The total value of online software and services transactions is likely to reach at least $135 billion by the end of 2024. The rapid expansion of digital sales and shift in consumer preferences offer immense opportunities to internet and software businesses.
However, the benefits of virtual transactions, such as the lack of physical products, instant sales, and card-not-present purchases are also attracting a swarm of cybercriminals and bad actors.
To thrive in an environment where increased fraud and business expansion go hand-in-hand, you need to fully understand both the threats and the drivers of growth. Keep reading for a breakdown of fraud risks and discover your path to secure growth.
What are Internet & Software Businesses?
Internet & software businesses are intangible products delivered immediately upon payment, such as online subscriptions, in-app purchases, and media. These businesses serve markets in both B2C, such as software and tech offerings for businesses, and B2B, like consumer-oriented software, technology, or services.
Internet & software companies have two defining characteristics:
- Intangibility: When a customer purchases a digital software or service, the entire transaction occurs online, and the product is delivered electronically. Sometimes, the customer will receive their order in an email with a link. In other cases, they are simply granted access to a service.
- Instant Delivery: When purchasing SaaS and services, consumers click “Buy now” or “Subscribe,” and expect immediate access. This ability to be immediately made available is one of the main differentiators between digital services and physical products, offering unparalleled convenience with nearly zero wait time.
Four Major Fraud and Business Risks for Internet & Software
The internet and software industry is particularly vulnerable to fraud due to the large volumes of users and transactions, an emphasis on speed over security, and the difficulty in tracking and verifying the delivery of intangible items. Here are some of the significant fraud and business risks impacting the sector:
1. Account Takeover (ATO)
There has been a 24% YoY increase in the average account takeover (ATO) attack rate across the Sift Global Network in Q2 2024. Account takeovers occur when fraudsters use stolen credentials to gain unauthorized access to an account. Once they have access, cybercriminals can use the account to make fraudulent purchases or steal other sensitive personal information. These attacks can lead to financial losses and damage customer trust.
2. Payment Fraud
In 2024, there was a 13% YoY increase in the rate of payment fraud attacks across digital goods. This includes the unauthorized use of payment methods to make illegitimate purchases. Typically, it involves using stolen or fake credentials, manipulating transactions, or exploiting weaknesses in payment systems. Two of the most common ways of committing payment fraud are card testing and card hopping.
Fraudsters carry out card testing to determine whether stolen credit card information is valid and can be used without detection. Usually, the test is a small purchase, often less than $1, in the hopes that the smaller amount will pass under the radar. If it works, cybercriminals will then use the card for larger purchases or sell the payment information on the deep or dark web. There’s evidence that fraudsters are automating card testing attacks and launching them at scale against online merchants.
3. First-Party Fraud and Chargebacks
First-party fraud occurs when a customer files a chargeback dispute claiming a transaction they made was fraudulent in order to get their money back and keep their purchase. This form of dishonesty presents specific risks to businesses because of the intangible nature of digital services. It’s much easier for users to dispute charges or falsely claim non-receipt after benefitting from the services. When the user deceptively claims dissatisfaction with a product or service and initiates a complaint, the bank reviews the chargeback dispute and may then reverse the transaction and charge the business additional fees.
Unauthorized transactions that result in chargebacks by the legitimate cardholder also come at a cost to businesses. Between 2022 and 2023, Sift tracked a 17% jump in chargeback value, revealing the growing financial burden on businesses.
4. Sophisticated AI Fraud Tactics
Advanced, AI-driven fraud attacks represent a new wave of threats to the DG&S sector. Fraudsters use generative AI tools like ChatGPT to launch convincing scams involving fake profiles, false reviews, and convincing phishing messages. AI voice cloning tools can be used to impersonate authentic customers and overcome legacy fraud prevention methods. What’s more, the rise of deepfakes has created an entirely new avenue for identity fraud, making it possible to create visual representations of human faces that bypass biometric measures.
As fraudsters embrace AI tools, digital and SaaS companies are forced to contend with increasing account takeover attempts fueled by AI-generated credentials. Additionally, detecting first-party fraud has become an increasing challenge as fraudsters use AI to mimic customer behavior.
Traditional fraud detection systems rely on static rules and predefined patterns, making them too rigid and slow to adapt to the rapidly evolving tactics of modern cybercriminals. To contend with AI-powered fraud, internet and software companies need AI and machine learning tools of their own.
Advanced tools like Sift offer real-time detection capabilities, enabling you to swiftly and accurately identify suspicious activity. By analyzing vast amounts of user behavior data, AI can detect subtle anomalies and uncover emerging fraud patterns, enabling you to stop them before they escalate.
Challenges Facing Internet & Software Companies
Internet and software businesses are at a crossroads, facing the need to balance security requirements with consumer preferences for instant, streamlined digital experiences. Here’s a closer look at the fraud and business growth challenges that many software and services companies are dealing with right now:
High-Volume Transactions
Digital services businesses can serve anyone, anywhere, at any time and transaction volumes can increase dramatically. The sheer number of transactions makes it easier for cybercriminals to hide among the legitimate customers.
User Experience vs. Fraud Prevention
Digital and SaaS companies must reconcile robust security with a seamless user experience. A fast and smooth onboarding process, along with instantaneous delivery, are essential for growth in the industry. However, implementing strong fraud prevention measures, such as multi-factor authentication, can introduce friction that may frustrate users and lead to higher abandonment rates.
Preventing Chargebacks
Chargebacks result in financial losses and harm relationships with payment processors and customers. Unlike physical goods, digital products can be instantly consumed, leaving businesses vulnerable to customers who dispute legitimate charges through first-party fraud.
Dispute Resolution
Resolving payment disputes in the internet and software industry also presents unique challenges. Digital products lack a physical shipping address, making it difficult to provide the evidence required to win disputes, such as delivery confirmation.
Additionally, changes in dispute resolution requirements, such as Visa’s Compelling Evidence 3.0, have further complicated this process for both B2C and B2B companies. Under these new guidelines, merchants must now also provide past customer transaction data for a historical footprint of previous purchase history.
Strategies for Secure Growth in Internet & Software
In addition to security threats, leaders in internet and software must also stay on top of growth opportunities. Here are the actionable strategies that businesses can implement to grow quickly and securely:
Implement AI-Powered Fraud Prevention
To maintain security without sacrificing growth, businesses need advanced digital risk tools and processes. Sift uses AI-powered fraud solutions to detect and prevent fraud with unparalleled accuracy and speed. With real-time fraud detection and revenue protection, your organization can continue to expand confidently.
Enhance Customer Trust
As your organization grows, it’s critical to enhance customer trust by implementing risk-based assessments that adapt security measures to the potential threat level of each transaction. This allows you to accept more legitimate transactions and retain loyal customers by applying friction only when necessary, ensuring a smooth and secure user experience with high accuracy.
Leverage Data Analytics
Data analytics is a powerful tool that increases your security and uncovers new growth opportunities. By analyzing transactional data, you can recognize emerging fraud tactics, spot suspicious behavior, and stay ahead of potential threats. With access to a global data network, you can benefit from shared intelligence across industries. This enables every business to recognize and defend against fraud trends occurring across different regions and sectors.
Automate Fraud and Business Operations
Automating your fraud and business services can significantly improve efficiency and accuracy, allowing you to swiftly handle high-volume transactions without missing red flags. Automated solutions can rapidly analyze vast amounts of data and detect suspicious activities, reducing the manual review burden on teams.
The Sift Difference: Empowering Fearless Expansion
The intangibility of internet and software as well as the volume of transactions make these companies a prime target for ATOs, payment fraud, and advanced AI fraud attacks. At the same time, customers purchasing software and services expect a high-speed, seamless transaction experience.
Sift’s AI-powered fraud decisioning platform allows businesses to protect themselves against evolving threats while delivering the fast-paced user experiences customers demand.
The Sift Platform offers:
- Real-time machine learning
- A global data network processing 1 trillion events per year
- Customizable rulesets
- Seamless integration
- Reduction of payment fraud attack rate to 3.6%
- ATOs cut to just 0.1%
Secure your digital business’s future with Sift. Get a free Digital Risk Assessment and unlock your growth potential without compromising on security.
