Payment Fraud
Payment fraud has become more prominent and more damaging as online transactions have grown in popularity. Cybercriminals are using advanced and evolving tactics to access payment information and avoid detection. It’s more important than ever for businesses to recognize the realities of payment fraud and implement prevention strategies.
Understanding Payment Fraud
Payment fraud is the illegal process of making a purchase using forged or fabricated payment information. Most payment fraud involves some sort of identity theft. Identity thieves might steal a target’s personal information as a direct or indirect way to access their funds. Vulnerable information can include the consumer’s name, Social Security number, credit card information, bank account information and account passwords.
Payment Fraud Across Industries
Payment fraud impacts businesses across multiple sectors. A 2022 report shows that many industries saw numerous instances of payment fraud costing hundreds of thousands of dollars over the year:
| Industry | Number of cases | Median loss |
| Banking and financial services | 351 | $100,000 |
| Government and public administration | 198 | $150,000 |
| Healthcare | 130 | $100,000 |
| Energy | 97 | $100,000 |
| Insurance | 88 | $130,000 |
| Transportation and warehousing | 82 | $250,000 |
| Construction | 78 | $203,000 |
| Telecommunications, publishing, media and other information | 60 | $58,000 |
| Real estate | 41 | $435,000 |
| Arts, entertainment and recreation | 41 | $73,000 |
Types of Payment Fraud
Perpetrators use numerous tactics to commit payment fraud. A few common payment fraud types include:
- Credit card fraud
- Phishing attacks
- Friendly fraud
- Skimming
- Triangulation fraud
- Card testing
1. Credit Card Fraud
Credit card fraud is a type of theft that occurs when a person steals another’s credit card information and uses it to make fraudulent purchases. Credit cards are common targets for scammers because they have become so prominent in commerce. Credit cards are also vulnerable because few authentication factors are in place—if a person possesses the credit card or the information on it, they can use the card to purchase anything within the holder’s limit.
Consequently, credit card fraud has risen steadily over the past decade. Reports find that credit card fraud occurrences increased by 10% between 2020 and 2021, amounting to over $30 billion lost worldwide and over $12 billion lost in the United States.
Fortunately, credit card companies can combat fraud by flagging suspicious activity, such as abnormally large charges or purchases made in an atypical geographical location.
2. Phishing Attacks
Phishing occurs when a thief poses as a reputable company to deceive the victim into sending account or payment information. Phishing attackers use fake emails, text messages, phone calls and websites that look close enough to those of a recognizable business to trick their victims.
During a phishing attack, the victim will receive a website link that often appears safe at first glance. However, the link directs the user to a fake version of the site and asks for login credentials. Submitting the login form will hand account information to the scammer, leading to an account takeover. A phishing link may also contain malware that infects the user’s device to access more information.
Phishing scammers target consumers to access their personal information, especially login and payment information on financial accounts. These scams also frequently target employees through business channels to access company data.
Phishing is one of the most common and dangerous types of fraud in digital payment. One study found that over 80% of employees fell for a malicious email scam and provided sensitive information. Another shows that phishing is among the most common types of cybercrime, doubling in frequency between 2019 and 2020.
3. Friendly Fraud
Friendly fraud, also known as chargeback fraud, occurs when a customer falsely disputes a legitimate transaction. The fraud claim causes the merchant to refund the customer after providing the product or service.
Friendly fraud can also occur when a dispute is legitimate, but the merchant isn’t at fault. If a thief steals a customer’s card information, the customer will rightfully flag the fraudulent purchase. Their credit card provider will likely pass the burden onto the merchant unless they find the person who’s truly behind the fraud.
Friendly fraud is a delicate subject for businesses striving for customer satisfaction. Helping legitimate customers avoid fraud is essential, but businesses must implement measures to verify online purchases. One study found that 23% of consumers admitted to falsely disputing charges. Fraud prevention efforts can mitigate the harm that friendly fraud and chargebacks cause.
4. Skimming
Skimming is a tactic that involves stealing a cardholder’s information from their physical credit card. Here, a criminal uses an inconspicuous device to read a customer’s credit card information as they complete an in-person transaction. Some skimming devices have cameras that sneak a peek at the card number, while others are installed inside the scanner and read the card’s magnetic strip.
Criminals used skimming to compromise upwards of 120,000 cards in the first half of 2023. This type of fraud is most likely to occur at a gas station or automated teller machine (ATM).
5. Triangulation Fraud
Triangulation fraud is a scam involving two separate consumers and a merchant. These attacks are complex and difficult to track and quantify.
This type of fraud begins with a cybercriminal posing as a merchant by using a similar web or email address. The first consumer doesn’t notice the discrepancy and completes a purchase. As a result, the cybercriminal steals the consumer’s financial information.
After stealing the first consumer’s information, the cybercriminal visits the legitimate merchant’s website and places the intended purchase in the consumer’s name—but they use a second consumer’s stolen payment information for the transaction.
The merchant accepts and fulfills the order, only later recognizing that the shipping information and billing information do not match. The initial consumer receives illegally purchased items, often without realizing it. Meanwhile, the cybercriminal has their payment information to use in a future scam, and the second consumer loses money to the fraudulent transaction.
The second consumer can report the event and receive a refund when they notice the attack. The merchant will need to forfeit their payment despite delivering the product or service. The cycle continues with another victim, another merchant and the initial victim’s payment information.
6. Card Testing
Card testing is a tactic that cybercriminals use to verify stolen credit card information before they sell it off. The crime is harmful to customers and merchants alike.
During a card scam, the perpetrator submits numerous small transactions to an e-commerce site. The card number may be the same each time, but other information, like the CVC or expiration date, will change as the scammer attempts to find the right combination.
When the scammer sees that the transactions are processing, they launch a full-scale attack. The e-commerce system may receive thousands of small transactions at once, all using stolen payment information. The scammer automates their guessing processes using a bot or another technological tool.
As payment requests roll in, the fraud victims will recognize fraudulent transactions on their accounts. They’ll submit chargeback requests to retrieve their money. The business will experience a sudden influx of transaction fees and chargeback fees that can amount to thousands of dollars. The scam may also lead to a freeze of the business’s merchant account.
The Impact of Payment Fraud on Businesses
Payment fraud can have a widespread impact on a business, affecting everything from its revenue to its reputation:
- Financial losses: Payment fraud can bring significant financial consequences for merchants. In 2022, online payment fraud caused $41 billion in e-commerce losses worldwide.
- Customer trust and loyalty implications: Consumers trust merchants to facilitate secure transactions, and breaches of this trust could cause them to take their business elsewhere. One survey found that 87% of consumers will choose a competitor after a data breach.
- Legal consequences: Payment fraud leaves businesses liable. Merchants often must repay the cardholder’s financial institution after a breach. Additionally, the Federal Trade Commission (FTC) details legal guidelines for protecting customers’ personal and payment information.
- Reputational damage: The reputational damage that payment fraud causes extends beyond lost revenue. As consumers turn to different businesses, prospective employees, investors and partners may do the same.
Common Warning Signs of Payment Fraud
While payment fraud is common and detrimental, your business can mitigate its harm. Monitor transactions for these warning signs that indicate payment fraud:
- Unusual transactions or spending patterns
- Multiple failed payment attempts
- Inconsistencies in consumer information
- Sudden changes in consumer behavior
- High-risk transactions or unusual activity spikes
Payment Fraud Protection Strategies
Explore some of the top fraudulent payment prevention strategies and practices your business can adopt today.
Secure Payment Processing Systems
You can implement an advanced payment platform to protect customers and your business while meeting Payment Card Industry Data Security Standards (PCI DSS) requirements. A cloud-based payment platform can provide a seamless customer experience while bolstering your business’s fraud prevention strategy.
Identity Verification
Methods like two-factor authentication and Know Your Customer (KYC) procedures can help verify purchasers’ identities to prevent fraud. Two-factor authentication requires customers to confirm their identity after submitting their password by responding to a text message, phone call or email. KYC procedures are internal measures your business can take to identify customers and qualify leads.
Tokenization
Tokenization is a data security method that replaces raw payment information with a digital placeholder.
When a customer completes a purchase, their payment information enters your payment portal. There, tokenization software can create a nonsensitive version of the payment data. The nonsensitive version of the data, or the token, travels onward for payment processing. The original sensitive information remains in the payment portal.
Payment processing systems have the credentials or tools necessary to decipher the token and view the sensitive information in the payment portal.
Real-Time Fraud Detection
The most secure payment processing systems include real-time fraud detection. Fraud detection systems use behavioral analysis to separate legitimate customer behavior from fraudulent activity. Behavioral analysis can prevent fraudulent purchases and help your business resolve claims faster.
Education and Training
Employees are often the target of phishing and other scams. Train your personnel to use secure practices and recognize attempts at data theft. Cybersecurity training should be a part of onboarding and ongoing learning to ensure employees build strong fraud detection skills and keep them current as tactics evolve.
Regular System Audits and Updates
Cyberattackers constantly adapt, so it’s important to update your infrastructure and protection on a regular basis. Analyze your fraud prevention system as a part of annual or semiannual risk assessments.
Protect Your Business Against Payment Fraud
Payment fraud is prominent and takes many forms. Understanding the possibilities and implementing prevention strategies can save your business countless hours and thousands of dollars.
At CSG Forte, we develop cloud-based payment systems with payment fraud security integration. Our systems and resources will give you peace of mind as you accept payments online, in person and over the phone. We encourage you to request access to our payment security whitepaper to learn more about effective payment security strategies.
We’re also available to discuss your situation, so contact us online to learn more about our secure, scalable payment solutions.