The Ultimate Guide to Payment Fraud Detection & Protection For Businesses

Introduction

Presently, most businesses have adjusted their means of payment to online, and this has resulted in many attacks from cybercriminals. However, several techniques of payment fraud protection for businesses have been developed, and they effectively detect and protect against payment fraud.

In this guide, you will learn about payment fraud, cybercriminals’ tactics, and payment fraud detection and protection techniques.

“According to estimates, e-commerce losses to online payment fraud were estimated at 41 billion U.S. dollars globally in 2022, up from the previous year. The figure is expected to grow further to 48 billion U.S. dollars by 2023” – Statista

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What is Payment Fraud?

Payment fraud is an illegal transaction performed by fraudsters, using stolen payment information. Payment methods that are more at risk of theft are virtual checks, direct debits, and phone payments.

Cybercriminals access the payment system through techniques like phishing, malware, and social engineering to steal sensitive information and cause financial loss and reputational damage to businesses. This can be prevented by implementing several payment fraud detection and protection techniques.

Types of Payment Fraud

The major types of payment fraud are:

1. Account Takeover (ATO)

Account Takeover is also known as ATO. It is a type of payment fraud where cybercriminals take over a customer's online account, such as an e-commerce, email account, or digital wallet account, and use it to make unauthorized transactions. The techniques used are phishing, malware, and man-in-the-middle attack.

2. Chargeback Fraud

Chargeback fraud is also called *friendly fraud*, it occurs when a customer intentionally makes a transaction with their credit card and then disputes the transaction with their credit card provider after receiving the goods or services purchased. If the product is faulty, the chargeback is legitimate but in chargeback fraud, there is no issue with the transaction.

3. Stolen Card Fraud

Stolen card fraud is the illegal use of the credit or debit card information of a customer to make unauthorized transactions or cash withdrawals. This leads to financial loss for the original card owners and the financial institutions involved.

4. Identity Theft

Identity theft is very common, it involves the use of personal information of others like Social Security number, bank account number, and credit card information to gain financial benefits or commit fraud.

5. Refund Fraud

Return fraud is an online payment fraud that occurs when an individual purchases an item legitimately or through fraudulent means and then returns it to get a refund or credit they are not supposed to get, resulting in financial loss for the business.

6. Bank Identification Number (BIN) Attacks

A Bank identification number (BIN) attack involves the use of the first six digits on a credit card by fraudsters to algorithmically try to guess the other legitimate numbers so they can get a usable card number. After getting the correct card number, they use it to perform unauthorized transactions or create fake cards.

7. Card Testing

Card testing is the illegal use of a customer's card information to perform minor online transactions to confirm if the card is valid or invalid. Once it is confirmed valid, the card is used for major fraudulent transactions or it is sold out to other criminals. This results in increased charges for the cardholder and chargebacks for the business.

8. Triangulation Fraud

Triangulation fraud involves three individuals: the customer, fraudsters, and an online store. The fraudster acts as a seller and creates a web store with unrealistic prices. When they receive an order from a customer, they collect the information and shipping address of the unsuspecting customer and purchase the goods from another store with stolen credit card data and the collected information. The order is delivered to the customer but the payment information of the customer is reused for other unauthorized transactions.

9. Authorized Push Payment (APP) Fraud

APP occurs when an individual is coerced through social engineering techniques to share personal details or send large amounts of money to a fraudster. These payments are irreversible as customers use a real-time payment system to make the transfers.

Effects of Payment Fraud on Businesses

The effects of payment fraud on businesses are;

1. Financial Loss

Payment fraud can cause a lot of financial losses for businesses, if a cybercriminal successfully steals money or goods, the loss goes to the business. The business bears the cost of refunds and it may also lose a lot of customers.

2. Chargeback Fees

Payment processors charge businesses for each chargeback. High rates of chargeback can result in increased fees or account termination by payment providers.

3. Damage to Reputation

Businesses that are affected by fraud lose customer trust as they assume that it is insecure and untrustworthy. This can result in long-term loss of funds and customers.

4. Legal and Regulatory Consequences

Businesses are tasked with the responsibility of fraud detection and protection and failure to do so can cause legal and regulatory consequences. Non-compliance with payment industry standards is usually followed by large fines and increased scrutiny from regulators which can eventually result in restrictions on business operations and damage to reputation.

5. Operational Disruption

Operational disruption results after a business is affected by payment fraud, as they would need to implement online fraud detection strategies, resolve fraudulent transactions, update security measures, and prevent recurrence. This affects other important aspects of the business and the overall productivity.

Common Payment Fraud Tactics

Cybercriminals are constantly developing new tactics for performing their activities. Some are;

1. Phishing: Phishing is a payment fraud tactic involving the use of fake emails, phone calls, text messages and websites to trick individuals into sharing sensitive information like passwords, account numbers and social security numbers.
2. Carding: Carding is when fraudsters try out stolen credit cards by making little online purchases to test if the card works. If the transaction is successful,, they then use the card for bigger fraudulent purchases.
3. Chargeback Fraud: Chargeback fraud otherwise known as friendly fraud, involves users or customers making purchases, receiving the goods and claiming that they didn’t authorize the transaction or receive the product. They then request that the bank reverse the charge. They receive a refund and keep the goods.
4. Synthetic Identity Fraud: Synthetic identity fraud is when fraudsters create a fake identity by combining real and fake information. For example, they might use a stolen Social Security number with a fake name. Malicious users use this fake identity to open accounts and pay for goods and services without detection.
5. Fake WAP: This technique involves the creation of fake WAP (WiFi Access Point) by fraudsters. It is similar to real WiFi and when users unknowingly connect to it, the fraudsters gain full access to the information in the network such as login details and credit card numbers.
6. Bait & Switch: This involves posting persuasive adverts on popular websites to trick users into clicking them. After clicking, they would be redirected to another page containing malware.
7. UI Redress/ClickJacking: This is more of an attack method, not a whole tactic. Fraudsters use it to deceive users into clicking a link by making it invisible or looking like something else.

Major Technologies in Detection and Prevention of Fraud

The major technologies used in online fraud detection are;

1. Artificial Intelligence and Machine Learning

Artificial intelligence uses machine learning to identify fraudulent activities within large datasets. It is concerned with training algorithms to identify patterns and anomalies that signify fraudulent activities.

Machine Learning is a branch of AI that creates algorithms and models that are used by computers to detect and stop fraudulent activities. Machine learning has accumulated information based on historical data of fraudulent and non-fraudulent transactions. So, it can easily detect deviations from the normal.

This technology is crucial for payment fraud detection as it makes it easy for businesses to predict fraudulent transactions.

2. Behavioral Analytics

Behavioral analytics is a process that scientifically observes the patterns of behavior of customers and detects unusual behaviour. This helps prevent security risks or cyber threats before it is too late.

The data that are monitored are the customers’ IP address details, location information, the devices, VPNs, and proxies they use, their system and browser configurations, the payment methods they use, when they log in, their transaction range, and normal spending habits.

3. VPN/Proxy/Bot Detection

One of the major technologies in payment fraud detection is the use of VPN/Proxy detection which is used in detecting fraudsters who make use of VPN or proxy servers to hide their location and identity during payment. VPN/Proxy Detection tools help business owners detect and stop fraudsters that use VPN/Proxy servers. This then mitigates the risk of fraudulent transactions and chargeback fraud.

4. Credit or Debit Card Verification

Fraudsters use stolen credit card information to carry out frauds like chargeback fraud. Therefore, merchants should make use of the BIN Lookup or BIN Checker Tool which provides accurate information about payment cards based on their BIN numbers. BIN lookup ensures that the payment information provided by customers is valid. Merchants are advised to combine BIN Lookup with other investigation methods (like using VPN/Proxy detection or any other type of fraud detection tools) in order to get accurate results in detecting fraudulent activities as legitimate customers may have a card issued by another country.

5. Use Fraud Detection Software/Companies

Fraud detection software is effective in supervising transactions and detecting fraudulent activities like unusual spending patterns or transactions. Once the software detects a fraudulent transaction, it may either block the transaction or request verification.

Greip's API is a popular and active software that uses artificial intelligence, machine learning algorithms, BIN checks, and other techniques to detect fraudulent transactions.

6. Multi-factor Authentication (MFA)

Multi-factor authentication is an identity verification method that protects businesses from payment fraud through the use of multiple factors to verify a user before granting access to a system or transaction.

The factors required are;

• A password or PIN (something you know)
• A phone, token, or card (something you have)
• Your fingerprint or face (something you know)

Multi-factor authentication adds extra security and prevents unauthorized access to sensitive information.

7. Tokenization and Encryption

Tokenization converts sensitive data to unique, randomly generated tokens that cannot be linked with the original data. If a fraudster steals a token, they cannot use it as the original information connected to the token is stored in a database called a token vault, which is protected by encryption.

Encryption involves the use of an algorithm to convert sensitive data to ciphertext so it cannot be understood or read by a third party. The data can only be decrypted using an algorithm and encryption key.

When used separately, Tokenization is much safer than encryption as it cannot be broken by a hacker. However, when used together, like in a cloud-based solution they can effectively protect businesses from payment fraud.

8. Biometric Authentication

Every individual has biometric features such as the face, voice, fingerprints, or irises, unique to them and this is used for identity verification. This feature is effective for the detection and prevention of fraud as two individuals cannot have the same biometric features.

9. Real-Time Transaction Monitoring

Real-time transaction monitoring is the process of analyzing customer transactions as they occur before they are recorded to detect any fraudulent activity and take the right steps to protect businesses from payment fraud.

10. Fraud Detection Automation

Fraud detection automation is a process of using software tools for the detection and prevention of payment fraud in real time. This process involves collecting data from various sources, preparing collected data for analysis, detecting anomalies in prepared data, assigning fraud risk scores to customers or transactions, and implementing machine learning.

11. IP lookups

IP lookups protect businesses from payment fraud as only valid users are granted access to the systems. Also, it allows businesses to track and monitor IP addresses for policy compliance purposes.

How to Implement Payment Fraud Protection for Businesses

Tips to follow to protect your business from payment fraud are;

1. Use secure payment methods

Secure payment methods are used for the detection and prevention of fraud as cybercriminals usually target checks, swipe cards, and manual credit cards.

To protect against payment fraud, other payment methods should be implemented. These include P2P payment methods, encrypted payment methods, digital wallets, prepaid cards, and EMV-chip technology in debit and credit cards for the generation of unique transaction codes for each purchase.

2. Set up multi-factor authentication

Multi-factor authentication is important for payment fraud protection, it verifies the users before activating a transfer, unlike one-step verification which uses only a password. With multi-factor authentication, after collecting login information, cybercriminals still have to access the second factor such as a biometric scan or a one-time password sent to a phone.

3. Monitor transactions

To effectively protect against payment fraud, businesses need to monitor all transfers and payments so unauthorized transactions can be observed when they begin. This is done through payment fraud software and manual review by trained professionals.

4. Limit access to sensitive information

Payment fraud protection can also be implemented by reducing the number of employees who have access to sensitive information. Only employees who need this information should be granted access.

5. Educate users and employees

Educating employees and clients on the techniques used by fraudsters is very important for payment fraud protection as they are susceptible to such scams.

6. Chargeback Protection

Chargeback protection is also called chargeback insurance, this service protects businesses from payment fraud by covering all the fees connected with unauthorized transactions or fraudulent disputes.

Businesses should implement chargeback protection tools as they help save time, and money and reduce the risks of high chargeback rates. However, proof that the chargeback was fraudulent must be provided.

Bottomline

Cybercriminals are always finding new ways to attack businesses and steal funds. To prevent this, several payment fraud detection and prevention tools have been developed. One important tool is the Greip, which functions by combining artificial intelligence and machine learning algorithms to analyze payment fraud, verify the card issuer, detect proxy and VPN, and score and validate user data.

Payment fraud protection for businesses is helpful for the prevention of fraud, chargebacks, and the preservation of customer loyalty.

FAQs

1. How to detect fraud in payments?

There are different ways to detect fraud in payments. One way to detect fraud in payments is to use payment fraud detection services like the one offered by Greip, to analyze and pinpoint any anomalies or patterns that suggest fraud. Another way is to verify the customer's details with the issuing bank as the fraudster may not have access to the card owner's billing address.

2. How do I stop online payment fraud?

Online payment fraud can be stopped using a risk-scoring engine. This blocks or triggers a review of abnormal transactions before approval.

3. How to check fake payments?

To check for fake payments, simply verify the transaction ID generated by the UPI transaction. If the ID on the payment received does not match or is absent, then it is fake.

References

Online Payment Fraud 101: What it is, Types, and How to prevent it

Implement Financial Fraud Detection Using Machine Learning In Your Business

Understanding AI Fraud Detection and Prevention Strategies

Multi-factor authentication