up, put a strain on a business's finances and hinder growth and expansion.

Operational impact

The impact of fraud on a business goes beyond just financial losses. Many businesses find themselves having to expand their fraud team or allocate product and engineering resources to manage operational overhead, diverting resources from their core product. This can slow down product development and impact a company's ability to innovate and compete in the market.

Reputational damage

Fraud can also damage a business's reputation and erode customer trust. If customers perceive a business as being vulnerable to fraud, they may choose to take their business elsewhere, resulting in lost revenue and market share.

Bad data

In addition, fraud can have a big impact on all parts of your ecosystem. Fraud can go unnoticed for a long time and cause an influx of false data, affecting analytics, forecasting, and customer behavior modeling.

This can skew the data and lead to inaccurate analysis, affecting critical business decisions. Customer behavior modeling relies heavily on accurate data to identify patterns and trends, and provide insights into customer behavior.

Ultimately, it all leads to forecasting errors, resulting in missed revenue opportunities or over investment in the wrong areas.

How can you help to prevent fraud?

Fear not, not all is lost. You can take several measures to prevent fraud and protect your bottom line.

  1. Implement robust identity verification measures: Verify the identity of new customers by collecting and analyzing various data points, such as name, address, phone number, email, and payment information. Use fraud detection tools and third-party verification services to ensure the information provided is accurate and valid.
  2. Monitor and analyze customer behavior: Monitor customer behavior for unusual activity, such as a sudden surge in orders, frequent use of different payment methods, or multiple accounts with the same IP address. Use analytics tools to detect and flag suspicious patterns and activity.
  3. Use chargeback prevention tools: Implement chargeback prevention tools that detect and prevent chargeback fraud in real-time, such as fraud scoring, address verification, and device fingerprinting.
  4. Educate customers: Educate customers on the risks of fraud and how to protect themselves. Encourage them to use strong passwords, avoid sharing sensitive information, and report suspicious activity immediately.
  5. Keep software and systems up-to-date: Regularly update software and systems to prevent vulnerabilities that fraudsters can exploit. Implement security patches, use firewalls, and enable two-factor authentication to ensure that all data is secure.
  6. Conduct regular fraud risk assessments: Conduct regular assessments to identify potential vulnerabilities and gaps in your fraud prevention measures. Review and refine your fraud prevention strategies and processes to stay ahead of emerging threats.

So you suspect fraud, what next? 

Suspect a fraudulent transaction? The best next step is to contact the buyer to verify the transaction. Be wary though. Keep in mind that fraudsters may use fake contact information, so it's essential to remain vigilant and verify the buyer's identity.

If that communication confirms your suspicions, or you're unable to validate the purchase, issue a refund and cancel the subscription, services, or product. This will help reduce the risk of a chargeback and minimize the loss of revenue to your business.

It's crucial to act quickly to prevent further fraudulent activity and safeguard your business's reputation and financial health.

How can Paddle help?

Paddle takes a comprehensive approach to fraud prevention, using advanced technology, customer verification, chargeback prevention, behavior monitoring, and risk assessments to help protect software businesses from fraud.

  1. Advanced fraud detection: Paddle uses advanced fraud detection tools and algorithms to analyze customer data and identify potential fraudulent activity. These tools include machine learning algorithms that can quickly adapt to new fraud trends and prevent fraudulent transactions in real-time.
  2. Identity verification: Paddle requires customers to verify their identity by providing various data points, such as their name, address, phone number, email, and payment information. Paddle also uses third-party verification services to ensure the accuracy and validity of the information provided.
  3. Chargeback prevention: Paddle has chargeback prevention tools, such as fraud scoring, address verification, and device fingerprinting, to help prevent chargeback fraud in real-time.
  4. Customer behavior monitoring: Paddle monitors customer behavior for unusual activity, such as a sudden surge in orders, frequent use of different payment methods, or multiple accounts with the same IP address. Paddle uses analytics tools to detect and flag suspicious patterns and activity.
  5. Fraud risk assessments: Paddle conducts regular fraud risk assessments to identify potential vulnerabilities and gaps in their fraud prevention measures. They review and refine their fraud prevention strategies and processes to stay ahead of emerging threats.

Recognizing indicators of fraudulent activity

Paddle handles fraud monitoring for our customers, using a number of risk management tools to identify and fight fraud. These tools use certain indicators of fraudulent activity to flag transactions.

The more indicators a transaction has, the higher the likelihood it is fraudulent. You can use the same indicators to identify suspicious transactions. While this is not an exhaustive list, some of these indicators include:

The buyer:

  • The buyer’s name on the user’s account at sign up doesn’t match the name on the payment method.
  • The name is spelt or formatted incorrectly i.e. missing an apostrophe or a hyphen.
  • The email address is nonsensical (i.e. John.smith120ph7572@mail.com).
  • The email address is a temporary one (i.e @contractor.com @proton.com).
  • Inconsistencies between email name and the user’s actual name.
  • The buyer’s card location doesn’t match the buyer’s billing address.

The transaction:

  • The same buyer has purchased a number of products/ subscriptions within a short timeframe which do not require multiple purchases.
  • There is an unusually large grouping of transactions from the same country, same amount or same payment type i.e. PayPal, Apple Pay or Visa.
  • There are multiple transactions from different cards with the same buyer name or similarly formatted email address.

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Fraud FAQs

What are the common types of fraud in SaaS businesses?

Common types of fraud in SaaS businesses include subscription fraud, account takeover fraud, chargeback fraud, refund fraud, trial abuse fraud, affiliate fraud, and ad fraud.

How can I prevent fraud?

You can prevent fraud by implementing robust identity verification measures, monitoring and analyzing customer behavior, using chargeback prevention tools, educating customers, keeping software and systems up-to-date, and conducting regular fraud risk assessments.

What is the impact on my business?

The consequences of fraud can be significant, including direct financial losses, increased operational costs, damage to brand reputation and customer trust, and inaccurate data analysis, forecasting, and decision-making.

How can I minimize the impact of fraud?

By implementing effective fraud prevention measures, regularly reviewing and refining their fraud prevention strategies and processes, and staying up-to-date on emerging fraud trends and threats.

Need more information on how to detect and prevent chargebacks? Check out this guide here.

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