Payment fraud is a costly headache, especially for companies selling products online, and it’s growing every day — Juniper Research estimates ecommerce fraud to exceed $107 billion in 2029. In this guide, we’ll explain what payment fraud is, what types of payment fraud there are, and tips to prevent it from tanking your revenue.
What is payment fraud?
Payment fraud occurs when a malicious actor steals login credentials or other financial information to conduct fraudulent online transactions.
More specifically, it involves fraudsters using various techniques to access customer data or business financial information, including credit card details, bank account information, usernames, passwords, and other personally identifiable information (PII). Once they have this information, fraudsters can go on a shopping spree, resulting in headaches and financial losses for both online shoppers and businesses.
4 common types of payment fraud
Payment fraud comes in all shapes and sizes, and fraudsters are always looking for new ways to cause trouble. Knowing their tricks is the first step to spotting weak spots in your payment processes and putting the right tools in place to catch suspicious activity. Let’s break down some of the most common types of payment fraud:
Credit card testing & cracking
Using automated tools or bots, fraudsters test stolen or fabricated credit card details with small, low-value transactions to see if the card is valid. Once they hit the jackpot, the card is used for bigger fraudulent purchases or gets sold on the dark web to other criminals.
Chargeback fraud
There are two types of chargeback fraud. The friendly fraud version occurs when customers knowingly dispute legitimate charges with their bank, claiming they didn’t authorize the purchase. The other type of chargeback fraud is when a bad actor uses stolen credit card details to make a purchase, and the legitimate cardholder (rightfully) disputes the transaction. Both scenarios result in lost revenue, in addition to the cost of the goods or services purchased. Even worse, too many chargebacks can damage your reputation with payment processing providers and increase your payment processing fees.
Account takeover
While more commonly associated with account fraud, account takeover can also target payment systems. Once inside, fraudsters use stored payment methods to make unauthorized purchases, leaving your customers frustrated and your business on the hook.
Authorized Push Payment Fraud
Also known as APP fraud, Authorized Push Payment fraud occurs when a legitimate user is convinced by a scammer to authorize a payment. Scammers use social engineering tactics to create a sense of trust and deceive the victim.
Payment fraud prevention solutions
No single tool or technique can strike the balance of making it easy and fast for honest buyers to spend their money while throwing up roadblocks for likely fraudsters. A comprehensive payment fraud prevention stack should include:
Payment processing fraud prevention
For instance, Stripe Radar uses signals from across billions of transactions to make intelligent guesses about the legitimacy of a transaction.
Device identification
Fingerprint sees through the tricks fraudsters use to adapt and conceal their identities by using a variety of signals to identify individual computers and mobile devices. Device identification is a powerful tool for letting the right folks shop while blocking suspicious ones.
Bot detection
Use Fingerprint’s bot detection solution when fraudsters use automation to test credit cards or break into your customers’ accounts, so you can block them before any damage is done.
Fraud scoring
Fraud scoring software allows you to take all the inputs and decide whether or not to approve a transaction. It typically uses a combination of machine learning and defined rules to determine a risk level, based on everything from the user’s location to typos in the billing address. Many transaction risk platforms can accept inputs from various sources; this is an important feature if you’re composing a best-in-breed payment fraud prevention suite.
Tips for payment fraud prevention
In addition to purpose-built software, there are several smart things you can do to reduce your exposure to payment fraud:
Use blocklists
Blocklists help prevent both first- and third-party fraud. People who have defrauded you once are likely to do it again, but now that you know who they are, you can prevent them from repeating. You probably want to deny any card that’s been involved in a fraudulent chargeback, as well as close and block the reopening of associated accounts. You can also use device fingerprinting to identify and block devices tied to previous fraudulent attempts and transactions. Similar concepts apply to return and coupon abusers.
Improve your transaction descriptor
There’s very little space for describing a charge on a credit card bill: MasterCard has a 22-character limit whereas Visa’s is 25. Some people dispute charges they willingly made simply because they don’t recognize the abbreviation on their bill. Even though it’s unintentional, this kind of chargeback is a form of fraud because it recoups payment from a legitimate transaction. If you face this challenge, consider changing how your line items look on customers’ statements.
Scrutinize small transactions
Low dollars, low risk, right? Wrong. Small purchase attempts, especially in a cluster, should raise suspicions of card testing. If criminals find you to liberally accept payments, those purchases could soon become big ones.
Single-use discounts and coupons
Generic coupon codes fly around the internet and can be used in bulk for scaled promo fraud attempts. Consider marketing processes that generate unique codes specific to a given customer.
Require extra verification
Merchants can decide how strict they want to be. Options include requiring two-factor identification to log into accounts, CVV codes, and accurate addresses on the purchase screen, or even direct verification with the credit card issuer.
Reduce friction for the good guys
Use device fingerprinting to boost your confidence in identifying honest customers. Consider backing off on all the roadblocks when you’re getting traffic from devices and locations you’re pretty darn sure won’t do you wrong.
Fingerprint helps stop payment fraud in a few simple steps
No seller wants to spend time, money, and focus fighting payment fraud, but it’s an unavoidable part of online commerce. Fingerprint’s payment fraud prevention solution makes it easier to distinguish trustworthy transactions from risky ones. If you want to reduce chargebacks by blocking more bad guys while smoothing the buying process for the good ones, consider adding device identification to round out your payment fraud prevention program. Create a free account today — implementation is less stressful than even a single chargeback dispute!
