5 Common Types of Payment Fraud—And How to Stop Them Before They Hit Your Business

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Key Takeaways

  • Identifying and understanding various types of payment fraud is essential for businesses to protect their revenue and reputation.
  • Each payment fraud type—such as account takeover, overpayment fraud and card testing—requires tailored prevention strategies and vigilant monitoring.
  • Implementing robust security measures and staying informed on the latest fraud tactics can help businesses stay ahead of evolving threats.

Payment fraud is one of the biggest threats businesses face today. Attacks are evolving fast, becoming harder to detect and even harder to stop. Understanding the different types of payment fraud is the first step to protecting your customers and your bottom line. Each fraud type demands its own tools and defense strategy—generic fraud prevention measures won’t cut it. Keep reading to learn the impact, warning signs and best practices for preventing five common types of payment fraud.

 

5 types of payment fraud

 

1. Account takeover (ATO) fraud

What is it?
Cybercriminals gain unauthorized access to a victim’s accounts to steal money or information. Fraudsters access a victim’s online account through phishing emails and websites, brute force attacks, social engineering, data breaches, malware or SIM card swapping.

Business impacts

  • Financial losses: When account takeover fraudsters make unauthorized purchases or transfer funds, individuals and businesses take a financial hit.
  • Chargebacks: After the account holder discovers the ATO, merchants can expect chargebacks (with fees added to each transaction).
  • Higher operational costs: Fraud teams must investigate account takeovers and invest in more robust security measures. Customer service teams field calls from distressed customers, increasing customer care costs.

Warning signs

  • New or unauthorized transactions
  • Large withdrawals
  • Random and sporadic spikes in traffic
  • Requests to change passwords, address, or payment beneficiary
  • Multiple failed login attempts—especially from an unusual location or time of day
  • New or unrecognized devices accessing an account

Ways to prevent ATO fraud

  • Implement front-door controls to stop fraudsters and bots before they gain unauthorized access to the payment system.
    • Multi-Factor Authentication (e.g., one-time passwords and biometrics)
    • Rate limiting/IP controls (limiting the number of failed login attempts allowed from a single IP address, device, or user account within a short period)
    • CAPTCHA
  • Monitor accounts to detect unusual activity.

 

2. Overpayment fraud

What is it?
A fraudster uses a stolen credit card or counterfeit check to pay significantly more than the agreed-upon price for a good or service. Then the fraudster asks the victim to refund the excess amount using a legitimate, irreversible payment method (like a wire transfer, payment app, gift card or cash). Merchants and rental property managers are common victims of overpayment fraud.

Business impacts
Total financial loss for the business/victim include:

  • The amount of the legitimate refund they sent to the scammer
  • The goods or services they provided to the scammer
  • Fees incurred from the fraudulent overpayment (e.g., chargeback or returned deposit item fees)

Warning signs

  • Sends more money than they should and claims it was a mistake
  • Overpays using a check from a different name or account than the buyer
  • Pushes for quick repayment—often before the original check clears
  • Requests refunds through methods that are difficult to track or reverse, such as gift cards or wire transfers or payment apps
  • Refuses to correct the payment themselves (e.g., by sending the correct payment)

Ways to prevent overpayment fraud

  • Never refund overpayments: Do not accept a payment for more than the selling price. If someone overpays, cancel the transaction and ask for the correct amount.
  • Wait for payments to clear: Don’t ship any item until you are sure the payment is valid. Even when your bank makes the funds available in your account, the money can be withdrawn later if the payer’s bank determines that the check is fraudulent or the true account holder reports unauthorized activity.
  • Only accept secure payment methods: Instead of taking checks, which offer less protection from fraud, accept cash or person-to-person payments through trusted, secure payment systems such as Venmo, Apple Pay or Google Pay. This may dissuade scammers from targeting your business in the first place.

 

3. Card testing

What is it?
Cybercriminals use bots to run small transactions or authorizations across large batches of stolen or generated card numbers to identify which cards are valid. Once verified, those card details are used for larger fraudulent purchases or sold on the dark web.

Business impacts

  • Transaction fees: Every attempted transaction—whether it’s approved or declined—costs merchants money. During card-testing attacks, these fees can escalate quickly, and too many declines may cause processors to label a merchant as “high risk,” triggering higher fees.
  • Chargeback fees: Even small successful test charges lead to chargebacks when cardholders notice unauthorized activity. Each dispute carries a fee, and excessive fraud-related chargebacks may result in higher processing costs or account termination.
  • Wasted staff time: Fraud, security and IT teams must investigate logs, block fraudulent IPs and clean up incident fallout—time that produces no revenue.
  • Lost revenue from false positives: To fight bots, merchants or payment platforms may tighten fraud rules, unintentionally blocking legitimate customers and losing sales.

Warning signs

  • Sudden spikes in authorization attempts
  • Many $1 (or smaller) transactions in rapid succession
  • Multiple card numbers used from the same IP, device or region
  • High decline rates due to large volumes of invalid or expired data
  • Transactions from unfamiliar or high-risk geographic regions
  • Inconsistent or mismatched billing information

Ways to prevent card testing

  • Transaction monitoring and alerts: Implement real-time monitoring of payment activity to detect unusual patterns, such as multiple low-value transactions or repeated declines, and automatically alert fraud teams for quick response.
  • Limit failed attempts and block suspicious accounts: Set thresholds for failed payment attempts and restrict further activity from accounts or IP addresses exceeding those limits to reduce the risk of automated card testing attacks.
  • Strong authentication: Require card verification value (CVV) and address verification service (AVS) checks. Add CAPTCHA to forms that allow card-on-file storage.

 

4. First-party (chargeback) fraud

What is it?
The customer makes a legitimate purchase but later files a chargeback with their bank, falsely claiming they didn’t authorize the purchase or receive the goods, or the product was damaged.

Business impacts

  • Financial losses: The merchant loses the product and revenue from the sale and incurs a chargeback fee from the payment processor.
  • Higher processing fees and scrutiny: Merchants with high chargeback ratios are subject to higher fees and monitoring by the payment processor.
  • Increased operational costs: Investigating chargeback claims, gathering evidence and responding to banks are labor-intensive tasks.

Warning signs
Red flags emerge after the purchase, typically via patterns in the customer’s behavior and dispute history.

  • Frequent chargebacks from the same customer
  • Customer claims they didn’t receive the order, despite delivery confirmation
  • Disputes filed shortly after the transaction (especially for digital goods or subscription services that have already been used)
  • Chargebacks with no prior contact with the merchant (i.e., no attempt to resolve the problem)

Ways to prevent first-party (chargeback) fraud

  • Keep detailed records: Document transactions, shipping/delivery details and customer communications to defend against chargebacks.
  • Use fraud prevention tools to:
    • Track chargeback patterns and flag high-risk customers for manual review.
    • Monitor transaction timelines and flag disputes raised unusually quickly.
    • Detect intent to commit friendly fraud chargeback.

Banks contact the merchant immediately when an account holder contacts them about a suspicious transaction. The merchant can pre-emptively refund the money before a formal chargeback is filed, avoiding the chargeback fee and preventing a hit to the merchant’s chargeback ratio.

 

5. Merchant bust-out fraud

What is it?
Cybercriminals use stolen or synthetic identities to establish fraudulent merchant accounts. After processing small, legitimate transactions for a few months, the fraudulent merchant suddenly “busts out” by processing a massive volume of fraudulent transactions (using stolen credit cards) before quickly disappearing.

Business impacts
Merchant bust-out fraud primarily impacts the acquiring payment processors and banks. When the victims of the fraudulent sales (the cardholders) file chargebacks, the processor is left to absorb the massive financial losses, as the fraudulent merchant has already withdrawn the provisional funds and vanished.

Warning signs

  • Inconsistent data: Missing or inconsistent personal data during the initial merchant account application may signal a synthetic identity.
  • Building a fake profile: The fraudulent merchant may initially make timely payments and normal purchases to build up a credit history.
  • Frequent credit requests: Regular requests for credit limit increases are disproportionate to the business’s financial history.
  • Sudden activity spike: A dramatic, uncharacteristic increase in the volume or dollar value of transactions may signal impending merchant bust-out.

Ways to prevent merchant bust-out fraud
Payment processors and banks should require rigorous checks throughout the merchant lifecycle, including:

  • Comprehensive onboarding checks: Partner with a payment processor that completes thorough merchant onboarding, including verification of business ownership, validation of tax identification numbers and review of corporate documents to ensure each merchant is legitimate and not operating under a synthetic identity.
  • Ongoing transaction and risk monitoring: Ensure your platform continuously monitors merchant activity for unusual patterns, such as sudden spikes in transaction volumes or suspicious payment behaviors. Automated systems flag high-risk accounts for further review, helping to detect and prevent bust-out fraud before losses occur.

 

Fight payment fraud with CSG Forte

The easiest way to safeguard your customers’ financial data and your revenue is to partner with a modern payment services provider who offers a secure payer engagement platform. CSG Forte provides robust tools to defend against multiple types of payment fraud.

Are you ready to take online payments faster and safer? Contact the experts at CSG Forte today to learn more or sign up for a demo.