Payment Fraud: What It Is & How To Protect Your Business

The last few years, payment fraud has grown exponentially. Online payment fraud losses grew from 17.5 billion dollars in 2020 to an estimated 48 billion dollars in 2023. It’s a problem that affects businesses of all sizes and industries, but it can be avoided with proper fraud prevention. The better you understand payment fraud, the better you’ll be able to prevent it.

E-Commerce Losses to Online Payment Fraud Worldwide

E-commerce businesses lose more money to payment fraud every year (statista).

This article will explain what payment fraud is, how it damages your business, what common types of payment fraud exist, and what you can do to protect your business from it.

Key Takeaways

• Payment fraud is a growing and increasingly sophisticated threat that causes not just financial, but operational and reputational damage too.
• There are many different types of payment fraud, from business credit card fraud to chargeback fraud.
• Robust fraud prevention software is the best way to minimize your risk of payment fraud. Other good ways include multi-factor authentication, using reputable payment processors, and educating your employees and customers.

What is payment fraud?

Payment fraud is the unauthorized manipulation of payment processes to illegally receive, spend, or transfer money. It undermines the integrity of financial transactions and threatens the security of personal and business information.

For example, a fraudster could use stolen credit card information to make a large online purchase, then quickly resell the goods for cash before the legitimate cardholder discovers.

Types of Payment Fraud

Payment fraud can be categorized into two groups: card-present (CP) fraud and card-not-present (CNP) fraud. Card-present fraud happens when the physical card is involved in the transaction, making it more common in brick-and-mortar retail settings. Card-not-present fraud happens when transactions are done without the physical card, typically online or over the phone. This type of fraud is by far the biggest of the two groups.

CNP fraud made for 73% of all card payment fraud losses in 2023 (emarketer).

Credit Card Fraud

Credit card fraud happens when someone uses someone else’s credit card information without their authorization to buy something or withdraw funds. This can happen with physical card theft or, more commonly, by finding credit card information on the dark web.

Credit card fraud is a common type of fraud. In 2023 alone, American consumers lost a total of $246 million to it. Credit card fraud can be minimized with robust payment fraud detection software that secures all endpoints and blocks automated threats in real time.

Debit Card Fraud

Debit card fraud happens when a fraudster gains access to someone’s bank account through their debit card information. This allows the fraudster to buy things or withdraw cash directly from a victim’s bank account. Different from credit card fraud, debit card fraud immediately impacts someone’s actual funds.

American consumers filed over 83,000 reports of debit card fraud in 2023, with bank card fraud losses projected to climb to $165 billion over the next decade. It is a serious problem. Financial institutions can protect against debit card fraud with online transaction fraud detection that can identify suspicious transactions in real time.

Bank Transfer Fraud

Also known as wire transfer fraud, bank transfer fraud involves tricking people or businesses into sending money to fraudulent accounts. The FBI’s Internet Crime Report revealed a record number of complaints about bank transfer fraud: 880,418 complaints in 2023, with potential losses over $12.5 billion.

Businesses can fight bank transfer fraud with multi-factor authentication and advanced fraud detection algorithms that can identify unusual transaction patterns. Education also plays a crucial role, as an employee or individual’s awareness of common fraud tactics will help them spot risks before they turn into fraud.

Check Fraud

Check fraud is a type of financial crime when someone creates, alters, forges, or uses a check in an attempt to illegally get money from an account they don’t own. It has seen a resurgence in recent years, with the US Treasury reporting a 385% increase in check fraud since the pandemic.

Fraudsters use various techniques to commit check fraud. They alter legitimate checks, create counterfeit ones, and steal checks from unsuspecting victims. Financial institutions can minimize check fraud with image analysis technologies and AI-driven fraud detection systems.

Mobile Payment Fraud

Mobile payment fraud happens when a fraudster uses vulnerabilities in mobile payment systems to steal financial information, manipulate a payment process, or make unauthorized transactions. Because smartphones are increasingly the primary device for financial transactions, this is a growing type of fraud.

Fraudsters often use sophisticated techniques to gain access to someone’s device or to trick them into revealing sensitive information. Such techniques include account takeovers, fake apps, phishing attacks, and SIM swap fraud. Mobile payment providers can reduce mobile payment fraud with biometric authentication, real-time fraud detection, and other advanced security measures.

How does payment fraud happen?

• Identity Theft: Criminals steal personal and financial information to make unauthorized transactions. This can involve methods like dumpster diving, mail theft, or hacking into databases containing sensitive information.
• Phishing: Fraudsters use deceptive emails, websites, or text messages to trick individuals into revealing their financial details. They often impersonate legitimate companies or institutions to gain the victim’s trust.
• Skimming: Criminals attach devices to ATMs or point-of-sale terminals to capture card information when users swipe their cards. The stolen data is then used to create counterfeit cards or make unauthorized online purchases.
• Chargeback Fraud: Also known as “friendly fraud,” chargeback fraud occurs when a customer makes a legitimate purchase but then disputes the charge with their bank to get a refund. The fraudster keeps both the purchased item and the refunded money.
• Business Email Compromise (BEC): Scammers impersonate company executives or vendors to trick employees into transferring funds to fraudulent accounts. This sophisticated form of fraud often involves extensive research and social engineering tactics.
• Malware: Cybercriminals use malicious software to infiltrate devices or networks and steal financial information. This can include keyloggers to capture passwords, or more complex programs that manipulate online banking sessions.

Industries at Risk of Payment Fraud

Certain industries are more susceptible to payment fraud than others. Here are the industries most at risk:

• Hospitality: High volume of transactions and the use of shared payment systems increase vulnerability. Fraudsters often target hotels and restaurants due to their frequent handling of credit card information.
• Digital Businesses: The reliance on online transactions and digital goods make them prime targets. These businesses often deal with high volumes of card-not-present transactions, which are easier to exploit than card-present transactions.
• Retail: Both brick-and-mortar and online retailers face risks, but online retailers are particularly vulnerable to CNP transactions. In-store retailers also face challenges like return fraud and counterfeit card use.
• Banking and Finance: Financial institutions are prime targets because of the frequency and value of their transactions. They are constantly challenged with sophisticated cybersecurity threats and must find a delicate balance between customer convenience and tight security.
• Healthcare: The healthcare industry is vulnerable because of their complex billing systems, large volume of transactions, and sensitive patient data. Fraudsters will try to exploit insurance claim processes, steal people’s identities, or use phishing and ransomware attacks.

How does payment fraud affect businesses?

• Financial Loss: Direct monetary losses from fraudulent transactions can significantly impact a company’s bottom line. Businesses often bear the cost of refunds to customers. This can be particularly damaging for small businesses or those operating on thin profit margins.
• Chargeback Fees: Each fraudulent transaction can result in costly chargeback fees from payment processors. High chargeback rates can lead to increased processing fees or even account termination by payment providers. These fees can quickly accumulate, adding to the financial burden of fraud. It’s often difficult for a business to prevent chargebacks.
• Damage to Reputation: Businesses that fall victim to fraud may experience a loss of customer confidence and loyalty. Negative publicity from fraud incidents can stop potential customers and partners from going with you. Rebuilding trust is a lengthy and costly process that can affect market share and competitive positioning.
• Legal & Regulatory Consequences: Companies can face legal action from affected customers or regulatory bodies for failing to protect sensitive data. Non-compliance with payment industry standards often results in hefty fines and increased scrutiny from regulators. This can lead to ongoing compliance costs and potential restrictions on business operations.

How to Prevent Payment Fraud

Despite the threatening nature of the most common types of fraud, it’s entirely possible to make payment fraud disappear for your business.

1. Implement robust security measures: Use encryption, tokenization, and secure payment gateways to protect transaction data. Encryption makes sure that data is unreadable to unauthorized users, while tokenization replaces sensitive information with non-sensitive equivalents. Secure payment gateways are an additional layer of security between merchants, banks, and consumers.
2. Monitor transactions for suspicious activity: Use advanced analytics and machine learning to detect unusual patterns. Real-time monitoring allows you to identify and address fraudulent activity as it occurs, minimizing potential damage.
3. Educate employees: Ensure that your employees can recognize and prevent fraudulent transactions. Regular training sessions and updates on the latest fraud tactics can seriously improve your business’s security posture.
4. Use fraud detection software: Such software can identify suspicious activities, flag fraudulent transactions, and adapt to new fraud techniques as they emerge. They often use a combination of rule-based filters, machine learning, and behavioral analytics to provide comprehensive protection.
5. Regularly update security protocols: Stay informed about the latest fraud tactics and adjust your security measures accordingly. Cybercriminals constantly evolve their methods, so you must remain vigilant and adaptive.
6. Limit access to sensitive information: Use strict access controls and the principle of least privilege to make sure that employees have access to the minimum amount of data required for their jobs. This approach minimizes the risk of internal fraud and reduces the impact of a successful external attack.

How to Remedy Payment Fraud

1. Have a response plan: Prepare a detailed plan for responding to payment fraud incidents, including customer communication, risk management, and remediation steps. A well-defined plan enables swift action to reduce the impact of fraud.
2. Investigate promptly: Quickly address and investigate any suspected fraud. Prompt investigation helps identify the root cause of the fraud and prevents further incidents. Good software can help automate this process, as a manual review of the many threats is often too slow.
3. Learn from incidents: Analyze fraud attempts to improve future prevention measures. Reviewing and learning from past fraud incidents helps businesses better their security strategies and reduce the likelihood of recurrence.

In Conclusion

Payment fraud is a growing and increasingly sophisticated threat that can affect your business. While it may seem hard to protect yourself against all types of payment fraud, you can minimize the threat with the right technologies. Install robust payment fraud prevention software, enable multi-factor authentication wherever you can, and regularly educate your employees and customers.

DataDome is payment fraud prevention software that provides cutting-edge fraud detection and prevention solutions to safeguard your payment systems and customer data. It detects and blocks all automated threats in real-time to eliminate all types of fraud. With DataDome’s comprehensive protection, you can focus on growing your business while keeping fraudsters at bay.