Let's admit it - we're not dealing just with a bunch of script kiddies with a knack for defacing popular sites. We're dealing with serious "bad guys" with a lucrative opportunity to use our systems, with a big shiny dollar sign at the end. And we want to stop them from doing so. Our only problem is that when we do so, we tend to make the legit buyers' lives much harder, because fraudsters are always more prepared and have more incentive to complete a purchase than the average buyer.
If you go back to square one, you'll discover that when coming to design a payment system one has to choose between an open and closed door approach. This might seem simple, but closed (only allow buyers you trust to make a purchase) vs. open (allow all to buy, then detect the bads while they buy) approaches not only define your risk aversiveness in general but also dictate your risk management strategy. True, the long term goal in each is to get to a nearly-perfect system and hedge the risk (more on hedging - thank you Tal - in a future post), but how do you get there?
All in all, we're looking to prevent scalable negative actions; reach a point where every frauster can only hit you once and you're in a completely new ballpark. For most merchants, the problem is the fact that fraudsters return to known exploits, and for most fraudsters the problem is finding and reusing without bouncing off rules and limitations. CAPTCHAs and Captcha-like mechanisms reduce the ability to quickly open many accounts ("horizontal scalability") while soft limits and caps limit the ability to create large losses through a single account ("vertical scalability"). By combining the two, one would expect, we make the fraudsters' livesharder, raise the "cost of fraud" and reduce risk. Somewhat right, somewhat wrong.
In themselves risk controls are not bad ideas, but to make good use of them they need to be utilized properly. Here's a common approach: "Heck, the last fraudster did one hundred 5$ digital goods transactions, let's stop anyone from doing that. Then that other one opened 5 accounts that are linked, let's not let any linked accounts in our system". Synchronous, always on controls, espcially explicit ones, raise the incentive to reverse engineer them. Use too many quotas and limits and you reach an unmanageable system with thousands of rules you forgot exist, and which effect on future (legitimate) buyers you cannot predict. This is why, among all recommendations, I would support heuristic profiling. It's a big word, true, and we'll need to shed some light on this subject before we move on; but only right profiling and segmentation of your legitimate and fraudulent users can allow proper use of risk controls and authentication mechanisms - one that doesn't strain legits for something fraudsters are trained at overcoming, and doesn't create a overgrown operations center (that doesn't justify itself) to manage.