Open Banking
Open Banking
January 12, 2024
3 minutes

Pay By Bank vs Cards - Fraud Prevention

Timothy Shin

Open Banking Expert

Continuing our Pay by Bank vs Cards comparison series, we examine the key differences in fraud between card payments and Pay By Bank transactions. Card fraud is the most common form of identity theft, and the costs of it almost always trickle down to the merchant. 

Despite years of rising card fraud, progress has been slow in directly mitigating the issues that cause its growth. While fraud does exist for Pay By Bank, Open Banking offers new opportunities to improve fraud detection and prevention. 

Understanding Card Fraud 

Card fraud is rampant, and there are many types, but here are the most common:

  • Card-Not-Present (CNP) Fraud - CNP fraud occurs when scammers steal a cardholder's card and personal information and use it to make purchases online. The manual input of card numbers is an inherently vulnerable digital payment method—the merchant has no physical card to examine and can't verify the buyer's identity. 
  • Chargeback Fraud, aka Friendly Fraud - Chargeback Fraud occurs when the chargeback system inherent to cards gets abused, intentionally or unintentionally, to reclaim money from a merchant after a transaction.
  • Phishing Scams - Malicious actors will pretend to be an official organization or financial institution to steal card details from consumers. 

Fraudsters are only becoming more sophisticated; CNP fraud is expected to hit $9.74 billion in losses for 2023 and $10.16 billion in 2024. Furthermore, $1 of fraud is estimated to cost merchants roughly $3.75 in losses. In a perfect world, consumers would immediately report that their credentials were stolen or lost to prevent fraudulent transactions from happening in the first place. Unfortunately, this is hardly the case, as evident by the consistent rise in CNP fraud. 

Not only is there fraud from malicious actors and identity thieves, but there’s also “friendly fraud,” aka chargeback fraud, which has been steadily rising by 19% annually. Chargeback fraud isn’t any more lenient, as chargeback fees often incur an additional $20 to sometimes even up to $100 in penalties on top of revenue loss. 

Understanding Pay By Bank Fraud 

Since Pay By Bank is an inherently different payment method than cards, the types of fraud experienced differ. Pay By Bank fraud mainly stems from malicious actors gaining access and exploiting accounts that don’t belong to them. Here are some common examples:

  • Account Takeover Fraud (ATO) - When malicious actors gain unauthorized access to consumer bank accounts with stolen credentials to commit fraudulent activities. 
  • Data Breaches - When bank account information gets leaked, fraudsters utilize the leaked data to access bank accounts and make unauthorized transactions. 
  • Phishing Scams - Like cards, this is when scammers use fraudulent emails or websites to steal banking credentials from unsuspecting bank account holders to gain access.

Naturally, the risk of fraud with Pay By Bank is a concern for most merchants and may make them hesitant to utilize it as a safe and effective alternative to cards. While Pay By Bank and ACH fraud does exist, unlike cards, Open Banking provides many safeguards that protect Pay By Bank from fraud by addressing several of its shortcomings directly.

Mitigating Credit Card Fraud vs. Pay-by-Bank Fraud 

The ACH network that enables Pay By Bank isn’t flawless and carries risk, just like cards do. In fact, the fraudulent activities listed can overlap and impact both Pay By Bank and card payments equally. The difference is how each payment method handles fraudulent activity. Here are a few direct comparisons of how each payment method mitigates fraud. 

Pay By Bank platforms powered by Open Banking vet consumers thoroughly with their bank accounts, such as their account history, transaction history, etc., and everything is consumer-permissioned. Nothing goes through without the consumer’s approval. 

The Trustly Advantage

Using Trustly’s proprietary Open Banking technology, merchants can confidently verify consumer identity and account legitimacy with real-time bank data, allowing for the intelligent approval or denial of potentially risky transactions and the identification of any anomalies.  Trustly Connect can authenticate 100% of consumer bank accounts, verifying account ownership to prevent ATO. Finally, with no card network involved in the payment process, chargeback fraud is eliminated. 

Fight Back Against Rising Card Fraud 

As fraud rates continue to rise, merchants no longer have to feel like there’s no alternative to card payments and the headaches involved with accepting them. Fraud shouldn’t be the “cost of doing business.” Know that with Trustly’s frictionless and easy-to-use Pay By Bank platform, you can mitigate fraud and protect your bottom line. 

As we continue this series, please be sure to visit our first blog on how Pay By Bank improves cost savings by avoiding swipe fees and the grip that the card network duopoly has on merchants.

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