How can machine learning detect fraud?

Machine learning can detect fraud by analyzing huge amounts of raw data under specific instruction to identify patterns and anomalies that indicate suspicious user behavior. It can be human-supervised for more accurate results without false positives.

What is the best machine learning algorithm for fraud detection?

It depends on the volume and complexity of the data, the type of fraud that you're looking for, and the level of accuracy and speed you're willing to accept. The best algorithm will require little human oversight when it's up and running.

What is ML based financial fraud detection?

This is a technology that uses algorithms and statistical models to identify fraudulent transactions in financial accounts. Scanning through large amounts of data, ML algorithms identify problematic actions and either block or highlight them for review.

API Protection: Don’t Let Chargebacks & Merchant Fees Cut Into Your Profits

Payment fraud & compliance

APIs are connections between different web and mobile applications, often used to exchange information and improve user experience. In an increasingly internet-connected world, APIs are only becoming more common, with 70% of developers expected to increase API usage in 2023. APIs connect e-commerce merchants to payment service providers (PSPs) that complete the transaction for the customer.

The money fraudsters can steal from PSPs and e-commerce websites by taking customer card information is not the only cost associated with fraud. Chargebacks and merchant fees add up for each fraudulent transaction processed by the merchant and their PSP.

Research shows that attackers are becoming more sophisticated and API-specific in their tactics, and traditional protection techniques are proving to be ineffective defense mechanisms. Without an accurate and scalable solution, companies face imminent risk of API attacks across the customer journey, which can negatively impact revenue and cause irrefutable damage to a company’s reputation.

Understanding Chargebacks & Merchant Fees

Chargebacks

Chargebacks occur when a customer files a dispute with their card provider claiming a fraudulent transaction was made. These often occur for one of the following reasons:

The card information was stolen and used by a fraudster.
The customer did not receive the goods or services they expected in the timeframe they expected.
The customer is performing chargeback fraud to get both the good or service they purchased and their money back.

Chargeback frauds can be a large source of lost revenue for businesses, particularly when fraudsters are able to receive the item(s) they purchase with stolen card details.

Merchant Fees

On a broad scale, merchant fees are the fees charged by a merchant service (PSP) to a vendor (your business) for processing card transactions. You are charged a percentage of every single transaction through your provider—even if the transaction is fraudulent or you eventually have to refund the cardholder.

You’re also charged for each transaction attempt that goes through the payment processor, even if the payment fails. For example, if bots are testing credit card numbers en masse using small transactions on your website, you will end up paying fees for each test transaction. Considering bots are used to test hundreds or thousands of card numbers in short order, your transaction fees can add up fast.

In addition, if enough chargebacks are filed compared to the number of non-fraudulent transactions, the PSP fees will increase—or the PSP can stop supporting your business entirely.

What are APIs used for in payment processing?

APIs connect devices and applications, helping to exchange information and allowing integrations that improve the user experience. Payment APIs help e-commerce businesses accept various forms of online payments. However, insecure APIs can expose sensitive information.

Protecting Your API From Payment Fraud & ATO

Several strategies and tools are available to help companies protect their payment APIs from fraud and account takeover.

Strong Authentication Mechanisms: Two-factor authentication (2FA) and multi-factor authentication (MFA) are commonly used to confirm user identity.
Data Encryption & Secure Transmission: Data encryption using both SSL and TLS is critical to secure internet connections and protect data in transit.
Monitoring & Anomaly Detection: Preventing fraud requires machine learning detection at the edge that identifies and adapts to changing threats and is constantly monitored by human experts.
Fraud Detection & Prevention: At the point of payment, Address Verification Services (AVS) can be used to verify billing addresses—but will not stop a fraudulent payment if the fraudster knows the right address.

To stay ahead of the evolving threat landscape, your best approach to API security is to employ AI-based fraud detection that uses many signals and data sources to protect your websites, apps, and APIs.

The ROI of Reducing Payment Fraud & ATO

As an example of the financial benefits you can see by reducing payment fraud and account takeover (ATO) attacks, consider the case study of a global hotel enterprise now protected by DataDome. In the 90 days prior to activating DataDome protection, the global hotel client had 392,570 credit card declines, even though they had an alternative bot protection software in place.

With enterprises typically being charged an authorization fee between $0.15 and $0.25 per transaction—including declines and voids—the hotel had lost roughly $98,142.50 in declined transaction fees in just one quarter. Had that rate continued, the hotel enterprise would have lost approximately $374,865 in one year to payment fraud alone.

Within the first 90 days after the hotel enterprise replaced their prior bot manager with DataDome, credit card declinations were reduced by 95.5%, saving the client nearly $400,000 over a 12-month period.

Global Hotel Enterprise Card Decline Reduction

At the same time, account takeovers were reduced by 99%, and account takeover attempts went down 97%.

Global Hotel Enterprise ATO Reduction

The reduction in fraudulent account activity and credit card transaction declinations more than paid for DataDome’s solution.

Start Reducing Payment Fraud With DataDome

There are fewer options available for API protection compared to website and even mobile app protection, but APIs are easy gateways to sensitive and confidential information. Since APIs are becoming more common, fraudsters are expanding and diversifying their routes of attack.

Proper API security requires a proactive approach, safeguarding your APIs to prevent fraud before it happens, saving online businesses from excess merchant fees and chargebacks. When APIs—particularly your payment APIs—are well-protected, you are less likely to pay out exorbitant fees for fraudulent or declined transactions.

DataDome’s API Protection solution identifies suspicious activity targeting your websites, mobile apps, and APIs from the first request. Bots and fraudsters are blocked within 2 milliseconds, ensuring they get nowhere near your payment APIs.

Want to see how much DataDome can save you in chargebacks, merchant fees, and card transaction declinations? Start by getting eyes on your traffic with a free 30-day trial or book a demo today.