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Updated by 11.14.2023

What Is Payment Fraud and How to Prevent It

Payment fraud is any fraudulent actions with payment methods, including stealing card information, using stolen cards to make purchases, creating counterfeit cards, and more.

About 35% of American consumers have fallen victim to credit card fraud, while 51% of businesses have experienced fraud within the past two years.

Payment fraud is a growing problem in today’s business landscape, but with the proper knowledge and tools to prevent internal and external fraud, like E-Complish’s VirtualPay with inbuilt fraud protection, Call Sentry, ePaymentLink, eAutoAssistant, eDocSign, ChatPay, and real-time ACH validation, to name a few, your company can safeguard itself and its customers from becoming fraud victims.

Understanding Payment Fraud: Definition, Causes, and Impact

Payment fraud is any fraudulent activity involving payment methods, such as credit cards, debit cards, checks, online payment services, or card information, to make unauthorized purchases that deprive a victim of property or payable funds.

The primary goal of industries fueled by consumer payments is to protect and secure consumers’ sensitive data at all costs. With so many payment channels and options available to conveniently assist the consumer, the door to various fraud opportunities is open.

One of the root causes of payment fraud is the lack of due diligence on the internal operations side, whether it be exposing consumer payment credentials to internal representatives/call centers and/or improper vetting of external vendor payment solution providers’ security measures and tools.

Payment fraud and merchant identity fraud have severe, long-lasting consequences. For eCommerce business owners, it results in decreased customer trust and profits, while consumers suffer financial losses, identity theft, and damage to their credit scores.

Common Types of Payment Fraud and How to Identify Them

Knowing how to prevent payment fraud and detect payment fraud promptly is a challenge. However, you can’t create an effective risk strategy unless you understand the various types of fraud in the digital payment industry and their side effects.

payment fraud detection

Friendly Fraud: Characteristics, Prevention, and Response Plans

“Friendly fraud” is a term used to refer to innocent chargeback requests. This occurs when customers are unaware that their purchase was made using their credit card.

To reduce chargeback fraud:

  • Implement stronger verification steps and passwords and have clear return policies (prominently displayed).
  • Use a robust system like VirtualPay to handle malicious fraud – when customers receive items but request chargeback fees so they can get their money back.

Credit Card Fraud: Signs, Consequences, and Prevention Techniques

Credit card fraud is when criminals use stolen credit card info to make unauthorized purchases/withdrawals from the victim’s account.

To minimize online fraud via credit cards:

  • Implement an AVS (Address Verification Service) or CID (card identification) check on transactions to verify the payment location and that the card is present.
  • Use behavioral analytics technology to flag suspicious behavior, such as multiple fraud transactions with the same email, orders, or someone purchasing an item multiple times.

Account Takeover Fraud: Detection Techniques and Prevention Tips

Account takeover fraud is when criminals access and exploit existing accounts with saved bank account details or create fake sites that appear legitimate and use them to steal login credentials from unsuspecting people.

To stop account takeover fraud:

  • Use timeline visualization to recognize the typical behavior of genuine customers and how it differs after an account takeover.
  • Requested customer verification when any details, such as a shipping address, are modified.

Card Testing Fraud: Prevention Strategies and Detection Measures

Card testing fraud is when stolen credit cards are used to determine whether they are valid. Usually, cardholders are asked to sign up for a free trial on a subscription-based service and then incur a zero-amount transaction, which tests the card’s validity.

To prevent card testing fraud:

  • Utilize behavioral analytics.
  • Monitor shopper behavior and use risk checks and other rules to detect suspicious activity.
  • Pay attention to order timing, as card testers often use bots and scripts – multiple transactions in a short period often indicate fraudulent payments.

Gift Card Fraud: Red Flags and Protective Measures

Gift card fraud is a popular method of committing transactional fraud, as gift cards are not as closely monitored and tracked as debit and credit cards. For example, someone uses stolen payment information to buy a product online and then requests a gift card refund.

To detect and prevent gift card fraud:

  • Use contextual data and custom risk checks. Combining these two with block lists based on the data can help spot suspicious transactions. Custom risk rules and specified indications can also be used to identify fraudsters.

Refund Fraud: How to Recognize and Prevent Refund Scams

Retailers are increasingly experiencing refund fraud, where bad actors request refunds or return different products than what they ordered or bought.

To prevent this type of fraudulent payment:

  • Implement a risk system with Unified Commerce capabilities to track the lifecycle of shoppers and view their past orders.
  • Use a combination of unique attributes and leverage custom risk rules to identify shoppers misusing these details.

types of payment fraud

The Payment Fraud Landscape: Detecting, Preventing, and Responding to Threats

Businesses have placed a high emphasis on security, often to the detriment of customer experience. When customers exhibit behavior outside the norm, payments can quickly be denied, leading to false positives and genuine customers being blocked.

To ensure a balance between risk and revenue, it is essential to have a robust system in place to detect, prevent, and respond to online payment fraud.

Detecting Payment Fraud

Harnessing Advanced Technology for Payment Fraud Detection

Technology for detecting fraud utilizes historical and cross-platform data from businesses to identify any abnormal behavior. Configurations can be adjusted for distinctive high-risk groups, such as certain industries or geographical areas with higher fraud levels.

Payment Fraud Prevention

Manually Reviewing Transactions: A Vital Component of Payment Fraud Prevention

Businesses can use manual reviews as an extra layer of fraud protection when processing transactions. Conducting such reviews verifies transactions are legitimate. Or, they can implement a tool like VirtualPay with multiple layers of identification to protect themselves and their customers.

Payment Authentication: Best Practices for Ensuring Secure and Validated Transactions

3D Secure (also known as Three Domain Secure) is a protocol developed by Visa and Mastercard to reduce the risk of online credit and debit card fraud. It requires cardholders to authenticate themselves using their card issuer’s authentication service. This authentication is typically done using a one-time password (OTP) sent to the cardholder’s mobile phone or email address.

Utilizing Supervised Machine Learning to Safeguard Transactions

Supervised machine learning combines risk knowledge and AI to help businesses automate part of the risk assessment process. This saves time and effort in risk management, making the process more efficient.

Customizable Risk Rules: Creating Effective Strategies to Thwart Payment Fraud Attempts

With customizable risk rules, businesses can construct risk profiles specific to the risks they are exposed to and use these profiles as the foundation of their payment evaluation process. This helps them decide which transactions should be accepted or blocked.

Responding to Payment Fraud Threats

Continuous Testing and Experimentation: Enhancing Payment Fraud Detection and Prevention

Try setting up different risk parameters and testing them against each other to determine which strategies will be the most successful for your organization. Through A/B testing, you’ll identify the most beneficial approach for your business needs.

how to prevent payment fraud

Payment Security and Ease of Use with VirtualPay: How Our Comprehensive System Safeguards Transactions?

E-Complish’s VirtualPay system is built with the latest technology to detect and prevent fraudulent activity, guaranteeing complete safety for all transactions made through our platform.

Our comprehensive fraud solution includes:

  • Encryption and tokenization: Protect sensitive information, such as credit card numbers and personal data, by converting it into an unreadable format.
  • Fraud detection tools: Identify and prevent fraudulent activities, such as account takeover, card testing, and friendly fraud.
  • Multiple layers of authentication: Implement two-factor authentication and biometric authentication to ensure only legitimate transactions are processed.
  • Customizable risk rules: Customize risk rules based on your business’s specific needs and preferences, such as setting transaction limits and blacklisting certain IPs or countries.
  • PCI compliance: Adhere to the security standards set by the Payment Card Industry to protect cardholder data and online payments.
  • Monitoring and reporting: Monitor transactions for suspicious activities and receive real-time reporting and fraud alerts.

But security isn’t our only focus – we aim to make the payment process easy and convenient for our users. With VirtualPay, customers can pay anytime, anywhere.

Receiving Secure Payments Made Easy with E-Complish’s Comprehensive Solutions

By using cutting-edge technology and formulating an effective risk strategy, companies can protect themselves and their customers from various types of payment fraud.

Unfortunately, with the development of new methods of fraud, businesses must remain vigilant and stay up to date with the latest defense tools to combat the ever-changing threat of fraudulent transactions.

That’s where E-Complish comes in. Contact us to find out how you can protect your business with VirtualPay.

Amber Capece
Amber Capece
Amber comes to E-Complish with 12 years of experience in the Hospitality Industry. We are sure you are wondering how…