What is Payment Fraud?
Payment fraud is a type of financial fraud in which criminals obtain stolen payment information or use fake information to make purchases. Typically, this may be stolen credit card information that allows them to create fake cheques or transfer funds. Credit card details can often be stolen through data breaches, phishing, or obtained from the dark web.
Payment fraud detection is critical for financial institutions and online businesses, especially when it comes to the retail industry, which is the most vulnerable due to the higher volume of transactions and often the lack of necessary resources to vet each payment method.
Low payment security is one of the main challenges that must be addressed to prevent payment fraud, as cybercriminals exploit payment systems vulnerabilities. With the implementation of fraud detection tools, real-time transaction monitoring, secure payment systems, and effective practices, organizations can significantly reduce fraud risk and notice suspicious activities in time, thereby avoiding financial losses, legal consequences, and damage to the reputation.
Types of Payment Fraud
Criminals and hackers can use different methods to gain access to sensitive information. The most common types of payment fraud include:
Credit Card Fraud
Unauthorized access to credit cards to withdraw cash or make purchases is called credit card fraud. Fraudsters can often use stolen card details to create counterfeit cards or make purchases online. According to the research, 552,000 cases of identity theft have been reported through the first half of 2024, on pace to exceed reports in 2023. Identity theft cases resulted in losses of $23 billion in 2023, up from $20 billion in 2022. This makes card fraud one of the most common types.
Debit Card Fraud
Besides credit cards, unauthorized access to debit card information is also common. Criminals can use a stolen card or sensitive information to make purchases, fraudulent transactions, and withdraw money from ATMs. This type of payment fraud often involves social engineering techniques, where the attacker can obtain access to the victim's PIN.
Card Testing Fraud
Card testing fraud involves the fraudster making low-value transactions to check whether the card works and whether the stolen card details are correct. If successful, the fraudster quickly starts making high-value purchases.
Chargeback Fraud
Another type is chargeback fraud or friendly fraud. This method involves using a customer's own credit card to make a purchase, but then the fraudster requests a chargeback from their issuer. Once the bank approves the chargeback and cancels the transaction, the fraudster gets their money back.
Cheque Fraud
In cheque fraud, criminals create or alter cheques to obtain funds. This typically involves forging a signature or altering the amount of the cheque. The most common method is to steal the victim's cheque book or gain access to sensitive information about the account.
Bank Fraud
This type of payment fraud involves banks or other financial institutions. Fraudsters can steal money using various fraudulent activities, including loans, account takeover fraud, identity theft, etc. Bank fraud is one of the worst for financial institutions due to significant financial losses. According to the Alloy 2024 report, 57% of respondents indicated that their organization lost over $500K (EUR/USD) in direct fraud losses over the past twelve months. Over one-quarter of respondents lost over $1 million in direct fraud losses over the past 12 months.
Mobile Payment Fraud
With the growing popularity of online banking and financial apps, mobile payment fraud has become one of the most common types of fraudulent transactions due to the widespread use of services such as Apple Pay or Google Wallet. This fraud is possible if the attacker has gained access to the victim's mobile device or payment information, or has managed to create a fake mobile payment account.
Business Email Compromise
This type of payment fraud is common in the corporate environment. Business email compromise occurs through hacking or spoofing email accounts, as well as using social engineering techniques. Fraudsters usually impersonate vendors or executives to gain access to information or funds.
Phishing
For phishing, attackers may use messages, phishing emails, or websites to trick the victim into giving away sensitive information such as credit card numbers, personal data, logins, passwords, etc. Cybercriminals then use the information they receive for unauthorized transactions and other types of fraudulent activity.
Skimming
For skimming, criminals install special small devices on card readers at ATMs or POS terminals. When the victim uses their card to pay or withdraw cash, this device (skimmer) remembers the card data, which can then be used to conduct unauthorized transactions or create counterfeit cards.
What Industries are Most at Risk?
Certain types of businesses, depending on their industry, are more vulnerable to payment fraud, therefore such organizations need to invest more in implementing reliable payments fraud detection and prevention solutions, as well as pay attention to developing an effective payment fraud strategy.
The risk group includes such industries as:
E-commerce
The E-commerce sector is one of the most vulnerable to payment fraud and attractive to criminals due to the ease of access to card information and the frequency of transactions. Fraudsters who have stolen sensitive information and card data can use this for online payment fraud, making purchases, and even creating fake online stores. Therefore, investments in payment fraud prevention are essential for E-commerce businesses.
Retail
Another industry where early fraud detection is critical is retail. As with E-commerce, retailers are often targeted due to the high volume of transactions and easy access to card data. Online stores are particularly vulnerable to this type of payment fraud, as cybercriminals can conduct fraudulent transactions from anywhere in the world, making them difficult or impossible to catch.
Banking
Despite strict regulations and PCI DSS requirements, banks and financial institutions may become victims of payment fraud, as they store sensitive client data. In the event of an exploit or leak, information about clients, accounts, and cards can fall into the hands of criminals. In addition, fraudsters often use social engineering and phishing techniques to trick clients and get access to their accounts, which can make fraud detection difficult.
Hospitality
Hotels and restaurants are another attractive place for fraudulent actors. The hospitality industry is at risk due to the high volume of credit card transactions. Using various fraudulent methods, criminals can steal cards or gain access to data to make fraudulent purchases.
Healthcare
In the healthcare industry, fraud prevention measures are a priority, as it concerns not only payments but also a large amount of sensitive patient information that healthcare institutions store. Patients' personal information can be used for numerous fraudulent activities, including blackmail. Additionally, if data is stolen, criminals may use fraudulent billing schemes to obtain payments.
How Does Payment Fraud Affect Businesses?
The lack of effective tools for early payment fraud detection and prevention poses serious risks and losses for businesses. The most tangible consequences of fraud include:
Financial Loss
One of the main problems for any organization in case of fraud protection failure is significant financial losses. If funds or goods were stolen, the business would have to somehow cover the costs or shift them to customers. In addition to falling profits, this also has a negative impact on customer loyalty and trust, thereby reducing the effectiveness of customer retention strategies.
Reputation Loss
Any loss of money or data leakage naturally affects the brand's reputation, as customers begin to think that since the organization could not properly implement tools for payment fraud prevention and ensure data protection, such a company is unreliable and unsafe. Loss of trust and reputation can even lead to the collapse of the business if the organization is unable to return old or acquire new customers.
Productivity Loss
Fraud disrupts business operations because the organization needs to focus resources on investigating and resolving fraudulent transactions. In addition, it is crucial to ensure that the situation does not recur, so the company will have to implement new security measures and payment fraud prevention solutions. All this takes time and effort, therefore, business productivity is significantly reduced, as the company has fewer resources to perform critical business functions.
Chargeback Fees
In the event of a disputed payment on credit card bills, the business will likely have to pay chargeback fees. In addition to the costs, it is also worth considering that most payment processing providers have additional fees when it comes to a higher chargeback ratio, so the business will pay more.
Legal Consequences
Any business that accepts or processes payments or stores sensitive customer information must comply with regulations and implement fraud detection & prevention strategies, as there are legal and regulatory consequences for breaches of requirements, data leaks, or theft of funds by fraudsters. In these cases, businesses may face serious fines, reputational damage, and lawsuits. Therefore, investing in compliance and implementing robust measures to combat fraud are among the key aspects that require special attention.
Payment Fraud Prevention Strategies
Implementing a reliable payment fraud strategy is the best way to ensure the safety of funds, sensitive data, and business reputation. With advances in technology to fight fraud and payment gateway development solutions for fraud detection, organizations can significantly reduce risks.
The best practices for fraud prevention on the payment gateway level include:
Tokenization of Payment Data
Secure storage of payment information is critical to prevent data leaks. In this case, tokenization is a great solution. With this approach, real sensitive data is replaced with unique tokens with a limited validity period, which are useless to fraudsters if intercepted. Thus, tokenization allows you to reduce risks when it comes to storing clients' sensitive payment data.
Real-time Data Analysis
Fraud detection systems must respond immediately to suspicious transactions and activity. Checking the IP address and actual geolocation allows businesses to identify fraud attempts using VPN or proxy servers. In addition, the implementation of a modern payment system allows you to track abnormal behavior in real-time, and together with tools for monitoring transaction speed, it helps to identify automated attacks and bots.
Risk Scoring
Each transaction must pass through a dynamic risk assessment system. Such solutions use artificial intelligence and machine learning algorithms to identify suspicious patterns and automatically block potentially fraudulent transactions. The risk scoring system can constantly learn from new data, adapting to changing fraud patterns and ensuring protection against fraud in the future.
Multi-factor Authentication (MFA)
MFA is one of the best practices to prevent fraud. The implementation of the 3D Secure 2.0 (EMV 3DS) protocol significantly increases transaction security, adding an additional layer of protection when making online payments. Also, with biometric verification (fingerprints or face recognition) and solutions for creating one-time passwords sent via SMS or email, the authentication process becomes much more secure. Among the effective tools, it is worth noting solutions for behavioral biometrics, as they can identify individual usage patterns at the start of a transaction and the user's interaction with the device, thereby reducing the risk of unauthorized access.
Advanced Data Validation
Thorough validation of all data is an effective way to reduce the risk of fraud and prevent inaccurate invoices from reaching the next stage of payment processing. Implementing the Address Verification Service (AVS) helps ensure that the address provided matches the card issuing bank, while mandatory CVV/CVC verification makes it difficult to use stolen card details.
