The True Cost of Fraud Goes Well Beyond Dollars Lost

The impact of fraud on a business can be swift and severe.

Several payments companies have partnered with or acquired companies to help them deal with fraudsters.

While artificial intelligence shows promise as a fraud detector and defender, criminals are also using it to facilitate financial and identity theft.

Fraud in financial services carries implications beyond immediate financial losses, impacting brand safety, reputation and consumer confidence. Discover® Global Network acknowledged these risks as central to its strategy, particularly given the rising prevalence of digital transactions. Kate Weiler, director of transaction risk at Discover, said fraud prevention and reputation management are closely intertwined.

“A brand can be impacted at every interaction,” she told PYMNTS, adding that even a single fraudulent incident has the potential to erode consumer trust and damage the brand’s standing.

The complexities of modern payments amplify these challenges, Weiler said. With the surge in digital payment options, consumers expect seamless, reliable interactions with brands.

However, a brand’s reputation can suffer quickly if users perceive a lack of security or encounter friction in their transactions. To address this, Discover enforces fraud controls while aiming to minimize interruptions to the customer experience. This approach highlights the balance needed to protect the brand from fraud while maintaining an accessible and user-friendly interface, recognizing that excessive declines or hurdles could deter users and impact merchants.

Fraud prevention is not only a technical issue but also a reputational one, Weiler said. In highly competitive digital markets, the consumer experience must remain smooth to retain trust. Discover sees brand reputation and consumer confidence as key assets that require continuous protection, as they are often much harder to rebuild than they are to preserve. This risk management approach is crucial, considering the reputational cost fraud poses if not adequately addressed in an increasingly digitalized payment landscape.

Tokenization as a Fraud Defense

Tokenization has emerged as a strategy in the fight against payment fraud, offering a secure, streamlined solution that minimizes risks for customers and businesses. In contrast to encryption, which scrambles sensitive data, tokenization replaces this data with unique tokens that are useless to anyone intercepting them. The technology provides an extra layer of defense without adding complexity to the customer experience.

“Tokenization allows us to secure the transaction while promoting a more seamless experience for the user,” Discover Global Network Vice President of Digital Products Valeri Vanourek said.

The adoption of tokenization technology aligns with the goals of Discover, maintaining high security standards and a frictionless user experience, she said. Tokenized data reduces the potential for fraud by rendering intercepted information unusable to fraudsters. As digital transactions grow in frequency, this process minimizes risk without compromising speed or reliability, an advantage over more traditional security methods.

Tokenization helps keep sensitive cardholder information secure without requiring added steps in the payment process, supporting Discover’s fraud mitigation efforts and its commitment to ease of use, she said.

In today’s financial services industry, where consumers demand security and convenience, tokenization represents a method to address both needs simultaneously, she said. For Discover, implementing tokenization is part of a larger strategy to support customer confidence and bolster transaction security across its network. The technology provides merchants and customers with a higher degree of protection against fraud while facilitating the kind of smooth, uninterrupted transaction experience that has become central to the modern digital economy.

Data-Drive Fraud Detection in Payments

As fraud tactics evolve rapidly, the strategy implemented by Discover includes layered security measures to detect, prevent and manage fraud. This approach combines data analytics and collaboration with acquiring banks and other stakeholders.

Discover Chief Information Security Officer Sunil Mallik said advanced analytics and machine learning are essential to detect and assess unusual patterns, helping the organization stay agile against emerging threats. Fraud prevention is not static but rather an adaptive strategy as attackers constantly seek new methods, including the use of AI.

“AI is in the hands of the bad guys just as much as it’s in ours,” Mallik said, highlighting the challenges of combating increasingly sophisticated threats.

The approach extends beyond detection to prevention, encompassing the entire payment journey. The Discover High Brand Risk Program, for example, integrates closely with acquiring partners to address high-risk transactions or merchants, focusing on categories vulnerable to fraud. Data insights from the program provide Discover with a clearer picture of merchant practices, helping the company identify potential risks and intervene when needed.

These data-driven strategies reflect a shift toward a proactive, intelligence-driven approach in the fight against fraud, in which Discover aims to identify vulnerabilities early and address them before they escalate.

Through these measures, Discover aims to promote transaction security and uphold compliance across its ecosystem, balancing operational security with customer and merchant expectations. This method serves to reinforce consumer trust, as Discover strives to build more secure, seamless payments across its extensive network.