Payment Fraud: What is It and How Can It Be Avoided?

 Did you know that 80% of companies were subjected to payment fraud attempts and attacks in 2023?

These attacks are a serious problem and have drastic consequences for consumers and merchants alike. 

While digital payments have made life so much easier when buying things, they have also created new risks. 

Malicious parties may infiltrate payment apps and systems to steal information and essentially rob money. 

Whether you’re a consumer buying something online or a business accepting payments online, you need to know the different kinds of payment fraud (and how not to fall for them). 

What is Payment Fraud?

Payment fraud is the illegal act of using someone else’s payment information to get money, goods, or services. It may involve compromised credit card details, online banking accounts, or digital wallets. 

The goal of fraudsters is typically financial gain. However, it may not always be to steal money directly. For instance, some attackers may use debit/credit card info to order things for themselves. 

Similarly, some may steal sensitive data that can be sold or used for further criminal activity.

Payment fraud also varies by the type of transaction. Bank transfers and payments dominate in terms of fraud loss value in the US. And, these losses have been continuously growing. 

The consequences of payment fraud can be severe. It can affect individuals through financial loss and identity theft. Businesses face revenue loss, legal consequences, and even loss of customer trust. 

According to McKinsey, global payment card fraud losses are expected to reach over $400 billion. 

Common Types of Payment Fraud

Payment fraud isn’t as straightforward as you might believe. It differs by payment mode and transaction type. 

Understanding the various forms of payment fraud is the first step to preventing it. 

Here are some of the most common types:

• Credit Card Fraud: This involves the unauthorized use of a stolen or counterfeit credit card to make purchases or withdraw money. Fraudsters usually get card details through data breaches, phishing scams, or physical skimming devices (these devices read the information on the card).
• Account Takeover (ATO): Account takeover fraud involves accessing a legitimate user’s account, often through password theft or social engineering. They then use it to make unauthorized purchases or transfers.
• Phishing and Social Engineering: These are the most common cyber threats. Phishing scams involve tricking individuals into providing sensitive information like login credentials or payment details. For instance, a malicious party may use a fake website to make a user enter their credit card info. 
• Chargeback Fraud: Also called friendly fraud, chargeback fraud is when a consumer disputes legitimate charges with their bank or credit card issuer. They falsely claim that they never received the product or service. Their bank or financial company puts a chargeback and gives them back their money. This type of fraud is particularly challenging for merchants to prevent.
• Card-Not-Present (CNP) Fraud: In CNP fraud, transactions are made without the physical presence of a credit card, which is common in online shopping. Cybercriminals steal debit/credit card information and then use it online to make purchases. 
• Identity Theft: Last but not least, Identity theft involves using someone else’s personal information. Data breaches steal information like Social Security numbers, addresses, or bank account details. They then use it to open new accounts, apply for loans, or make unauthorized purchases.

How to Prevent Payment Fraud as a Business?

B2C businesses, and even some B2B businesses, must incorporate online payments for customer convenience. However, this also opens the door for payment fraud, such as credit card fraud, chargeback fraud, or identity theft. 

So, what can you do as a business to avoid payment fraud? Here are some tried-and-tested practices: 

Secure Payment Gateways and Encrypt Data

Most businesses work with payment processing platforms that handle digital payments, whether through credit cards, bank accounts, or mobile payment methods like ApplePay. 

Ensure you partner with a payment processor that prioritizes security and uses the latest in cybersecurity technologies. 

Their payment systems should comply with industry standards like the Payment Card Industry Data Security Standard (PCI DSS).

They should encrypt sensitive information to protect it from being compromised. 

Implement Fraud Detection Software

You should partner with a payment processor with dedicated fraud detection software as a business. Alternatively, you can invest in one yourself. 

Such software will use artificial intelligence to monitor transactions in real time and flag suspicious behavior.

This can help catch payment fraud in the early stages before it causes actual monetary damage. 

Conduct Regular Security Audits

Schedule regular audits of your systems to identify vulnerabilities. Update software and systems frequently to close security gaps.

Partner with payment processing platforms that use real-time monitoring and regular audits to detect issues before they have a chance to cause problems. 

Train Employees and Customers

Educate your staff on recognizing potential fraud attempts. This is particularly important for people working in customer service, finance, and IT departments.

Your own employees may fall for social engineering attacks and compromise company credentials for handling money. 

Similarly, create awareness about phishing and social engineering attacks for your customers. Ask them not to trust correspondence from phone or email other than yours. 

Adopt Strong Customer Authentication (SCA)

On both your side and the payment processing platform, implement multi-factor authentication for all transactions. This adds an additional layer of security. 

Even if your customers credentials like SSN or credit card info has been stolen, the perpetrators won’t be able to use them without authorization. 

Preventing Payment Fraud: Best Practices for Consumers

In many instances, the business isn’t at fault for customer payment fraud. The customers themselves become victims because of their own negligence. 

Still, the business may have to bear the brunt. You should encourage your customers to follow the best practices for online security:

 

• Use Strong, Unique Passwords and Two-Factor Authentication (2FA): Create complex passwords for your accounts and enable 2FA wherever possible. Don’t share authorization codes with anyone. 
• Regularly Monitor Financial Statements: Keep a close eye on bank statements and credit card activity. Report any suspicious or unauthorized transactions immediately to the financial institution.
• Be Wary of Phishing Attempts: Always scrutinize emails, messages, and phone calls requesting sensitive information. Avoid clicking on suspicious links or downloading fishy attachments.
• Secure Online Transactions: Only make purchases on websites with HTTPS encryption. For added security, consider using a virtual private network (VPN), especially when using public Wi-Fi.
• Report Suspicious Activity Immediately: If you suspect you’ve been a victim of payment fraud, contact your bank to freeze your account and immediately change passwords. 

Tap into a Secure Payment Solution

Nexio offers a wide range of payment processing and embedded finance solutions for businesses of all types. From e-commerce brands to software as a service (SaaS), Nexio provides solutions tailored to the specific needs of your business. The goal is to make it easy to collect payments locally or internationally. 

Nexio takes a serious approach with payment processing and utilizes the latest technologies in fraud prevention. For instance, e-commerce companies can comply with SCA regulations, applicable in many regions, via 3D Secure authentication feature. 

But that’s not all — Nexio is also designed to handle complex payment structures. Merchants in travel, entertainment, and heavily regulated industries like arms and chemicals need additional features to process payments according to regulations and changing business needs. Nexio’s platform customizes payment processing to suit those complex needs without compromising on security. 

FAQs

How do you report a payment as fraud?

If you suspect that a payment has been made fraudulently, follow these steps:

• Contact Your Bank or Card Issuer Immediately: Contact your bank or the issuer of your credit card as soon as possible to report the unauthorized transaction.
• Freeze Your Account or Card: Request your bank to temporarily freeze your account or block your card to prevent more theft. 
• File a Dispute: In the case of credit card fraud, you may need to dispute the charge formally. This will start an investigation, which can take some time. 
• Report to Relevant Authorities: For significant fraud cases, report the incident to your local authorities and consider filing a report with organizations dedicated to protecting consumers (for example, the Federal Trade Commission in the US). 

How do you detect fraud in payments?

There are multiple ways to detect fraud in online payments:

• Location: City or country other than where the person or business is located.
• MFA: Multi-factor authentication with SMS, WhatsApp, email, or biometric verification. 
• Unusual activity: Monitor for unusual activity, such as larger payments than usual.
• Customer authentication: Verify information such as phone number, billing address, IP address, etc. 

Do banks refund scammed money?

Depending on various factors, your bank may or may not refund the money you lost in the scam. It depends on the type of scam, the amount, and whether you authorized the transaction yourself. 

 

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