Payment Fraud

Payment fraud happens when the bad actor uses certain schemes to access sensitive data and payment information and then conduct unauthorized transactions. 

Most common examples of such fraudulent behavior linked to payment fraud include:

• Identity theft. Stealing another person’s identity data, such as their SSN.
• Phishing. Creating deceiving emails, fake websites, and text messages with harmful links that help criminals access login data and credit card information.
• Chargeback fraud. This occurs when users open disputes on purpose for legitimate charges in order to keep the item or service and receive a refund for it. 
• Skimming. Installing devices on payment terminals to intentionally capture card information and PINs for creating fake cards and withdrawing cash.

In general, all methods have a single goal: bypassing security systems and exploiting unpatched vulnerabilities that could help scammers steal personal information. 

Any business that has money flow going is at risk of payment fraud, which is why all online platforms integrate fraud prevention systems.

However, some industries are more targeted than others, for example:

• Banks and financial institutions
• Online retailers 
• Hotels and restaurants 
• Healthcare service provider
• E-commerce businesses 

As payment fraud grows, so do the losses, which are projected to reach a total of $343 billion for merchants between 2023 and 2027. While it’s estimated that merchants spend at least 3% of their revenues on fraud prevention on average, up to 1% of fraudulent orders are missed, leading to costly chargebacks. Additionally, you’ll need to add up indirect costs, which are lost productivity, damaged image, and loss of customer loyalty. 

Friendly fraud is chargeback fraud, also sometimes called friendly chargeback fraud. This is the process of disputing a legitimate charge that the customer made on their debit/credit card.  In friendly fraud, different from other traditional payment fraud methods, the customer initiates the transaction but later claims it was fraudulent or unauthorized. 

Friendly fraud can often be just confusion from the customer’s side, as it happens that the customer disputes a legitimate charge made by a family member in their household.

Anti-money laundering (AML) compliance is a set of rules and mandatory regulations that e-commerce platforms and other businesses (for example, banks and crypto companies) follow to prevent fraud, money laundering, terrorism financing, and other financial crimes, including payment fraud. 

The main goal of AML is to monitor and prevent fraudulent activities while adhering to strict regulations, as well as ensure that the company’s customers, suppliers, and partners aren’t involved in any criminal activities. 

There are various fraud prevention solutions and AI-powered tools that provide insights into customer behavior, such as IP scoring, along with additional security measures like email or phone verification. 

However, most businesses use these essential tools to prevent payment fraud:

• Identity verification confirms an individual’s personal details to ensure the customer’s authenticity and prevent fraud while complying with KYC regulations. For example, e-commerce platforms selling age-restricted items use ID verification to verify the user’s age.
• Customer reauthentication verifies the identity of users already on your platform, especially during high-value transactions or suspicious activities. For instance, changes in account data, such as payment details, might indicate ATO fraud. 
• Screening and ongoing monitoring help detect and prevent fraud in real-time by checking customer behavior and flagging suspicious users.