Payment fraud 101: How it works and how to protect your business

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  1. 导言
  2. What is payment fraud?
  3. Types of payment fraud
    1. Credit card fraud
    2. Debit card fraud
    3. Bank fraud
    4. Wire transfer fraud
    5. Check fraud
    6. Mobile payment fraud
  4. How does payment fraud happen?
  5. What industries are most at risk of payment fraud?
  6. How does payment fraud affect businesses?
  7. How to protect your business against payment fraud

Payment fraud is a growing concern for businesses of all sizes and industries, with losses estimated at over $42 billion worldwide in 2020 alone. For most businesses, particularly those that deal with a high volume of customer payments, payment fraud is an unfortunate yet unavoidable part of doing business. Managing the security of payments has become more complicated with the rise of digital commerce and new payment methods. As fraudulent actors’ tactics become more sophisticated, so too must fraud detection and prevention measures. The impact of payment fraud on businesses can be significant, including financial losses, damage to reputation, and legal and regulatory consequences.

Even when a business does everything possible to prevent payment fraud, it can still happen. Though by learning about the different types of fraud and how they work, you can put yourself in the best position possible to block fraud. We’ll cover what you need to know about fraud, how it happens, and what you can do to protect your business and customers.

What’s in this article?

  • What is payment fraud?
  • Types of payment fraud
  • How does payment fraud happen?
  • What industries are most at risk of payment fraud?
  • How does payment fraud affect businesses?
  • How to protect your business against payment fraud

What is payment fraud?

Payment fraud is a type of financial fraud that occurs when someone intentionally uses false or stolen payment information to make a purchase. For example, fraudulent actors might use stolen credit card information, create fake checks, or make unauthorized electronic fund transfers.

Retail businesses are particularly vulnerable to payment fraud, since they deal with a large volume of transactions and may not have the resources to thoroughly vet each payment method. Payment fraud can result in significant financial losses for businesses, damage to their reputation, and legal liabilities.

Types of payment fraud

There are several types of payment fraud:

Credit card fraud

Credit card fraud is the unauthorized use of a credit card to make purchases or obtain cash. For instance, this fraud can involve the use of stolen credit card information or the creation of counterfeit credit cards. In credit card fraud, the fraudster can use the stolen credit card to make purchases online or in-person, or they may use the card to withdraw cash from an ATM.

Credit card fraud losses increased to $4.2 billion in 2020, up from $3.5 billion in 2019. Card-not-present fraud is expected to increase from 57% in 2019 to 74% by 2024.

Debit card fraud

Debit card fraud is similar to credit card fraud but involves the unauthorized use of a debit card. The fraudulent actor may use a stolen debit card or the card information to make purchases or withdraw cash from an ATM. Debit card fraud can also occur if someone obtains access to the PIN associated with the card.

Bank fraud

Bank fraud refers to any type of fraud that involves a bank or financial institution. This can include fraudulent loans, account takeover fraud, and identity theft. Bank fraud can result in significant financial losses for individuals and institutions.

The 2022 ACFE Report to the Nations found that banking and financial services are the second-most targeted industry for fraud, with a median loss of $100,000 per case.

Wire transfer fraud

Wire transfer fraud occurs when a fraudulent actor obtains access to someone’s bank account or wire transfer information and then uses it to transfer money to their own account. The fraudulent actor may employ various tactics to obtain the victim’s information, including phishing scams or hacking into the victim’s computer or email account.

The FBI’s Internet Crime Complaint Center (IC3) reported that wire transfer fraud was the most commonly reported type of business email compromise (BEC) and email account compromise (EAC) scam in 2020.

Check fraud

Check fraud involves the creation or alteration of a check to obtain funds fraudulently. This can include forging a signature or altering the amount of the check. Check fraud can occur when someone steals a checkbook or obtains access to a victim’s checking account information.

Checks were the payment method most vulnerable to fraud, accounting for 66% of all payment fraud in 2020.

Mobile payment fraud

Mobile payment fraud is the unauthorized use of mobile payment services, such as Apple Pay or Google Wallet, to make purchases or transfer funds. This can occur if someone gains access to the victim’s mobile device or payment information. Mobile payment fraud can also occur if a fraudulent actor creates a fake mobile payment account using someone else’s information.

Seventy percent of fraudulent transactions took place on mobile devices in 2022.

How does payment fraud happen?

Fraudulent actors use a range of tactics to obtain access to sensitive payment information or carry out unauthorized transactions:

  • Phishing
    Phishing is a technique used to obtain sensitive information such as credit card details, log-in credentials, and other personal information. Phishing is often done through email or social media, where the fraudulent actor creates a fake log-in page or payment portal to trick the victim into entering their information.

  • Skimming
    Skimming is the process of stealing credit or debit card information by installing a device on a legitimate payment terminal. The device captures the card information and PIN number, which can be used to create counterfeit cards or withdraw cash from an ATM.

  • Identity theft
    Identity theft occurs when a fraudulent actor obtains someone’s personal information, such as their name, address, and Social Security number, to commit fraudulent transactions. This can include opening new credit cards, applying for loans, or making unauthorized purchases.

  • Chargeback fraud
    Chargeback fraud occurs when a customer makes a purchase using a credit or debit card and then disputes the transaction with their bank, claiming that the purchase was unauthorized or defective. With chargeback fraud, the business is often stuck reimbursing the customer, even if the purchase was legitimate and made by the cardholder.

  • Business email compromise (BEC)
    BEC is a type of fraud that targets the employees of a business. The fraudulent actor will send a phishing email to an employee, usually a senior executive or business partner, requesting that the employee disclose sensitive information or transfer funds to the fraudulent actor.

  • Malware
    Malware refers to any type of malicious software designed to gain access to sensitive information or control a victim’s computer or device. Fraudulent actors use malware to steal credit card information, log-in credentials, and other personal information.

What industries are most at risk of payment fraud?

Payment fraud can occur in any industry, but some are more at risk than others:

  • Retail
    Retail businesses are often targeted by fraudulent actors due to the high volume of credit card transactions and the ease of access to credit card information. Online retailers are particularly vulnerable to payment fraud, as fraudulent actors can use stolen credit card information to make fraudulent purchases from anywhere in the world.

  • Banking and finance
    Banks and other financial institutions are frequent targets of payment fraud due to the sensitive nature of the information they hold. Fraudulent actors may attempt to steal customer information or use social engineering techniques like phishing to gain access to accounts.

  • Healthcare
    Healthcare providers are often targeted by fraudulent actors due to the large amount of sensitive patient information they hold. Fraudulent actors may attempt to steal patient information or use fraudulent billing schemes to obtain payments.

  • Hospitality
    The hospitality industry is at risk of payment fraud due to its high volume of credit card transactions, particularly at hotels and restaurants. Fraudulent actors may attempt to steal credit card information or use stolen credit cards to make fraudulent purchases.

  • Ecommerce
    Ecommerce businesses are vulnerable to payment fraud due to the ease of access to credit card information, the frequency of card-not-present transactions, and the anonymity of online purchases. Fraudulent actors may use stolen credit card information to make fraudulent purchases or set up fake online stores to obtain payments.

How does payment fraud affect businesses?

Payment fraud can affect businesses in serious ways, including:

  • Financial loss
    Payment fraud can result in significant financial losses for businesses. If a fraudulent actor is able to steal funds or goods from a business, the business may have to absorb the cost or pass it on to customers, which can harm the bottom line. Fraud can also hurt customer retention and decrease customer lifetime value (LTV).

  • Chargeback fees
    If a customer disputes a charge on their credit card bill, the business may be required to pay a chargeback fee. Additionally, many payment processing providers charge additional fees to businesses that have a higher chargeback ratio.

  • Damage to reputation
    Beyond hurting the LTV of individual customers, fraud can tarnish a business’s reputation, making customers believe they are untrustworthy or insecure. This can lead to a long-term loss of customers and revenue.

  • Legal and regulatory consequences
    While even the tightest safeguards might fail to prevent some fraud, businesses have an obligation to be diligent about fraud prevention; failing to do so may result in legal and regulatory consequences. Payment fraud can also put businesses at risk of noncompliance with industry regulations and standards, such as the Payment Card Industry Data Security Standards (PCI DSS). Failure to comply with these standards can result in fines, legal action, and reputational damage.

  • Operational disruption
    Payment fraud can cause operational disruption for businesses if they need to investigate and resolve fraudulent transactions, update security measures, or implement new policies and procedures to prevent future fraud. This can divert resources from other critical business functions and impact productivity and efficiency. Fraud prevention isn’t only concerned with mitigating the losses associated with fraud. It also helps preserve the company’s ability to focus on more constructive tasks.

How to protect your business against payment fraud

Businesses must take a strategic and multifaceted approach to payment fraud prevention. This includes implementing strong security measures, such as using encryption, requiring strong passwords, and regularly monitoring accounts for suspicious activity. Businesses should also educate employees and customers about the risks of payment fraud and how to protect themselves.

Here are some strategies that businesses can use to combat payment fraud:

  • Use secure payment methods
    Whenever possible, businesses should use secure payment methods, such as EMV chip cards, mobile payments, NFC contactless payments, and encrypted online payment systems. These payment methods offer more built-in fraud prevention measures than cash, checks, or credit and debit cards that use a magnetic stripe.

  • Implement strong authentication measures
    Businesses can implement strong authentication measures, such as two-factor authentication or biometric authentication, to ensure that only authorized users can access sensitive information. As technology changes best practices around payment authentication, it’s helpful to work with a payments provider like Stripe that continuously evolves solutions to reflect the most up-to-date security standards. Businesses can benefit from best-in-class authentication and payment security measures without needing to invest their own resources in developing, maintaining, and updating them.

  • Monitor accounts regularly
    Businesses should monitor their accounts regularly for suspicious activity, such as unusual transactions or changes in payment patterns. Even with a range of strong fraud detection measures in place, having a human being look through your payment records for anomalies on a regular basis is invaluable.

  • Educate employees and customers
    The more you and your team understand about fraud risk, the more prepared you’ll be to protect your business and your customers. Train employees to identify and report suspicious activity and teach customers to spot phishing emails and other fraudulent scams.

  • Use fraud detection software
    Businesses can use fraud detection software to monitor transactions for signs of fraud, such as unusual spending patterns or transactions. For businesses that use Stripe payment solutions or hardware, a powerful suite of fraud protection tools are already built in and require no additional steps to integrate.

  • Limit access to sensitive information
    Businesses should be careful about who in the company has access to sensitive information, such as customers’ credit card numbers or bank account information. It’s important to restrict access to this type of information to only those employees who need it.

  • Stay up-to-date with security measures
    Businesses should stay up-to-date with the latest security measures and software updates to ensure they are using the most effective fraud prevention tools. This is where working with a provider like Stripe proves invaluable, since it allows businesses to outsource the important work of monitoring payment fraud and implementing the right payment systems updates.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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