The Ultimate Guide To Payment Fraud Detection and Prevention

Payment fraud is one of the most serious challenges for businesses in the UK, no matter the size or the type of business. With more and more fraudsters taking advantage of system weaknesses, companies are exposed to significant threats.

But what can you do as a merchant to avoid these issues?

In the following sections, we take a deep dive into the realm of fraud detection and fraud prevention. We explore what fraud is, how it impacts your business, what the different types of fraud are, and more.

What is payment fraud?

Payment fraud is the occurrence of unauthorised payments. Payment fraud occurs as a result of the use of stolen payment data or false information. 

It leads to weakened financial security for the business and usually takes place when credit card details are obtained by criminals via data breaches or exchanges on the dark web.

Payment fraud is a serious concern for businesses of all types and sizes. It can lead to dramatic financial losses, unhappy customers, legal conflicts, and more. 

Types of payment fraud

Not all payment fraud is the same.

This space has dramatically evolved over time and the rise of new business structures and payment methods has paved the way for new, advanced, and creative ways to steal data and manipulate payments.

Here are the different types of payment fraud and their characteristics.

Account Takeover (ATO)

Account takeover fraud, also referred to as hacked accounts, takes place when an impostor hacks into a victim’s account and gains access. This usually happens via digital platforms or solutions, like digital wallets, online banking accounts, or eCommerce accounts. 

Under an account takeover, the fraudster logs into the victim’s account using the stolen information, account details, or phished credentials. They can even gain full control by changing the login details of the individual, preventing them from regaining access.

After hacking and controlling the account, the impostor can perform unauthorised transactions, send money to different accounts, and take advantage of stored payment details to make purchases. 

Friendly Fraud 

Friendly fraud is often referred to as chargeback fraud. Just like the name suggests, under this form of deception, a cardholder requests a chargeback for an online purchase in cases where there are no product defects or transaction problems.

Originally, chargebacks are designed to offer peace of mind to shoppers experiencing faults with their bought products. However, in the case of chargeback fraud or friendly fraud, no actual issues can be detected.

Stolen Card Fraud

Stolen card fraud or credit card fraud is made possible via stolen credit card information. 

Credit card details can be stolen by implementing two approaches. One of them is physically stealing the card from its owner and taking advantage of the available data. The second approach is skimming card details by using an illegal device. 

Regardless of the practices used to obtain the card details, stolen card fraud enables fraudsters to use the stolen card details to initiate unauthorised payments and cash withdrawals. 

This can result in substantial financial losses, both for the financial institutions and the legitimate customers involved. 

Money Laundering

Money laundering, on the other hand, is considered a more advanced and rather complex form of committing fraud. This type of fraud is conducted with the main goal of hiding illegally accumulated financial resources.

In most cases, money laundering goes through three core phases:

• Placement – Introduction of illicit money to the financial system by depositing small amounts of cash into bank accounts or investments in financial instruments.
  
• Layering – Conducting a number of financial transactions in order to separate the money from its source. Some of the activities that are typical for this phase include bank transfers or transferring funds to other accounts, currency exchanges, high-value transactions, and more. Transferring money across a wide array of channels making it complicated to track them. 
  
• Integration – Finally, the money is reintroduced to the economy via investments in legitimate businesses, luxury goods shopping, and others. 

All of these steps make it more difficult for the resources to be tracked back to their origins.

Identity Theft

Identity theft is perhaps one of the most common types of fraud attempts. It represents scenarios where a fraudster makes an illegal use of an individual’s PII or Personally Identifiable Information.

This is done with the aim of initiating purchases, withdrawing money, or even to create counterfeit cards and transfer funds to unrecognised recipients. 

Synthetic Identity Fraud

Synthetic Identity Fraud occurs when a criminal steals a person’s identity, or at least parts of it. The stolen data is used in combination with false information to create a new “synthetic” identity.

The goal behind this type of fraud is to generate substantial credit history and loans around this false identity.

Refund Fraud

Refund fraud is also popular among fraudsters. This type of fraud happens when funds are generated via deceptive means. 

Put otherwise, refund fraud occurs when someone purchases a product or service only to take advantage of the gaps in the seller’s return policy. As a result, they’re able to make a refund or receive credit, creating substantial financial losses for the merchant.

Business Email Compromise 

Business email compromise is a type of fraud aimed at businesses specifically. 

In this case, criminals manipulate or hijack business email accounts to trick business personnel or management staff into initiating and completing unauthorised financial transactions or revealing confidential data.

Bank Identification Number (BIN) Attacks

Fraudulent activities that fall under the Bank Identification Number attacks take place through stolen payment information.

In this case, the fraudster gains access to the first six digits of a credit card and uses algorithms to uncover the remaining numbers in order to gain access to the full information. 

This is a type of card not present fraud that requires a part of the customer’s data.  If the information is properly guessed and the fraudster gains access to the card number, they can use it to conduct fraudulent transactions and more.

Card Testing

Card testing fraud, on the other hand, is when malicious actors use stolen card information to initiate online payments, usually of smaller amounts. 

The aim of these transactions is to simply confirm whether the stolen card details are correct and active.

Once confirmation is made, fraudsters can perform more substantial transactions or sell this valuable data to other criminals. This form of fraud accumulates significant processing and chargeback fees for businesses.

Triangulation Fraud

Another complex form of fraud attacks is triangulation frauds. This form of fraud includes a client, a criminal, and an online shop.

The criminal creates an online web store and adds products for sale. Once an order from a shopper is received, the fraudster will use the transaction data (customer information, shipping address, and credit card data) to buy the product from a different merchant.

The shopper is delivered the product and remains unsuspicious about the committed fraud. As a result of this crime, the shopper’s payment data remains available to the fraudster for future use.

Authorised Push Payment (APP) Fraud

A type of fraud that’s mostly used via social engineering techniques like impersonation, APP tricks individuals into performing real-time payments on behalf of criminals.

These schemes often feature investment scams, romance scams, and others. 

How does payment fraud impact businesses?

Naturally, payment fraud can create significant challenges for businesses and negatively impact reputation, performance, and ability to grow. For example, operational costs can dramatically grow for the business as a result of fraudulent behaviour. 

One of the factors that influences operational costs is the accumulated chargeback fees from banks or payment providers. When fraud takes place, businesses usually have to refund affected customers, leading to lost revenue and extra fees.

In addition, in order to combat payment fraud, significant investment is required in payment security measures and fraud detection systems. In most cases, these go hand in hand with substantial setup expenses and maintenance costs. 

Not to mention that suspicious transactions must be investigated and effectively managed. This requires well-trained, and in most cases, expensive personnel. 

Moreover, there are unmissable regulatory and legal challenges where payment fraud happens in your business. 

Overcoming issues with payment fraud

If your business has been affected by payment fraud, there are a number of challenges that are likely to occur. 

To handle the situation and overcome issues with payment fraud, there are different response actions, long-term strategies, and preventive measures you can take.

For example, you can put an immediate halt to active fraudulent transactions in order to minimise any additional losses for you and your customers. Inform financial institutions, payment processors, and authorities about the situation, requesting an account freeze and an investigation.

Don’t forget to notify affected customers about breaches and partner with cybersecurity specialists to identify the root cause of the issue.

How to manage payment fraud risk 

No matter the type of business you operate, fraud detection and prevention is a must. 

Managing fraud risks consists of three core components – detection, prevention, and response.

Here’s what you need to know about each one. 

Fraud detection

As the term suggests, fraud detection efforts are aimed at uncovering fraudsters and detecting malicious behaviour. This is usually possible via the help of advanced fraud detection tools, like payment gateway fraud detection, for example.

There are a range of different techniques companies can adopt to set apart legitimate clients from criminals. For instance, machine learning, in-depth data analysis, and pattern recognition are popular instruments. 

Fraud detection can help identify abnormalities in the behaviour of shoppers, indicating whether the activities are conducted via legitimate customers of fraudsters. 

However, it’s important to note that as a result of the diverse types of fraud, businesses can’t rely on a standardised approach. Instead, it’s recommended to adopt advanced financial technology that can provide personalised solutions and risk strategies to fit your specific needs. 

Fraud prevention

Payment fraud prevention, on the other side, is a preventative way to fight fraud.  This risk strategy ensures that fraudulent behaviour and activities cannot impact the business, the client, or the financial institution involved in the process.

The best way to achieve this is through risk rules and machine learning. Rather than relying on human effort, machine learning can help minimise cases of false positives and false negatives.

For example, through custom rules, companies can rely on risk assessment via risk profiles created to specifically respond to the needs of the business. For an even more advanced fraud protection, high-risk transactions can be handled with manual review. 

Fraud response

Perhaps one of the most guaranteed ways to enhance your risk setup is to rest different risk strategies. 

To identify the techniques that perform best for your business, it’s advisable to test the impact prior to activating new rules or making changes to existing rules. 

For example, you can test the rule based on historical data before activating it. You can also implement a range of configurations and A/B tests to figure out the most results-proven solutions for your company. 

How to know if your payment fraud strategy is good enough

Effective payment fraud management always involves ways to measure how effectively the business can block fraud. 

To be able to measure your fraud detection and prevention capabilities you’ll need to first define success. Outline what the ideal case scenario looks like, taking into consideration your peculiarities as a business.

Next, decide on what measurement KPIs will look like. What are the metrics that you need to monitor to determine how successful you are at fraud detection and fraud prevention? What types of payment fraud analytics do you need to look at?

Once you’ve figured out the answers, make sure to measure fraud extensively and benchmark it against your expectations or your competitors. 

How to protect your customers

The good news is that there are plenty of payment fraud protection methods and instruments you can rely on to minimise fraud at your company and protect your customers and partners.

Here are some of the most popular ways to prevent payment fraud:

• 3D Secure – an online payment security measure that enables companies to avoid payment fraud without compromising the shopping experience. Via this method, the scheme, issuer, and acquirer communicate with each other for data and transaction authentication. 3D secure is a compulsory fraud protection method in all countries with a PSD2 (Payment Services Directive 2).
  
• Delegated authentication – ensures conversion rates remain the same while preventing fraud at the same time. Third parties are responsible for payment authentication and are there to monitor transactions, allowing companies to provide a seamless journey with safety guarantees.
  
• Tokenization – a method that permits companies to substitute sensitive data with non-sensitive data.
  
• Fraud transaction monitoring – real-time analysis of business transactions as they take place in order to spot suspicious statistical outliers in your payment information.
  
• Preparation for seasonal peaks – some of the popular seasonal peak methods implemented to prevent fraud include fraud setup and rules, conversion enhancements, and monitoring and close analysis.

By implementing these techniques, you can stay out of the dark web realm and avoid risky transactions. As a result, you can enjoy cost reductions, a boost in reputation, happy customers, and full compliance with regulations. 

Regulatory compliance and fraud prevention standards

To ensure that your company is regulated and protected from fraud, there are a number of regulatory compliance and fraud prevention standards that must be met in the UK.

For example, these include Anti-Money Laundering (AML) regulations, which request that businesses implement specific measures to identify and eliminate chances for money laundering activities. 

The General Data Protection Regulation and the Data Protection Act are also worth becoming familiar with.

Overall, the Financial Conduct Authority acts as the main regulatory body that oversees financial services and markets in the UK. It offers a range of different guidelines that businesses must abide by to limit fraud.

Which industries face the highest risk

There’s one important thing to understand about payment fraud – there are no industries fully protected.

Any type of business can fall victim to payment fraud. At the same time, there are a few industries that stand out as extremely attractive for fraudsters.

Here are some of the business spaces that face the highest risk from fraud.

eCommerce and retail

eCommerce and retail stand out with shoppers performing multiple purchases, making these industries ideal for payment fraud. 

In addition, in order to complete a purchase, customers use diverse payment method solutions. 

Criminals can take advantage of payment system weaknesses, especially in cases where card-not-present transactions are involved.

Financial services

The financial services industry is also highly exposed to payment fraud. Think of banks, credit unions, and other financial institutions, where large amounts of money are handled on the daily and sensitive information is stored.

Some of the ways through which fraudsters can penetrate this industry include identity theft, phishing, and other schemes we outlined above.

Hospitality and travel 

Businesses like hotels, airlines, travel agencies, and other hospitality actors also process large volumes of online reservations and payments, making them lucrative for fraudsters.

In most cases, payment fraud in this sphere involves stolen credit cards, booking fraud, and chargebacks.

Insurance 

The insurance realm is another space encouraging fraudster’s appetite. 

Fraudsters can take advantage of stolen identities or false data to exploit these systems and perform different types of fraud, like claim fraud, payment processing fraud, application fraud, and others.

Logistics

Last but not least, the logistics and shipping industries are exposed to vulnerabilities when it comes to payment fraud.

Just like in some of the previous examples, such companies deal with high-value transactions and handle a range of different payment methods.

This makes them attractive for criminals who can take advantage of stolen payment data and unverified shipping transactions. 

Best practices for securing online transactions

As noted above, online payment fraud detection and prevention are crucial if you want to maintain the reputation of your business, avoid losses, and keep your customers happy.

To achieve all of this, there are a few best practices we recommend implementing.

Advanced security technology

There are a range of different security technologies you can implement in order to secure online transactions and protect your customers.

Multi-factor authentication is one of the most recommended ones, especially if you want to add another security layer by asking shoppers to verify their identity through multiple methods.

SSL and TLS are some of the encryption technologies that can help you protect information that’s sent from the shopper’s browser to your servers. 

Tokenization and EMV solutions

In addition, you can rely on tokenization and EMV solutions for maximum protection.

Use unique identification symbols or tokens instead of sensitive payment data to prevent information access and theft.

In cases where you are handling card-present transactions, use EMV chip technology, which creates unique payment codes that cannot be reused. 

Real-time transaction monitoring

Rely on real-time monitoring and transaction analysis to spot and respond to suspicious activity.

Fraud detection software can make a huge difference, especially in the cases where it uses machine learning and behavioural analytics to detect anomalies and possible fraud patterns. 

PCI compliance

Another way to secure online transactions and prevent fraud is to ensure that you’re compliant with PCI DSS (Payment Card Industry Data Security Standard. 

PCI DSS offers guidelines on ways to secure and protect payment card data.

It’s essential that you review and update your security measures on a regular basis to guarantee that your payment processing systems are up to date with the most recent standards.

Training programs

Educating employees and customers about fraud prevention is equally important.

Develop adequate training programs to help personnel and clients detect and respond to suspicious activity and possible fraud attempts.

For example, demonstrate how online security practices work, including determining what a secure website is, staying away from giving out sensitive data over email, using strong passwords, and more.

Reliable access controls

One of the most vulnerable components of any business are those related to data access.

Limit access to sensitive payment data to authorised employees only via role-based access controls. This will help prevent breaches and stolen information. 

Secure payment gateways 

Working with reputable and reliable payment gateways with advanced security features is also a must.

In most cases, payment gateways will have robust fraud detection and fraud prevention tools and instruments.

When partnering with a payment gateway, always check if they comply with industry standards and practices. 

Risk-based authentication

Last but not least, it’s highly advisable to implement risk-based authentication. 

This will help you assess transaction risk levels according to a number of factors. These can include user location, device, transaction amount, and others. 

In addition, make sure additional verification steps are put in place for high-risk transactions. 

Future trends in payment fraud detection and prevention

As fraudsters become more experienced and innovative in their schemes, the fraud detection and prevention realm must evolve to mitigate risks.

In the future, it’s expected that we’ll be seeing Artificial Intelligence and Machine Learning at the core of fraud detection and prevention. These technologies and solutions provide unquestionable pools of instruments designed to identify and limit fraudulent activities related to payments. 

AI an ML have the power to analyse large volumes of data, monitor transaction patterns, apply device fingerprinting, and more. This enables them to quickly and easily detect suspicious activity and implement measures to prevent fraud. 

Most importantly, AI and Machine Learning are capable of ongoing updates based on new fraud schemes. 

In the near future, expectations are that the following technologies will dominate the world of fraud detection and prevention:

• Dynamic verification processes;
• Behavioural pattern analysis;
• Machine learning algorithms;
• Real-time fraud detection, and others. 

Naturally, these technologies are to set the new scenes for businesses in their efforts to avoid fraud.

Conclusion

Understanding the nature of different fraud types and their implications for you and your customers is essential. Most importantly, implementing security measures and innovative technologies can help you mitigate risks and detect suspicious activity on time to prevent fraud.

We hope that this article will help shed light on the topic and will better equip you to grow your businesses with the confidence that you, your partners, and your clients are fully protected. 

Frequently asked questions

What are the methods to protect your business from payment fraud?

In order to detect and prevent payment fraud, you must put in place fraud detection mechanisms and systems and adopt robust security measures. These include multi-factor authentication, encryption or tokenization, real-time transaction monitoring, and more.

How can you detect payment fraud?

Some of the popular signs of payment fraud include sudden changes in transaction patterns, multiple small transactions from a single account, unrecognised payments, or unnatural discrepancies in billing or shipping addresses.

Can regulatory standards help prevent payment fraud?

Yet, regulatory standards like PCI DSS, GDPR, and AML regulations offer guidelines on security and protecting financial information, adopting strong authentication measures, and monitoring payments. Being compliant with these standards enables businesses to set up a secure environment and minimise fraud risks.