Payment Fraud Prevention: Best Practices

Payment fraud is an ever-growing concern for businesses and consumers alike. The anonymity of online transactions and the increasing sophistication of cybercriminals have made payment fraud a significant threat, but that threat can be reduced with effective fraud prevention measures.

Global losses due to payment fraud reached a staggering $41 billion in 2022 and were estimated to exceed $48 billion in 2023. As the landscape of commerce continues to evolve, businesses must implement robust risk mitigation strategies to safeguard their finances and reputation.

Types of Payment Fraud

Payment fraud can take many forms, each posing unique challenges to businesses. Understanding the different types of fraud is crucial for developing effective prevention strategies.

Credit Card Fraud

Credit card fraud is one of the most common forms of payment fraud, involving the unauthorized use of a credit card to make purchases or withdraw funds. Fraudsters typically obtain credit card details through phishing attacks, data breaches, or skimming devices. Once they have the information, they can make unauthorized purchases online or create counterfeit cards for in-person transactions.

Debit Card Fraud

Similar to credit card fraud, debit card fraud involves the unauthorized use of a debit card or its information. However, the consequences can be more severe for the victim since debit cards are directly linked to bank accounts. Fraudsters can withdraw cash from ATMs or make unauthorized purchases, often draining accounts before the victim realizes what has happened.

ACH Fraud

Automated Clearing House (ACH) fraud is a type of payment fraud that involves the unauthorized use of electronic funds transfers. Fraudsters may gain access to an individual or business’s bank account information through phishing or hacking and use it to initiate unauthorized ACH transactions. These can include fraudulent purchases or even direct transfers to the fraudster’s accounts.

Real-Time Payments (RTP) Fraud

Real-time payments (RTP) fraud is a growing concern as the adoption of instant payment systems increases globally. RTP allows funds to be transferred between bank accounts within seconds, which, while convenient, also provides fraudsters with the opportunity to exploit the speed of these transactions. The rapid nature of RTP transactions makes it challenging for financial institutions to reverse fraudulent transfers, making prevention and real-time monitoring crucial.

Peer-to-Peer (P2P) Payment Fraud

Peer-to-peer (P2P) payment platforms, such as Venmo, Zelle, and Cash App, are popular for their ease of use and speed in transferring money between individuals. However, this convenience also opens the door to P2P payment fraud. Fraudsters may impersonate trusted contacts, request payments under false pretenses, or exploit weak authentication measures to access and drain accounts. Unlike traditional payment methods, many P2P transactions are irreversible once completed, making it difficult for victims to recover lost funds.

Account Takeover

Account takeover fraud occurs when a malicious actor gains unauthorized access to a user’s account, often through phishing, credential stuffing, or social engineering. Once inside, the fraudster can change account details, make purchases using stored payment credentials, or even transfer funds to other accounts.

Card Testing

Card testing fraud involves fraudsters making small transactions with stolen payment information to determine whether the card is active and can be used for larger purchases. These small transactions often go unnoticed by the cardholder or the bank, allowing fraudsters to make multiple tests across different merchants. Once a card is successfully tested, it can be used for significant fraudulent purchases or sold on the dark web for a higher price.

The Impact of Payment Fraud on Businesses

Payment fraud can have devastating consequences for businesses, affecting their financial health, operations, and reputation.

Financial Loss

The most immediate impact of payment fraud is financial loss. Businesses not only lose the value of the transaction but also incur additional costs such as chargeback fees. If not addressed, these losses can drain a significant portion of company revenue.

Operational Disruptions

Fraud can also disrupt business operations. Time and resources that could be spent on growing the business may instead need to be diverted to dealing with fraud, including investigating major incidents, managing chargebacks, and implementing new security measures.

Other Consequences

Exceeding fraud ratio thresholds set by card networks can have severe consequences for businesses. If a company’s fraud or chargeback ratio surpasses 0.9% percent, it may face fines, additional chargeback fees, and higher processing costs.

Best Practices for Payment Fraud Prevention

To protect against the growing threat of payment fraud, businesses must adopt a comprehensive and multi-layered approach to security. The most effective methods will depend on the industry, the types of fraud a business most often faces, and the willingness of customers to provide additional information or complete extra authentication steps.

Every company must carefully weigh the benefits of fraud prevention against the costs of increased friction to find an appropriate balance. Nevertheless, here are a few common best practices that merchants can employ to fortify their fraud prevention strategies:

AVS and CVV Matching

Address Verification System (AVS) and Card Verification Value (CVV) matching are essential tools in the fight against payment fraud. AVS compares the billing address provided by the customer with the address on file with the card issuer, while CVV checks ensure that the card’s security code matches what is on the card itself. Implementing AVS and CVV checks during the payment process adds an extra layer of security, making it more difficult for fraudsters to use stolen card information.

Velocity Checking

Velocity checking involves monitoring the frequency and volume of transactions associated with a particular account, payment method, IP address, etc. By setting predefined thresholds, businesses can identify and flag unusual activity, such as a sudden surge in transactions, that may indicate fraudulent behavior.

Risk Scoring

Risk scoring is a tool typically used by third-party fraud prevention software. It assigns a risk score to each transaction based on various factors, such as the customer’s purchase history, geographic location, authentication results, etc. Transactions with higher risk scores can be blocked, diverted to an additional authentication challenge or alternate payment method, or flagged for manual review. Transactions deemed low risk can proceed seamlessly. This method reduces the risk of fraud while minimizing disruptions for legitimate customers.

Account Security Measures

Securing customer accounts is critical to preventing fraud, particularly account takeover attacks. Implementing strong authentication measures, such as two-factor authentication (2FA), IP and device recognition, and CAPTCHA, can help ensure that only authorized users can access their accounts.

EMV Chips

The widespread adoption of EMV chip technology has been one of the most effective measures in reducing card-present fraud. For merchants, it is essential to use EMV chip readers for all in-person transactions without exception. This not only protects against fraud but also helps businesses avoid liability for fraudulent transactions under the rules of the EMV liability shift.

3-D Secure

3-D Secure (3DS) is a security protocol that adds an extra layer of authentication for online card transactions. The latest version, 3-D Secure 2.0, improves upon the original by skipping any additional authentication steps for transactions deemed low risk by the issuing bank.

Monitoring and Analyzing Chargebacks

Chargebacks are a common consequence of payment fraud, and monitoring them closely can help businesses identify patterns and trends that may indicate underlying issues. By analyzing chargeback data, businesses can identify repeat offenders, detect emerging fraud trends, and take corrective actions to prevent future incidents.

Measuring the Success of Fraud Prevention Strategies

Implementing fraud prevention strategies is just the first step; businesses must also measure their effectiveness to ensure they are providing the desired level of protection.

Defining KPIs

Key Performance Indicators (KPIs) are essential for tracking the success of fraud prevention efforts. Common metrics include fraud detection rates, chargeback ratios, cart abandonment rates, and the estimated number of false positives. By monitoring these KPIs, businesses can assess the effectiveness of their strategies and make data-driven decisions to improve their fraud prevention measures.

Regular Audits and Assessments

Continuous evaluation and improvement of fraud prevention tactics are crucial for staying ahead of fraudsters. Regular audits and assessments help businesses identify weaknesses in their fraud prevention strategies, evaluate the effectiveness of their fraud prevention tools, and ensure compliance with industry standards. These reviews should be conducted periodically, with adjustments made as necessary to address emerging threats.

Benchmarking Against Industry Standards

While many companies are hesitant to share this information, benchmarking performance against others in the industry can help businesses better evaluate the effectiveness of their fraud prevention efforts. By comparing metrics such as chargeback rates and fraud detection accuracy, businesses can identify areas where they excel and areas that may need improvement. This external perspective can help businesses stay competitive and ensure they are implementing best-in-class fraud prevention practices.

Final Thoughts

Payment fraud is a persistent and evolving threat, but with the right strategies in place, businesses can protect themselves and their customers from its damaging effects. By staying vigilant, adopting a multi-layered approach to security, and continuously updating their fraud prevention measures, businesses can reduce the risk of fraud and maintain profitability. In the fight against payment fraud, proactive prevention is always the best defense.