Credit card fraud detection and prevention: Best practices and tactics for businesses


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  1. Introduction
  2. What is credit card fraud?
  3. Types of credit card fraud
  4. Which businesses are most vulnerable to credit card fraud?
  5. Credit card fraud prevention and detection

As electronic transaction volume continues to rise, the potential for fraudulent actors to exploit vulnerabilities in payment systems is also increasing. Credit card fraud is a growing concern for businesses worldwide – according to a 2021 Nilson Report, global card-fraud losses amounted to US$28.65 billion – and it’s important for businesses to educate themselves on credit card fraud detection and prevention.

The shift towards online and card-not-present transactions has increased the risk of fraud by making it more difficult to verify the authenticity of cardholders. This has led to a significant surge in fraud cases, with LexisNexis reporting that for every US$1.00 of fraud, US retail and e-commerce businesses now incur a cost of US$3.75 – a 20% increase compared to 2019 figures, when the cost stood at US$3.13.

These statistics highlight how important it is for businesses to proactively combat credit card fraud. Implementing effective strategies for fraud detection and prevention helps businesses protect their revenue and invest in the integrity of their customer experience.

Below are best practices for credit card fraud detection and prevention, including a detailed explanation of the role that businesses must play – and how the right resources for fraud prevention and mitigation can augment these efforts.

What’s in this article?

  • What is credit card fraud?
  • Types of credit card fraud
  • Which businesses are most vulnerable to credit card fraud?
  • Credit card fraud prevention and detection

What is credit card fraud?

Credit card fraud is a category of financial crime that involves the unauthorised use of a credit card, credit card information, or a credit card account to make purchases or obtain funds without the cardholder’s consent.

Types of credit card fraud

Credit card fraud can show up through a variety of tactics, each engineered to exploit a different vulnerability in payment systems. For each touchpoint in a payment system, there are fraudulent actors trying to take advantage of potential weaknesses. Here are some of the most common types of credit card fraud:

  • Stolen or lost credit cards
    This type of fraud occurs when a criminal acquires someone else’s physical credit card, either through theft or loss. The fraudulent actor then uses the card to make unauthorised purchases until the card is reported missing and deactivated.

  • Card-not-present (CNP) fraud
    CNP fraud occurs when a fraudulent actor obtains credit card information – such as a card number, expiry date or CVV – and uses it to make unauthorised transactions online, by phone or by post, without the physical card. Fraudulent actors can obtain card information through data breaches, phishing and other means.

  • Account takeover fraud
    In this type of fraud, a criminal gains unauthorised access to an existing credit card account, typically through identity theft or phishing. They might change the contact information associated with the account, add themselves as an authorised user, or request that a new card be issued, which they would then use to make unauthorised purchases.

  • Application fraud
    This occurs when a criminal applies for a credit card using stolen or fake personal information. Once they receive the card, they use it for unauthorised transactions, leaving the victim to deal with the financial fallout.

  • Skimming
    Skimming involves using a small electronic device, known as a "skimmer", to capture credit card information from the card’s magnetic stripe during a legitimate transaction, typically at an ATM or payment terminal. Fraudulent actors then use the captured data to create counterfeit cards or carry out CNP transactions.

  • Phishing and vishing
    These are scams that use email, phone calls or text messages to trick cardholders into revealing their credit card information. For example, an individual might receive an email that appears to be from a legitimate bank or retailer, asking them to "confirm" their account details by clicking on a link or providing information over the phone.

This is not an exhaustive list of credit card fraud tactics. Similar to other types of payment fraud, credit card fraud is perpetually evolving to keep pace with technological advances and the changing nature of payment systems.

Which businesses are most vulnerable to credit card fraud?

Certain types of businesses may be more vulnerable to credit card fraud due to various factors, including the nature of their transactions, the industries in which they operate, and the security measures that they put in place. Some businesses that tend to be more susceptible to credit card fraud include:

  • E-commerce and online retailers
    As these businesses conduct CNP transactions, which makes it more difficult to verify the authenticity of the cardholder, they are more exposed to fraud. Additionally, online transactions may be more susceptible to data breaches, phishing, and malware attacks.

  • Small businesses
    Small businesses might lack the resources to invest in robust systems for fraud prevention and detection. They may also be less aware of the latest security practices, which can make them more vulnerable to different types of fraud, including credit card fraud.

  • High-risk industries
    Businesses in high-risk industries, such as gambling, adult entertainment, and travel, experience higher rates of chargebacks and fraud. Criminals might target these industries due to the higher value of transactions or the greater level of anonymity that these businesses provide.

  • Businesses with high employee turnover
    High employee turnover can make it challenging to maintain consistent security practices and adequately train staff in fraud prevention. In some cases, employees might even participate in fraudulent activities themselves.

  • Companies with weak security measures
    Businesses that do not implement strong security measures, such as encryption, tokenisation, and secure payment processing, are more susceptible to fraud. Weak security can lead to data breaches, making customer information more accessible to criminals.

  • Brick-and-mortar retailers with outdated technology
    Retailers that use outdated point-of-sale (POS) systems or payment terminals may be more vulnerable to skimming and other types of fraud, as older technology may not have the latest security features, such as Europay, Mastercard, and Visa (EMV) chip card readers.

To reduce vulnerability to credit card fraud, businesses should invest in fraud prevention tools, implement strong security measures, train employees to recognise and prevent fraud, and stay informed about the latest fraud trends and best practices.

Credit card fraud prevention and detection

Businesses can employ various tactics to prevent, detect, and respond to credit card fraud effectively. These measures can mitigate the risk of fraud and minimise financial losses. Here’s what you need to know about creating a comprehensive plan for fraud detection and prevention and the specific components that it should include:

  • Secure payment processing
    Implementing secure payment processing systems, such as those that use tokenisation and encryption, can protect sensitive credit card data during transactions and reduce the risk of breaches.

  • EMV chip card technology
    Encouraging the use of EMV chip cards and adopting EMV-compliant payment terminals can reduce the risk of fraud at brick-and-mortar locations, as chip cards are more difficult to counterfeit than magnetic stripe cards.

  • Address verification system (AVS) and card verification value (CVV) checks
    Using AVS and CVV checks can verify the authenticity of card-not-present transactions and minimise the risk of fraud.

  • Fraud detection tools
    Employing fraud detection tools – especially those that use machine-learning algorithms and behavioural analysis – can flag suspicious transactions before they are processed.

  • Employee training
    Educating employees to recognise and prevent fraud can minimise the risk of fraudulent activity, especially in retail environments.

  • Regular monitoring
    Monitoring transactions and customer accounts on a regular basis can help businesses identify unusual patterns and catch potential fraud early.

  • Chargeback management
    Implementing a chargeback management system can help businesses track, analyse, and respond effectively to chargebacks – which can be an indicator of fraud.

Working with a comprehensive fraud protection provider like Stripe Radar can be highly beneficial for businesses in preventing and detecting credit card fraud. Stripe Radar uses advanced machine-learning algorithms and a vast global data network to identify and block fraudulent transactions. Some key features and benefits of using a fraud protection provider like Stripe Radar include:

  • Customisable rules: Businesses can create custom rules to suit their unique risk profiles, preventing false positives and ensuring that genuine transactions are not blocked.

  • Dynamic learning: Stripe Radar’s machine-learning models are continuously updated with new data, enabling the system to adapt to changing fraud patterns and trends.

  • Comprehensive analytics: Stripe Radar provides businesses with in-depth insights and analytics on their transactions, enabling them to monitor fraud patterns and make data-driven decisions to minimise risk.

  • Integration with other Stripe products: Stripe Radar is designed to work seamlessly with other Stripe solutions, providing a cohesive, robust payment and fraud prevention ecosystem.

By employing these strategies and working with a comprehensive fraud protection provider, businesses can significantly reduce their vulnerability to credit card fraud and limit financial losses. To learn more about working with Stripe Radar, get started here.

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