Digital Payments Payment Gateways

12 Common Types of Payment Frauds & How to Mitigate Them

The Indian Cybercrime Coordination Centre reported a rise in digital financial fraud, which has led to a loss of Rs. 1.25 lakh crores over the last three years. Approx. 13,000 cases were registered in 2023 to record the financial fraud that severely impacted the finances of businesses and customers.

An Overview of Payment Fraud

Payment fraud is a type of financial fraud that occurs through the intentional usage of false or stolen payment information to obtain money or goods. Nowadays, it is considered a growing concern for all businesses and industries dealing with large customer payments.

Meanwhile, payment frauds are deliberate and unauthorized fraudulent activities that bypass or steal sensitive information regarding the payment system. They also attract legal and regulatory consequences.

The 12 Common Types of Payment Frauds

Payment fraud is categorized into different forms, leading to unavoidable loss and damage to reputation. The 12 common types of payment fraudulent actions are as provided below:

1. Chargeback Fraud

Chargeback fraud, commonly known as friendly fraud, is the most common type of fraud, and it has greatly increased in the last few years. Merchants find this type of fraud to be one of the most challenging payment frauds, leading to loss of services or payment.

Chargeback fraud happens when customers buy something and tell their credit card company that the charge wasn’t authorized. They might do this on purpose, use a stolen credit card, forget they made the purchase, or take advantage of easy refund policies. To avoid this, businesses can implement stronger verification processes and keep clear records of transactions. However, the risk of such fraudulent activities can be easily prevented:

• By a signature of the customer as proof of delivery when receiving the product or service;
• By confirming all orders via email or text;
• By applying ‘frictionless transaction monitoring’ for your business;
• By capturing the CVV code for card-not-present transactions;
• By implementing fraud detection tools like address verification or IP geolocations.

2. Triangulation Fraud

Triangulation fraud is one of the most common types of payment fraud, and it involves three participants (i.e., unsuspecting customers, online stores, and stolen data) in the transaction. The triangulation fraud occurs upon the happening of the following series of events, as provided below:

2.1. 1^st Instance or Happening

When a legitimate customer purchases a product or service from a fraudster third-party marketplace seller.

2.2. 2nd Instance or Happening

When the fraudster third-party places an order on a genuine retailer (like eBay or Amazon) for the same products that the legitimate customer ordered.

2.3. 3^rd Instance or Happening

When the fraudster third-party pays for the transaction with stolen payment information or credit card purchased on a dark web.

2.4. 4^th Instance or Happening

When the order is processed and sent to the customer by a genuine retailer.

2.5. 5^th Instance or Happening

When the customer receives the ordered item, the genuine retailer will process a fraudulent transaction.

3. Clean Fraud

Clean fraud incorporates fraudulent transactions that appear to be legitimate, which is problematic for merchants as the transaction is not permanently blocked or flagged. Hackers committing clean fraud use their extensive knowledge of the details of the card and cardholders (i.e., real customer data) to fool the system or commit cybercrime.

4. Identity Fraud

Identity fraud is one of the widely operated payment frauds, affecting the identity of the victims through theft and concealment of their identity and personal information.

4.1. Merchant Identity Fraud

It is one type of payment fraud in which fraudsters present themselves as legitimate merchants by using stolen cards and setting up a merchant account. Bust-out fraud, identity swap, transaction laundering, and deep fake AI are some of the common merchant identity frauds. It is also known as data breach exploitation.

4.2. Phishing Attacks

A phishing attack is a type of social engineering fraud that includes tactics used to deceive people by use of fraudulent emails, text, messages, or websites. The tricks manipulate the individuals to disclose sensitive information, including login credentials and card details.

Phishing attacks are further classified into email phishing, spear phishing, whaling, smishing, pharming, and vishing phishing, which are types of payment fraud.

5. Skimming

Skimming is a type of payment fraud in which a device called a skimmer is used to steal the information on the victims’ debit and credit cards. The fraudsters attach skimmers and small cameras to ATMs or sale terminals, such as petrol pumps and self-service checkouts.

There are specific signs for the detection of skimming devices present in ATMs. Some of the ways of identifying the skimmers are provided below:

• Loose or damaged card readers;
• Extra or inappropriate device attached to the ATM;
• Device different form payment terminal attached in the ATM.

6. Business Email Compromise

Business Email Compromise (BEC) is a type of payment fraud that involves scanning employees for transferring money to fraudulent accounts. The fraudsters use legitimate-looking emails, similar to those of a high-level executive or vendor.

The identification of BEC, which exploits human trust in authority, is possible by interpreting the following fraudulent activities:

• Urgent request for transfer of payment;
• Unusual instructions for payment transfer;
• Emails with unusual grammatical or spelling mistakes.

7. Man-in-the-Middle Attack (MITM)

The man-in-the-middle attack (MITM) generally occurs invisibly, i.e., without the merchant or the customer’s knowledge. Here, the fraudsters intercept communication among customers and merchants to exploit vulnerable software or Wi-Fi signals.

This leads to the stealing and inhibiting of sensitive payment information, data, and login credentials of the customers.

8. Card-not-Present Fraud

Card-not-present fraud (CNP) is one type of payment fraud when the details of the stolen credit or debit card are presented for online purchases on e-commerce websites. CNP fraud is continuously increasing due to social-engineering tactics like phishing, etc.

9. Mobile Payment Fraud

Mobile payment fraud is one type of payment fraud caused by the unauthorized use of mobile payment services like Apple Pay and Google Wallet. It occurs when fake mobile payment accounts are created using the credentials and information of genuine individuals. In the year 2022, mobile payment fraud created approximately 70% of the fraudulent transactions through the use of mobile devices.

10. Account Takeover Fraud

Account takeover fraud includes hacking of your online payment account by an unknown person. The fraudsters hacking your online account hold access to your personal and financial information and have the authority to transact under your name.

Account takeover by fraudsters might lead to the following consequences as provided below:

• Change of account information and login credentials;
• Lock you out from the account;
• Carry out unauthorized transactions.

11. Wire Transfer Scams

Wire transfer scams, also termed wire fraud, occur when fraudsters scam by creating a convincing and manipulative urgency for an immediate wire transfer of funds into their account. The following are the crucial red flags that need to be thoroughly evaluated:

• The manipulated victims wiring out of money in a sense of urgency;
• The manipulated victim sends a check in exchange for a return payment;
• The manipulated victims are asked for a confirmation code before the withdrawal of the funds.

12. Invoice Fraud

Invoice fraud is a type of payment fraud in which fraudsters present fake invoices to trick victims into making payments. The fraudsters use real information to compel the victims to pay the invoices.

How does Payment Fraud Impact Business Setups?

Payment fraud has an unfortunate and serious impact on the business setup. Consider the following cons of payment fraud, which adversely affects the business setups:

• It leads to financial loss;
• Adverse effect on customer retention;
• Decreases customer lifetime value (LTV);
• Charged with additional chargeback fees;
• Damage to business reputation;
• Long-term loss of customers and revenue;
• Legal and regulatory consequences;
• Causes operational disruption;
• Threatens business finances and customer policy.

How to Mitigate Common Types of Payment Fraud?

Mitigating the most common types of payment fraud does not solely mean preventing fraud. But, it also talks about preserving the company’s ability to focus on more constructive tasks. Below are some of the methods or preventive measures required to mitigate the common types of payment fraud:

1.    Use Secured Payment Methods

Acquiring a PCI-DSS compliant Payment Gateway License to secure payment methods and avoid different types of payment fraud. Also, businesses must use other payment methods, including EMV chip cards, mobile payment, NFC contactless, and encrypted payment systems, to secure the whole payment mechanism operated in the business setup.

2. Implement Strong Authentication Measures

Businesses must implement strong authentication measures (including biometric authentication), which are required for the two-step authentication and tokenization of card details.

3. Regular Monitoring of Accounts

Businesses are required to regularly monitor their accounts to capture any fraudulent or suspicious payment fraud.

4. Use Fraud Detection Software

The business must use fraud detection tools and software, such as address verification and IP geo-location tools, to identify suspicious activities associated with customers.

5. Limit Access to Sensitive Data

Businesses must limit access to sensitive data like customer credit card and bank account details. The restriction or limitation imposed by businesses assists them in avoiding any type of loss arising from the breach of financial data.

6. Stay Up-to-Date with Security Measures

Businesses are required to stay up-to-date with the latest security measures and software updates to evaluate and mitigate the loss arising from payment fraud. They must also use Artificial Intelligence (AI) to revolutionize payment fraud detection techniques.

Benefits of Payment Fraud Protection

Businesses enjoy certain key benefits of implementing preventive measures for protection from payment fraud. Some of the benefits are provided below:

1. Protection of Financial Assets

One of the benefits of payment fraud protection is the protection of the business’s financial assets. It generally eliminates the possibility of loss caused by fraudulent practices. Simply put, fraud protection creates future reliability for the business by reducing the risk of financial loss and business assets.

2. Protection of Customer Data

Another benefit of payment fraud protection for businesses and customers is protecting customer data. Businesses implement payment fraud protection measures to protect their customers’ personal and financial information and build a sense of trust and loyalty among them.

3. Chargeback Mitigation

The measures prevent businesses from chargebacks, which can result in revenue or merchandise loss. Chargeback mitigation involves detecting fraudulent transactions and identifying chargeback vulnerabilities.

4. Maintains Customer Loyalty

By taking preventive measures to avoid the different types of payment fraud in India, businesses can secure their reputation and customers’ loyalty. Implementing payment fraud protection measures is considered a commitment to security.

5. Ensures Compliance with Regulations

Implementing fraud protection policies and regulations has avoided fines and penalties resulting from any personal or financial data breach.

Conclusion

Businesses must be active and aware of the tools and strategies used to safeguard or protect themselves from existing types of payment fraud. Payment fraud, including email phishing, account takeover, and wire transfers, are scams in which hackers target businesses with reputable payment processing. Businesses are required to spread awareness among the entity’s members and customers regarding the possibility of financial data breaches.

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