5 Different Types of Payment Fraud and How to Prevent Them

It is an unfortunate reality that any merchant doing business today must contend with payment fraud. Scammers have a plethora of options to deceive businesses and cardholders, and new forms of fraud have risen in popularity as businesses struggle to keep up. Vigilance in recognizing fraud and taking preventative measures to combat it is an absolute necessity for businesses of all sizes.
Fraud prevention requires staying up to date on trends and putting measures in place to protect against the varied threat landscape. In this article, we discuss some of the most common types of payment fraud and tips on protecting your business.

The basics of payment fraud

According to the Federal Trade Commission, credit card payment fraud is one of the most common types of identity theft, with over 390,000 reports in 2020. Fraud affects most people and businesses, with 77% of merchants and 53% of consumers reporting they have been victims of fraud in a recent survey.

It’s highly likely that sometime, somewhere, most people’s personal information already has or will be exposed. Data breaches occur daily, and those that make the news are just the tip of the iceberg. Cybercriminals actively seek ways to defraud businesses, presenting an ongoing threat that leaves no company safe from payment fraud.

Credit card fraud occurs when scammers make purchases with stolen payment information. That theft can take many forms, meaning that customers and businesses must actively protect their sensitive information.

For example, it is remarkably easy to buy and sell personal information online. Depending on the information exposed, identity thieves can also open new accounts. Unfortunately for businesses and consumers, personal data is inexpensive to purchase; criminals can buy credit and debit card information on the dark web for as little as $5.

How payment fraud occurs

So, how exactly does payment fraud happen? Let’s look at some of the common methods that scammers leverage.

1. Phishing

Phishing is a common method of obtaining personal information. Over the years, phishing scams have evolved from obvious emails promising an “inheritance”, to sometimes hard-to-spot texts, emails, and spoofed websites. Phishing is intended for the victim to follow a link and then enter their personal information. Depending on the level of sophistication, these can look blatantly obvious or deceptively realistic. Once criminals capture this personal information, they can use financial details for any number of fraudulent purchases.

2. Pagejacking

Related to phishing is pagejacking. This occurs when cybercriminals create websites that look very similar to legitimate websites. Customers are then routed to a spoofed site where they can be easily fooled into completing a purchase, exposing their payment and personal information to scammers.

3. Data breaches

Consumers don’t always need to unwittingly click a link or visit a spoofed website to expose their payment information. Sometimes, this information is exposed in a data breach which can cost millions in damage. Memorable breaches include Target and Marriott, resulting in the exposure of millions of customer’s payment and personal information, and the loss of millions of dollars in fines and lawsuits.

4. Card testing

Card testing falls under the umbrella of credit card fraud and occurs when scammers attempt multiple low-value purchases to see if the stolen information processes. When these transactions clear, the bad actor often makes larger purchases to max out the card. This type of fraud is usually done online and can result in expensive chargebacks and fines. Once payment information is exposed, whether through phishing, breaches, or stolen identities, card testing is common for scammers to test their ability to use the payments.

5. Friendly fraud

Fraud doesn’t always take place with stolen payment information. Friendly fraud occurs when a buyer purchases items using their actual payment information, most commonly online. This type of fraud involves the customer disputing a legitimate purchase with their bank, causing a chargeback, and keeping the product.

Sometimes friendly fraud is accidental and caused by confused customers who may not recognize a purchase on their statement and respond by calling their bank. However, those doing it intentionally may have a number of reasons for initiating a chargeback, including being disgruntled with the merchant.

How to prevent payment fraud

Merchants looking to combat credit card fraud should, at minimum, take a few measures to protect their customers and business. Many companies do business online and must safeguard sensitive information. Cybersecurity software and services are widely available, and all businesses should protect their vulnerabilities by partnering with vendors who will best serve their needs.

Monitoring for suspicious transactions

Due diligence in checking customer information to look for fraudulent transactions is also essential. Red flags such as mismatched billing and shipping information warrant a second look. High-value and expedited shipping packages from unfamiliar buyers may not always be a fraud indicator, but double-checking the details saves time, money, and the reputation of a business.
Businesses should also be on the lookout for small transactions in quick succession, as this is a clear indicator of card testing. Halting transaction processing and not shipping out products is essential in preventing this type of fraud.

Preventing fraud through customer service

Providing responsive and helpful customer service is the first step in preventing friendly fraud. Also, ensuring descriptors of the payment are clear and match the business name will help eliminate friendly fraud initiated by confused customers. Additionally, if this type of fraud is prevalent, maintaining a list of repeat offenders and no longer doing business with them may be a necessary step.

Pay attention to fraud prevention trends and developments

With many types of fraud taking place, businesses must be aware of the fraud trends most likely to affect them. Monitoring for redirects from your website and immediately attending to all fraud reports will protect your business, brand reputation, and customers.

Fraud prevention strategies vary and need to evolve with trends and the business’s unique challenges. Finding trusted partners and technology solutions to protect the company will provide a better customer experience and prevent devastating losses.

It is imperative for merchants to take measures to monitor for and take swift action against fraud in order to protect their business and their customers. By following security best practices, maintaining compliance, and exercising due diligence in protecting sensitive customer information, businesses can reduce their vulnerabilities.

Stax offers secure payment solutions to help prevent fraud. To learn more about how the Stax all-in-one platform can help your business, fill out the form below to request a savings estimate today.

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