Payment Fraud: What You Need to Know

Payment fraud is when stolen or falsified financial information and/or credentials are used to make purchases. While this is a thorn in everyone’s side, including consumers, it’s especially problematic for online and omnichannel businesses.

Fraud trends and statistics

Globally, it’s estimated that online payments fraud was responsible for $41 billion in losses in 2022—and that’s just in the e-commerce sector. By the end of 2023, it’s predicted to exceed $48 billion, 42% of which is expected to take place in the United States.

But payment fraud doesn’t just affect e-commerce. According to J.P. Morgan, 71% of companies surveyed claimed to be victims of payments fraud in 2021. The simple truth is, no business is impervious to this issue.

One of the things that makes combating payment fraud so challenging is the sheer number of ways it can be carried out. Understanding the different types of fraud that affect payments is the first step in preventing it.

Let’s take a look at some of the top tactics used by cybercriminals.

1. Card-not-present fraud

Card-not-present refers to a purchase made online or over the phone, where the card isn’t physically present. Card payments make up at least 36% of successful fraud transactions.

2. ACH fraud

Automated Clearing House (ACH) fraud pertains to payments made digitally via bank account transfer.

3. Chargeback/disputes fraud

Chargeback fraud is when a customer buys something and then files a dispute with their credit card company after receiving the goods or services. This is also known as friendly fraud and accounts for at least 23% of fraud—and from customers’ own admissions.

4. Merchant identity fraud

This is when a bad actor impersonates a legitimate business. The criminals create fake business accounts with the company's stolen information in an effort to trick customers into making purchases at the phony site.

5. Phishing

Phishing is when criminals essentially throw out a line and “fish” for an unsuspecting victim via email scams or fake websites. The intent is to trick customers into providing sensitive information by posing as a legitimate site or business.

6. Retail fraud

Retail fraud is an internal and external threat to businesses. This can include payment terminal tampering and credit card number theft, as well as refund fraud, gift card fraud, and more.

7. Skimming

Skimming targets in-person payments by tampering with terminals and devices used to swipe and read card data.

8. Wire transfer scams

A wire transfer scam is when a bad actor pretends to be a real business requesting a wire transfer from a customer for immediate payment. This is typically done with a sense of urgency to scare the victim into action.

9. Account takeovers

An account takeover is when a criminal hijacks an account, rather than assuming a merchant or individual's identity. Once they have control over the account, they can transfer funds to other accounts, make unauthorized purchases, and steal sensitive information.

10. Check fraud

Surprisingly (or not), check fraud is still the top form of payment fraud—accounting for 63% of payment fraud—as it’s easy to exploit but hard for businesses to fight.

Regardless of the type of payment fraud, it comes at an enormous cost for businesses of all sizes and across all industries. As mentioned earlier, losses due to payment fraud are in the multi-billions. LexisNexis found that every $1 in fraud costs businesses $3.99 for legitimate transactions, and $4.75 for fraudulent digital wallet transactions.

While profit loss is what most companies think of as a result of fraud, another thing to keep in mind is it affects your business reputation. Payment fraud has a significant effect on lifetime value (LTV) as it breeds mistrust and loss of confidence in your brand. This has long-reaching consequences on revenue and customer relationships.

Furthermore, payment fraud can lead to legal ramifications for your company, including hefty fines and large settlements from lawsuits.

It’s not all doom and gloom when it comes to payment fraud. There are several strategies and tools you can use to protect your business.

Follow best practices for security

First and foremost, ensure your company is up to speed on and following best security practices. For instance, keeping your systems and software patched and up-to-date will help prevent and/or limit vulnerabilities. Setting clear policies and procedures for handling sensitive information within your organization also works to minimize fraud risk.

Ensure your business and merchants are PCI compliant

Compliance is extremely important for payment acceptance. In fact, some of the biggest data breaches were the result of businesses falling out of compliance. The easiest way to achieve PCI compliance for your organization and your merchants if you have them, is to integrate with a secure and reliable payments provider. For a deeper look into this topic, visit our blog “Everything You Need to Know About PCI Compliance.”

Stress test your business

An effective way to identify weaknesses and vulnerabilities is to stress test your organization's risk management. This can show you potential risk factors that would impact your company’s financial condition.

Data and analytics

Another method for detection and prevention is through analytics and data. Watch for anomalies and unusual patterns in your website traffic as well as your payment transactions.

Stay up on trends

As the saying goes, knowledge is power. Stay informed on the latest threats and tactics fraudsters are using to attack businesses and consumers.

Employee education

Ensure your employees are aware of your policies and procedures and are knowledgeable about common threats and what to look out for.

Payment fraud is a costly problem for all businesses, but awareness, education, and a secure payment processor go a long way in fighting back.

Finix offers a sophisticated, real-time payment fraud detection tool. Depending on your integration package, you can choose a fully managed solution or a self-managed option that gives you more control over your fraud risk management and deeper insight into what’s happening with your transactions.

We also provide a robust dispute management system that makes handling disputes and fighting chargebacks easier and more efficient. We even work with you to increase your win rates!

To learn more about how we can help your business manage and fight payment fraud, fill out the form below.