The subscription economy boomed at a rate of 435% in the last ten years. This business model has transformed digital commerce, where companies offer continuous, flexible, and evolving services for a recurring fee. This expansion comes with a pitfall: subscription fraud, a threat that costs businesses over $2 billion annually.
Internet and software companies are targeted by attacks that negatively influence revenue and strain operations. To combat this threat, organizations are turning to advanced security tools like AI-powered fraud prevention solutions. Keep reading to learn more about subscription fraud, its impact on businesses, and how to fight back.
What is Subscription Fraud?
Subscription fraud involves fraudsters exploiting vulnerabilities to gain unauthorized access to services. This can occur through stolen credentials, synthetic identities, or repeated abuse of trial offers. Unlike other types of fraud that focus on payment manipulation or one-time purchase scams, subscription fraud is heavily account-centric.
In Australia, a man was arrested for allegedly receiving $211,000 from selling stolen Netflix, Spotify, and Hulu accounts. Subscription fraud is a “thriving criminal ecosystem” that targets the over-the-top (OTT) music and video streaming industry.
Why is Subscription Fraud a Growing Issue?
Subscription fraud is becoming more widespread as software and internet service industries grow and diversify. It’s a challenge to ensure account security, especially when faced with customer bases of millions of accounts. These fraud cases are further driven up due to a lack of awareness in consumers. In a world where one in three Americans pays for a subscription they never use, and 35% no longer track their subscription spending, fraudsters have found ways to slip by under the radar.
Subscription Fraud Tactics
To defend against subscription fraud, it’s essential to know the tactics fraudsters use. Here, you’ll find a list of the most common attacks on subscription-based services:
- Account Takeover (ATO): Fraudsters can use databases of stolen credentials gathered from past data breaches to run brute force and credential stuffing attacks to gain access and control over user accounts. Another way to take over an account is through AI-powered phishing attacks, where generative AI is used to create convincing, fake login pages to steal legitimate customers’ login data.
- Promotional Abuse: Many subscription services offer free trials or introductory discounts to attract new users. In promotional abuse attacks, users create multiple false accounts to perpetually access services for free. This abuse can lead to significant revenue losses over time, especially for services that rely on promotional offers for user acquisition.
- Synthetic Identity Fraud: Synthetic identities are fabricated profiles that use AI to mix real and fake information to create accounts that bypass standard security checks and legacy verification methods. These false identities can then be used for a variety of fraudulent uses, such as promotional abuse or to create a network of fraudulent accounts that can be sold on the dark web.
- Chargeback Fraud: This is known as “first-party fraud” and it involves users disputing legitimate charges with their bank to force a transaction reversal after benefiting from the subscription’s services. The result for service providers is lost revenue and chargeback fees from payment processors.
- Refund fraud: Some customers will sign up for a free trial with the intention of canceling the subscription before the free trial ends. Despite being fully notified of the time limit, they will continue using the service past the free trial period and then request a refund from the company. They may also use a service for some amount of time and then claim it didn’t work to get their refund.
Impact of Subscription Fraud on Internet and Software Businesses
Subscription fraud poses major challenges for companies in the internet and software sectors, hindering their growth and their ability to serve their customers. By attacking automatic billing structures and promotional incentives, fraudsters reduce organizations’ ability to attract and retain customers. Fraud affects subscription-based services on three fronts:
- Financial Losses: Businesses face significant revenue loss due to unpaid services and chargebacks. Though initially small, these affect profits, and can spiral into bigger losses.
- Reputational Damage: Fraudulent activity has a marked effect on the general public’s trust in a business, leading to higher churn rates. High-profile fraud incidents can garner negative publicity, damaging a company’s reputation and dissuading potential customers from converting.
- Operational Costs: Combating fraud leads to hours wasted on detection and prevention efforts. For instance, customer service representatives may be diverted from support tasks to handle account restoration and fraud complaints.
Smartproxy, a proxy and web data gathering solutions provider, faced challenges in verifying the legitimacy of customer accounts through their existing process, which caused thousands of manual customer reviews each week. By selecting and implementing Sift’s AI-powered fraud solution, Smartproxy has successfully automated their account review efforts, enabling seamless user screening without interruptions or delays while keeping fraudulent activity off the platform. Since implementing Sift, Smartproxy has slashed manual review time by 99% and reduced customer support emails by 96%.
How to Prevent Subscription Fraud
As fraud tactics have become more sophisticated, so too must organizations’ ability to protect their platform and customers. Traditional security measures like IP blocking or password protection aren’t strong enough deterrents. Today’s subscription-based businesses need advanced, multi-faceted defense strategies to stay secure. Below, you’ll find some of the most effective ways to stop this kind of fraud in its tracks:
- Implement Multi-Layered Authentication: Verify user identities at multiple levels, coupled with multi-factor authentication (MFA) to prevent fraudsters from taking over accounts.
- Analyze User Behaviors: Monitoring account activity can help identify unusual fraud-related patterns. For instance, if an account displays multiple rapid logins from different IP addresses, it may indicate unauthorized access.
- Monitor Free Trials and Promotions: Tracking trial usage can help you detect and prevent promotional abuse. Restrict the number of free trials per user or device to mitigate these risks.
- Integrate Automated Fraud Detection: AI-powered fraud detection and prevention platforms, like Sift, provide real-time monitoring and automated protection. These systems can continuously analyze account behaviors and issue alerts when abnormal activities are detected, enabling businesses to take preemptive actions to secure their accounts.
Revolutionizing Fraud Prevention with Sift’s AI-Powered Solutions
Sift is on the frontline in the fight against payment fraud, equipping subscription-based companies with cutting-edge AI-powered tools designed to detect, prevent, and respond to suspicious activities. With powerful account behavior analytics and robust MFA capabilities, Sift simplifies account security and frees you from the worry of losing revenue to fraudsters.
Companies that utilize Sift benefit from:
- Real-Time, Automated Detection: Uses advanced AI algorithms and multi-factor authentication to analyze accounts for fraud and autonomously stop attacks in real-time, increasing operational efficiency by as much as 70%.
- Customizable Rules: Creates opportunities for growth by tying friction to risk, making it easier for trusted users to make additional purchases while ensuring that higher-risk customers go through the correct vetting processes.
- Behavioral Analytics: Monitors post-login behavior to identify suspicious patterns. When anomalies are detected, Sift’s machine learning system immediately notifies you of a possible threat.
- Global Data Network: Powered by analyzing over one trillion events, the Sift Global Network identifies and tracks 16,000 different signs of potentially fraudulent activity, enabling the platform to immediately detect fraud with incredible accuracy.
With Sift, subscription businesses can protect their operations, ensure user trust, and stay ahead of evolving fraud tactics. Get a free demo from Sift and grow securely with fraud prevention for subscription businesses.