Payment fraud detection and prevention: A how-to guide for businesses

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  1. Introduction
  2. What is payment fraud?
  3. Types of payment fraud
  4. Payment fraud detection and prevention
    1. Phishing
    2. Skimming
    3. Identity theft
    4. Chargeback fraud
    5. Business email compromise
    6. Card-not-present fraud
  5. How to create a unique payment fraud plan for your business

The digital revolution has permanently changed the way businesses conduct transactions, opening up new opportunities for growth and global reach. However, this shift has also made organizations increasingly vulnerable to payment fraud. Recently published data from the Federal Trade Commission reveals that customers reported a loss of almost $8.8 billion to fraud in 2022, an increase of over 30% compared to 2021.

It’s not only customers who lose money as a result of fraud. Estimates indicate that total global ecommerce losses due to online payment fraud reached $41 billion in 2022, a 105% increase from the previous year. This figure is expected to increase to $48 billion by the end of 2023. It’s important for businesses to educate themselves about payment fraud prevention and detection to protect their financial assets, maintain customer confidence, and stay ahead of evolving threats.

Payment fraud detection and prevention is a complex challenge that requires a dynamic set of interlocking solutions. In this article, we’ll talk about the key concepts, best practices, and strategies that businesses can use to effectively combat payment fraud, ensuring the safety and integrity of their transactions in an increasingly connected world. Here’s what you need to know about specific tactics for responding to different types of payment fraud and how to create a comprehensive payment fraud strategy that reflects the unique needs and risks of your business.

What’s in this article?

  • What is payment fraud?
  • Types of payment fraud
  • Payment fraud detection and prevention
  • How to create a unique payment fraud plan for your business

What is payment fraud?

Payment fraud is any dishonest or illegal activity that takes advantage of payment systems to gain unauthorized access to funds or financial information. It can include stealing someone’s identity, making unauthorized purchases, or tricking a company into refunding money.

Payment fraud has severe consequences for individuals, businesses, and the economy as a whole. The primary impacts of payment fraud are:

  • Financial losses: Fraudulent transactions can lead to significant monetary losses for individuals, businesses, and financial institutions, and they can erode trust in payment systems.

  • Identity theft: Payment fraud often involves the theft and misuse of personal and financial information, causing long-lasting harm to victims and making it difficult for them to restore their identity and credit.

  • Business reputation: Companies that fall victim to payment fraud may suffer damage to their reputation and customer trust, potentially leading to decreased sales, customer attrition, and increased operational costs.

  • Legal and regulatory consequences: Organizations that fail to comply with antifraud regulations or do not adequately protect customer information may face legal penalties, fines, and increased regulatory scrutiny.

  • Increased operational costs: Preventing, detecting, and mitigating payment fraud requires significant investment in technology, personnel, and resources, which can strain an organization’s budget and operational efficiency.

By addressing payment fraud, businesses and financial institutions can minimize the risks and negative consequences associated with fraudulent activities, ensure the integrity and security of payment systems, and maintain trust in the larger financial ecosystem.

Types of payment fraud

Because fraudulent actors use a variety of methods to exploit vulnerabilities in payment systems, payment fraud comes in many forms. Some of the most common methods include:

  • Phishing
    Phishing is a type of payment fraud in which attackers use deceptive emails, text messages, or websites to trick individuals into providing sensitive information, such as login credentials, credit card numbers, and personal data. The fraudulent actors then use this information to commit unauthorized transactions or other forms of financial fraud.

  • Skimming
    Skimming is a technique that criminals use to capture credit or debit card information. They install small devices, known as “skimmers,” on card readers at ATMs or point-of-sale (POS) terminals. When someone uses the ATM and swipes their card, the skimmer collects card data, which fraudulent actors can then use to create counterfeit cards or carry out unauthorized transactions.

  • Identity theft
    Identity theft occurs when a fraudulent actor obtains and uses someone else’s personal information—including Social Security numbers, bank account details, and credit card numbers—to impersonate them, make unauthorized purchases, open new accounts, or commit other forms of fraud.

  • Chargeback fraud
    Chargeback fraud, also known as “friendly fraud,” happens when a customer makes a purchase using their credit card but then falsely disputes the charge with their card issuer, claiming the product was not received or the transaction was unauthorized. The fraudulent actor’s goal is to obtain a refund while retaining the goods or services.

  • Business email compromise
    Business email compromise (BEC) is a type of payment fraud in which criminals impersonate company executives or vendors to trick employees into transferring funds or sharing sensitive information. Typically, this is done by hacking or spoofing email accounts and using social-engineering tactics to manipulate the targeted employee.

  • Card-not-present fraud
    Card-not-present (CNP) fraud refers to fraudulent transactions made when the physical card is not present, such as online or over-the-phone purchases. Fraudulent actors use stolen credit card details to make unauthorized purchases, which can be difficult to detect and prevent due to the lack of physical card verification.

For a more in-depth exploration of the different kinds of payment fraud and which businesses they tend to impact, read more here.

Payment fraud detection and prevention

To effectively combat payment fraud, companies must adopt a comprehensive and proactive approach, which includes understanding the different types of fraud they may encounter, assessing their unique risks and vulnerabilities, and implementing sweeping prevention and detection measures. By prioritizing payment security and constantly evolving their strategies and tactics, businesses can safeguard their financial integrity, protect their customers’ data, and maintain trust in their brand.

Here’s an overview of how businesses can prevent, detect, and respond to the most common types of payment fraud:

Phishing

  • Educate employees to recognize phishing emails, verify the identity of an email’s sender, and practice safe browsing habits.
  • Implement filtering and scanning technologies to block or flag suspicious emails, and use DMARC (see the “Business email compromise” section below) for sender authentication.
  • Deploy firewalls, intrusion-detection systems, and network segmentation to protect internal systems, and keep software and systems updated.
  • Require multifactor authentication for important systems and applications to reduce the risk of unauthorized access with stolen credentials.
  • Analyze logs, network traffic, and system data to detect and respond to potential phishing attacks or other suspicious activities.
  • Develop a clear plan outlining the steps to take if a phishing attack is successful, including containment, reporting, and communication procedures.
  • Assess third-party vendors’ security practices to ensure they meet your organization’s standards and don’t expose your business to phishing attacks.

Skimming

  • Inspect POS terminals and ATMs regularly for any signs of tampering or unauthorized devices.
  • Implement tamper-evident security measures, such as security seals or locks.
  • Ensure secure and encrypted data transmission for card transactions.
  • Upgrade to chip-and-PIN or contactless payment technology, which is less susceptible to skimming.
  • Train employees to recognize skimming devices and report suspicious activities.
  • Collaborate with law enforcement and industry partners to share information and best practices.

Identity theft

  • Implement robust data-security measures, such as encryption, secure storage, and access controls.
  • Monitor transactions and account activities for unusual or suspicious behavior.
  • Use multifactor authentication for online accounts and transactions.
  • Conduct customer identity verification, especially for high-value transactions or account changes.
  • Educate customers about protecting their personal information and how to detect identity theft.

Chargeback fraud

For more information about how to prevent chargebacks, see our guide. Below are steps you can take to prevent and address chargeback fraud when it occurs:

  • Verify customer identity and billing information during transactions.
  • Provide clear and accurate product descriptions, shipping information, and return policies.
  • Implement fraud detection tools to flag suspicious transactions for review.
  • Keep detailed records of transactions, including customer communication and proof of delivery.
  • Maintain open communication with customers to address concerns and minimize disputes.
  • Monitor chargeback trends and adapt strategies accordingly.

Business email compromise

  • Train employees to recognize and report suspicious emails.
  • Implement email security measures to authenticate the identity of an email’s sender and prevent spoofing. Such measures include:
    • DMARC: Domain-based Message Authentication, Reporting, and Conformance is a system that helps ensure emails are genuine, preventing fake emails from appearing to come from your domain.
    • DKIM: DomainKeys Identified Mail is a technique that adds a digital signature to emails, verifying they’re sent by a legitimate source and haven’t been tampered with.
    • SPF: Sender Policy Framework is a method to confirm that an email is sent from an approved server for a specific domain, blocking unauthorized senders.
  • Establish multilevel approval processes for financial transactions and sharing sensitive information.
  • Encourage secure communication channels and verifying requests via phone or in person, when in doubt.
  • Update and patch software, operating systems, and security tools regularly.

Card-not-present fraud

  • Use address verification service (AVS) and card verification value (CVV) checks for online transactions.
  • Implement multifactor authentication for customer accounts.
  • Deploy fraud detection tools, such as machine learning algorithms, to identify and flag suspicious transactions in real time.
  • Monitor transactions for unusual patterns and velocity checks.
  • Encourage customers to use digital wallets and tokenization services for added security.
  • Comply with the Payment Card Industry Data Security Standard (PCI DSS) to protect sensitive cardholder data.

How to create a unique payment fraud plan for your business

To create a payment fraud plan tailored to their unique needs and risks, businesses should follow a systematic approach that involves assessment, prioritization, implementation, and continuous improvement.

Here’s a step-by-step guide that businesses can use to develop and mobilize a payment fraud strategy:

  • Risk assessment
    Conduct a comprehensive risk assessment to identify the types of payment fraud most relevant to the business, based on its industry, size, customer base, and transaction methods. Assess the existing systems, processes, and controls to identify vulnerabilities and potential areas for improvement.

  • Prioritization
    Based on the risk assessment, prioritize the most significant threats and vulnerabilities, taking into account the potential financial impact, reputational damage, and likelihood of occurrence. This will help determine which fraud prevention measures should be implemented first.

  • Strategy development
    Outline a clear strategy that addresses the prioritized risks and vulnerabilities, incorporating a mix of preventive, detective, and responsive measures. Customize the strategy to the unique needs and risks of the business and include both short-term and long-term objectives.

  • Resource allocation
    Allocate the necessary resources—including personnel, budget, and technology—to implement the chosen tactics and best practices. Assign clear roles and responsibilities to team members, and establish a strong governance structure to oversee the implementation and ongoing management of the strategy.

  • Implementation
    Roll out the chosen tactics and best practices, ensuring they are integrated into existing systems and processes. This may involve updating policies and procedures, investing in new technologies, or conducting training and awareness programs for employees.

  • Monitoring and evaluation
    Continuously monitor the effectiveness of the implemented measures, using key performance indicators (KPIs) and metrics to track progress. Conduct regular audits to identify areas for improvement and ensure compliance with industry standards and regulations.

  • Adapting and improving
    Based on the monitoring and evaluation results, refine and adjust the strategy as needed, incorporating new tactics to address emerging threats or changing business needs. Maintain a proactive approach to payment fraud prevention, staying informed about the latest trends, technologies, and best practices in the field.

Working with a provider of fraud prevention and mitigation services can amplify your efforts to fight fraud. And depending on which solutions you use to power your payments infrastructure and processing, you might already be equipped with fraud protection.

For example, Stripe offers a suite of tools and features to help businesses prevent, detect, and respond to payment fraud, in addition to comprehensive payment functionality for a variety of business models and use cases. With Stripe Radar and other built-in fraud-mitigating features of Stripe payment solutions such as Terminal and Checkout, businesses can monitor transactions in real time, flag suspicious activities, and block fraudulent attempts. To learn more, start here.

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