Payments

A Field Guide to Online Payment Fraud

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Payment fraud can cover a lot of territory. While most merchants are all-too-familiar with the various permutations of credit card fraud, it’s important to remember that fraud can be attempted against a wide range of payment types and scenarios.

Defending against credit card fraud is essential for preventing chargebacks, but if you don’t incorporate other forms of payment fraud into your plans you can find yourself vulnerable to other schemes that can be costly and damaging in their own right. How many different ways can payment fraud take shape, and what can merchants do to prevent it from happening to them?

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We can consider “payment fraud” to be a broad category that includes any and all deceptive or illegal transactions carried out to benefit a cybercriminal.

Even in cases where the initial purchase is legitimate and authorized, fraudulent actions carried out later can place the entire transaction within the bounds of payment fraud.

Payment fraud frequently involves deceptions regarding lost or stolen merchandise, or other false claims made by the original purchaser.

Payment fraud is prevalent, and it’s fair to say that the recent growth in ecommerce has caused a commensurate increase in online fraud of every type. In recent years, the introduction of the EMV chip made considerable headway in terms of reducing card-present fraud, forcing fraudsters to shift their focus to card-not-present environments.

They haven’t been lacking for opportunities—the more people venture into the world of ecommerce, the more potential victims the fraudsters have to target, and the COVID-19 pandemic of the past year forced even greater numbers of consumers to shift their shopping activities online. Not surprisingly, fraud has been on the rise.

For merchants, one of the first and most crucial steps in stopping fraud is being able to recognize it.

What are The Various Forms of Payment Fraud?

It’s easy to lose track of all the different fraud schemes that are out there. While this list is by no means comprehensive, it represents the widely-seen forms of payment fraud that most merchants will need to watch out for.

Credit Card Fraud

No merchant can afford to disregard the threat of credit card fraud, in which the fraudster uses stolen payment credentials to place an unauthorized transaction.

For cardholders, credit card fraud is a lot easier to deal with than identity theft or other, more involved forms of fraud, because they can get their money back by reporting the fraud and obtaining a chargeback.

For the merchant who is liable for the chargeback, however, credit card fraud can end up costing double the original transaction amount when fees and related costs are factored in.

Friendly Fraud

Friendly fraud involves a legitimate transaction followed by an illegitimate chargeback, which is why it’s sometimes just called chargeback fraud.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyFriendly fraud can happen by accident when cardholders forget or fail to recognize charges on their bank statement, but many fraudsters engage in it intentionally as a form of cyber-shoplifting: they buy what they want, file a chargeback, and they get their money back and their goods for free.

Identity Theft

One form of fraud that gets a lot of attention is identity theft, where a fraudster uses a victim’s personally identifying information (like their date of birth and social security number) to impersonate them for the purpose of accessing privileged accounts or opening up new ones.

Fraudsters often employ phishing attacks to obtain this information. Once the fraudster has stolen what they wanted, the victim is left to deal with the damage to their finances and credit score.

Many fraudsters now favor synthetic identity theft, in which new identities are created by combining actual stolen information with made-up data. These identities can prove harder to track.

Refund Fraud

Any scheme in which the fraudster benefits by receiving a refund to which they aren’t really entitled can be considered a form of refund fraud. Frequently, the fraudster simply makes a false claim that their package was lost or stolen and demands a refund, but more elaborate ruses may be seen at times.

Merchants are often under pressure to be generous with their refunds in order to avoid chargebacks, which can make them susceptible to refund fraud.

Triangulation Fraud

This is a rather involved form of merchant fraud in which the fraudster sets up a fake online storefront, takes orders from real customers, and “fulfills” them by purchasing with stolen credit card numbers from an unwitting third-party merchant.

While other forms of merchant fraud may be more commonplace (such as pagejacking attacks, where malicious software redirects users from a real ecommerce site to a fraudulent fake), triangulation fraud is notable in that it victimizes other, legitimate merchants.

How Can Merchants Avoid Payment Fraud?

Protecting yourself from payment fraud isn’t always easy. There are a lot of different attack vectors to cover, and it can be easy to over-focus on the attacks you’re familiar with while leaving the vulnerabilities you’re less aware of exposed.

One of the first and most important prevention steps is to analyze your fraud and chargeback data so you can see exactly where your attacks are coming from.

Using the right anti-fraud tools is also extremely important. There are highly advanced programs out there, many of which use artificial intelligence and machine learning to deliver the most accurate fraud filtering possible. Merchants should carefully assess their needs and their current situation in order to determine which solutions will work the best for them.

One more thing that merchants can do is adopt higher security standards. For example, requiring strong passwords and two-factor authentication at login. These choices can cause some added customer friction, but they can be highly effective at deterring fraudsters.

Some forms of fraud, however, require a specialized approach. Friendly fraud, for example, can be reversed and recovered through the chargeback representment process, as long as the evidence is on your side and you present your case correctly.

Conclusion

Stopping fraud is no easy task, and it can be a lot for small, independent merchants to take on—which is why many of them enlist the help of fraud and chargeback experts to develop and execute a winning strategy.

Whether you decide to go it alone or seek out assistance, knowing how to recognize the many faces of payment fraud can keep you from getting caught off-guard by predatory cybercriminals.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions or requests for advice to: win@chargebackgurus.com.

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