What Is Online Payment Fraud and How to Stop It
Find out what online payment fraud is and why it’s a major issue for businesses.
Explore common fraud types and get expert tips on how to protect your business.
Businesses face many threats to their stable development daily. One of the issues companies encounter regularly is online payment fraud. A recent AFP survey found that a vast majority of businesses, 80%, were targeted by payment fraud in 2023. Thus, fraud connected with online payment is a problem one cannot simply dismiss.
To protect your assets, educating yourself on current issues, their origins, and available solutions is vital. In this article, we explain what online payment fraud is and why payment fraud is more common online. We also list the most common types of payment fraud and give some practical advice on online payment fraud protection.
What Is Online Payment Fraud?
Many people think they know what fraud is, but they still struggle to define it. So, what is online payment fraud? In most cases, online payment fraud occurs when unreliable customers use stolen credit card information to make online purchases. The actual cardholder later notices the payment they don't recognize and issues a refund through their financial company. The merchant will be required to pay various fees, such as chargeback fees and investigation expenses. Not only can the seller lose revenue, get charged extra money to resolve the situation, and waste precious time, but also suffer reputational damages. A damaged reputation can later become a serious obstacle in attracting new customers and forming strategic alliances with other companies.
Why Is Payment Fraud More Common Online?
Fraud is a common thing in the merchant field. However, payment fraud occurs much more frequently online than offline. Multiple factors make this type of fraud so popular. The list includes:
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Lack of Physical Verification
Real-life payment requires verifying the cardholder's identity and a signature. However, online payment systems often lack the necessary verification steps, making committing fraud by using stolen card information or forging payment details easier. -
Data Breaches
Due to data breaches, fraudsters often gain access to large amounts of personal data, including credit card information. Access to this data makes online payment fraud extremely simple since such individuals don't even need to risk hacking someone.
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Anonymity
Online payment operations offer clients high anonymity, making it simpler for fraudsters to operate without being detected. Unidentified, such unreliable clients continue committing payment fraud, using stolen or forged payment information. -
Complexity of Online Systems
Online payment systems are quite intricate. Thus, identifying a person who committed fraud might be quite challenging. Finding a culprit takes time, effort, and money. Often, due to the complexities of the identification, the unreliable client remains unknown.
Paying attention to these factors is vital for developing an efficient anti-fraud strategy. Analyze your data frequently to notice the spots in your defense system that might require improvement.
What Are Some of the Most Common Types of Online Payment Fraud for Merchants to Watch Out For?
Online payment fraud doesn't always follow the same scheme. There are various types of payment fraud, each requiring a specific strategy to be dealt with. Here, we present the most common types of payment fraud, describe how they work, and explain why these types of fraud are dangerous.
Identity Theft
Identity theft, also known as stolen card fraud, is one of the most common and unpleasant types of payment fraud. It occurs when unreliable customers perform transactions using stolen credit card information. Such individuals might obtain it in various ways: hacking, card skimming, social engineering, etc. The situation where the fraudsters occur to be relatives or friends of the actual cardholders is also very common. This type of fraud harms both the merchant and the actual cardholder: the unsuspecting person loses money unexpectedly, and the seller later needs to refund the customer despite not being at fault for the unpleasant incident. Identity theft fraud can have devastating consequences for businesses when connected to a large, expensive purchase.
Friendly Fraud
Friendly fraud is another type of fraud online sellers encounter daily. This kind of fraud is far from pleasant despite the word "friendly" in its name. Friendly fraud occurs when customers obtain services or products the merchant provides and later request a refund, using believable, "friendly" excuses that suggest the seller's incompetence. The most common excuses are "The package wasn't delivered," "The parcel came in damaged," and "The product doesn't match the description." Some clients who commit fraud might also claim they were double charged. If the merchant refunds such clients, the company loses the profit; however, if that doesn't happen, payment fraudsters can damage the business's reputation by posting negative reviews online.
Chargeback Fraud
Chargeback fraud and friendly fraud are slightly similar. However, unreliable clients do not communicate with the merchant when it comes to chargeback fraud. Instead, after receiving the services or goods, they contact the bank to request a reversed transaction, known as a chargeback. The chargeback operation mechanism was built to protect cardholders if a merchant committed fraud. The bank decides if you can issue a chargeback transaction for merchant fraud on online purchases. However, many individuals abuse the chargeback system to their benefit.
Such clients use the same excuses as friendly fraudsters when issuing a chargeback. If the bank approves the chargeback request, the money gets transferred from the seller's account to the cardholder's. In cases of chargeback fraud, sellers not only lose revenue for the order but also pay chargeback transaction penalty fees. Moreover, frequent chargebacks might be considered a sign of the merchant's incompetence by the financial company, resulting in increased processing fees for every transaction the establishment performs.
Dealing with any type of online payment fraud is tedious and frustrating. Resolving fraudulent purchase-related issues can take a lot of time and result in significant monetary losses. That's why the proactive approach is crucial; implementing anti-fraud tactics is vital for your business's stable growth.
The Best Strategies to Prevent Payment Fraud
Online purchase fraud is not a problem that can be dismissed. Fraudulent payment activity requires immediate solutions that effectively address the issue, eliminating the potential risks. Here, we present a list of the best online fraud prevention strategies you can implement to protect your business.
Confirm Details with Your Clients
Information confirmation is a crucial step in any online purchase. Make sure you confirm every detail with your client: the purchased item, the shipping address, the full name of the client, the bank account data, the final sum of the purchase, etc. Also, don't forget small details such as the product type, quantity, color, or size of the item. Additionally, to avoid violation of your policies, you can ask your customers to confirm they read and agree to the rules of your company. Ensure you preserve the confirmation data so it will be impossible for fraudsters to manipulate information or easily uncover their fraudulent activity.
Keep Records
Sometimes, the situation escalates, no matter the efforts you put into protecting your company from payment fraud. In cases like that, it is essential to have proof of your reliability as a merchant. For instance, in cases of friendly fraud, having records of the client confirming their address or asking for a particular item you shipped to them in a chat with your company's employee might be helpful. Such records will show your competence as a seller and can help uncover the fraudster's lies. Keep information about the purchase in your database, record the phone and video calls, and preserve scripts from online conversations. This strategy can help you win a dispute against an unreliable client, successfully protecting your company's budget.
Implement Strong Authentication System
One of the reasons unreliable customers succeed in committing fraud is a weak authentication mechanism. To avoid identity theft on online payments, it's crucial to implement a multiple-factor authentication system. Add an ID verification step to the payment process. Implement a two-factor identification system to enhance payment security. You can also implement mechanisms that will allow customers to confirm the purchase using their biometric data from the banking application. This strategy will successfully minimize the risk of identity theft, securing the cardholders' finances and your establishment's budget.
Implement Chargeback Prevention Services
A great strategy to minimize the risk of chargeback fraud is to implement chargeback protection instruments. Such tools offer clients a variety of useful features that enhance the company's defense against chargeback and friendly fraud. Such services as Ethoca and Verifi already proved their efficiency in the online merchant field, successfully helping sellers minimize their expenses. Moreover, such services offer automated chargeback dispute resolution mechanisms to help employees resolve chargebacks quickly, saving time for more crucial tasks. By implementing these tools, you ensure efficient
chargeback fraud protection of your business.
Review the Fraud Trends Regularly
Staying informed about the latest fraud trends is a great tactic for fraud prevention. Look up educational videos and articles on the latest fraud trends online and learn how to protect your business before the situation escalates. To ensure better protection, also look up information on dealing with a new type of fraud if you have already become a victim of it.
By following these online fraud prevention tips, you can successfully minimize the risk of fraudulent activity and simultaneously improve customer service, raising the level of general satisfaction with your business within your client base. Check your data on fraud cases regularly to identify weak spots in your online payment fraud prevention system and eliminate them proactively.
Conclusion
Online payment fraud is a frustrating issue that merchants regularly encounter. While resolving fraud cases is important, a proactive approach is the key. Fraud prevention is essential for businesses based on online payment. By implementing payment fraud protection tactics, you invest in your business's financial security and stable development. Check your data on payment fraud regularly, identify your weaknesses, and apply an appropriate strategy to minimize the risk of fraudulent activity, prevent the problem before the situation escalates and ensure your business’s protection.
