Payment fraud is like a natural disaster—persistent and unpredictable; still, many businesses overlook its importance. According to the AFP report, 8 out of 10 organizations were victims of payment fraud/attempts in 2023, highlighting the financial impact and the challenges a business faces.
In this blog, we’ll discuss payment fraud, its types, and how to prevent fraud and detect it to protect your bottom line.
What is payment fraud?
Payment fraud is a financial fraud in which fraudsters steal someone else’s payment data or information and use it for illicit transactions. For example, fraudsters open new accounts using someone else’s credentials or intercept and alter payment details in transit—ruining your business’s reputation.
Businesses of every type are susceptible to payment fraud—inflicting financial hardships in terms of lost merchandise, reputational damage, chargebacks with potential fines, and legal liabilities.
Types of payment fraud
Chargeback fraud
Chargeback or friendly fraud occurs when a customer disputes a charge you made on their credit card. You have to reverse the charge and refund the deducted amount. As customers initiate chargeback fraud after making a legitimate purchase from you, this fraud is challenging to detect and prevent.
Impact on your business
- Penalization by the card issuer
- Chargeback fees
- Increased processing cost
- Lost inventory
- Lower authorization rate from the card charge issuer
- Lost opportunity cost
How to detect
- Keep an eye on your transaction patterns
- Look for repeat offenders
- Review the reasons for past chargebacks
- Contact customers directly to verify large or suspicious orders before processing them
- Use address verification services (AVS) to match the billing address with the address on file with the card issuer
Account takeover fraud
Account takeover fraud occurs when fraudsters access your online banking or financial institution account, digital wallet, or ecommerce account by capturing keystrokes or stealing login details from compromised devices. With these details, fraudsters seize control of your account. Once in, they create mayhem by performing unauthorized transactions or transferring your business funds.
Impact on your business
- Financial loss
- Reputation damage
- Operational disruption
How to detect
- Track login attempts
- Identify sudden changes in account details
- Analyze behavior patterns to detect anomalies
Identity theft
Fraudulent actors may steal credit cards online through methods like hacking, card skimming, and social engineering, which is identity theft. They use stolen credit card information, such as your customer’s personal details, credit card numbers, and other sensitive information, to make a payment in the customer’s name.
Impact on your business
- Refund the purchase
- Incur chargeback cost
- Financial penalties if your chargeback ratio surpasses the card scheme limit for consecutive months
- Reputational damage
How to detect
- Use credit monitoring services
- Implement identity theft protection
- Leverage behavioral analytics tools to flag activities that are different from normal
- Audit access logs to detect unauthorized attempts or successful breaches
Bank identification number (BIN) attack
In a BIN attack, fraudsters use the first six digits of a credit card to algorithmically guess the remaining digits to generate usable card numbers. They then use the generated card number to make unauthorized payments or transactions until the customer blocks the card.
Impact on business
- Reduces trust in financial institutions
- Operational cost related to fraud detection and prevention
- Reputational damage
- Regulatory fines
How to detect a BIN attack
- Look for a high volume of transactions using specific BINs within a short time frame
- Track transactions from unexpected or inconsistent geographic locations
- Use advanced network-level analytics to detect BIN attacks
- Implement deep packet inspection (DPI) to track incoming and outgoing traffic at the application layer
- Analyze different channels to detect patterns and linkages within fraudulent activities.
Triangulation fraud
As the name suggests, triangulation fraud involves three participants: your customer, your business, and a fraudster. In a triangulation fraud, a fraudster poses as a seller. They offer great discounts on a product, get paid by the real customer, and then use a stolen card to complete the customer’s order from a legitimate website—more like an arbitrage. Though the customer receives the product, they’re unaware about the fraud. The real cardholders and your business face the brunt of the financial loss.
Impact on your business
- Inventory depletion
- Chargeback fee from real cardholder
- Order fulfillment issues
How to detect
- Monitor unusual purchasing patterns, like high-volume orders and shipping address mismatch
- Use machine learning algorithms to detect and analyze transaction data
- Behavior tracking and profile building of customers
- Perform address and location verification
Payment fraud prevention techniques
Use these techniques to prevent payment fraud:
Secure payment methods
For preventing payment and credit card fraud, use secure payment methods, such as NFC contactless payments, EMV chips, and mobile payments. You can even replace sensitive card information with unique identification symbols (tokens) that retain all your customers’ information without compromising security. Wherever possible, discourage using credit or debit cards because they use a magnetic stripe—less secure and more susceptible to online fraud.
KYC protocols
To make sure your customers are who they say they are, implement Know Your Customer (KYC) or Know Your Business (KYB). Perform thorough identity verification when they create their accounts. But it’s not just a one-time check—continuously monitoring their activities to spot any unusual behavior. Staying vigilant enhances security and protects your business and customers alike.
Fraud detection software
Fraud detection software detects and stops fraudulent transactions, protecting business transactions and blocking unsolicited fund transfers. These fraud prevention tools collect data from various sources, such as transaction records, customer profiles, and external databases. The tool establishes customer behaviors and finds patterns in your financial activities to detect changes from the known patterns.
Artificial intelligence and machine learning
Using AI and ML algorithms, you analyze a vast amount of transaction data to identify patterns and anomalies in payment transactions. You only have to feed historical data and user behavior into these systems to improve detection capabilities over time. Big data analytics adds fuel to your efforts as it analyzes unstructured data from multiple sources, giving you a comprehensive overview of potential frauds.
Strong authentication measures
To make your login and transaction process secure, implement multiple-factor authentication (MFA). This can include passwords, one-time passcodes (OTPs), and even biometric data like fingerprints or facial recognition. Using biometric authentication adds an extra layer of security, making it challenging for fraudsters to access customer data.
Regulatory compliance
Comply with regulatory and industry standards like PCI-DSS (Payment Card Industry Data Security Standard) to secure your payment environment. Regularly conduct security audits and assessments. These routine checks ensure you meet all the necessary regulations and spot potential data breaches and vulnerabilities before they become major issues.
Payment fraud—A financial burden for businesses
The battle against online payment fraud is ongoing, and businesses need to stay vigilant at every step. When fraudsters commit payment fraud, it hurts your bottom line while degrading your reputation and customer loyalty. As a result, online businesses need to start investing in robust payment fraud detection and prevention techniques.
While you may hear about payment fraud in the news, don’t wait until your business experiences a fraud attempt—NOW is the right time to combat fraud.
