Payment Fraud Types: What to Watch Out For

Oct 16, 2023
4 minutes Read
Explore essential tips to safeguard your transactions from payment fraud, ensuring secure and trustworthy exchanges for all parties involved.
Payment Fraud Types: What to Watch Out For

Whenever money changes hands, there’s an opportunity for dishonest dealing. These days, credit card numbers and banking information are exchanged in e-commerce transactions without merchants, cardholders, or fiat money being present. That situation gives rise to new kinds of payment theft.

What is payment fraud?

Fraud is cheating, trickery, or deception to gain an advantage. With payment fraud, that deception involves stealing credit card numbers, banking information, or identities to purchase goods or services or acquire money. Payment fraud types are categorized by the techniques fraudsters use to extract financial information.

Common types of payment fraud

Technologists aren’t the only innovators out there. Unfortunately, fraudsters are also talented, inventive, and creative people. Whenever a new payment method or e-commerce trend emerges, there is an opportunity for payment fraudsters to update their tactics. Here are the most common types of payment fraud to watch out for.

1. Phishing

In these scams, fraudsters send convincing but phony emails posing as legitimate companies – banks, government departments, or businesses. Those messages try to acquire your credit card or financial information by asking you to verify a recent purchase or validate your information to win a prize. Sometimes they ask you to click a link or call them to update your account information.

2. Smishing

It’s the same thing as phishing, but it happens via text message. Be wary and remember that banks and governments organizations will never ask for payment information by text or email.

3. Identity theft

In digital spaces, you are your data. When a criminal collects enough details about you to convince a store or financial institution that they’re you, that’s identity theft. With your name, address, phone number, social security number, and other identifying data, fraudsters can buy things as you or open accounts in your name to apply for loans or rebates. Criminals obtain information by phishing, hacking into company databases, and even searching through discarded mail.

4. Skimming

Fraudsters attach special devices to card readers at payment terminals and bank machines that extract payment details from the magnetic strips on credit cards. Sometimes they place cameras near payment terminals to record customer PIN numbers. That information is then used to make fraudulent purchases.

5. Card-not-present fraud

This type of payment fraud is the result of the others. Once a fraudster obtains credit card information, they can use it to make unauthorized purchases online or over the phone.

6. Chargeback fraud

The terms of credit card contracts are designed to protect consumers from fraud. In chargeback fraud, customers rely on these protections in error or game them on purpose. It starts by customers making legitimate purchases. Later, they dispute the purchase, claiming they didn’t purchase the item or it never arrived.

Sometimes the purchase amount is returned and the customer keeps the merchandise. Sometimes a “replacement” delivery is made and the customer gets two items for the price of one. Either way, merchants lose revenue, time, and products, and sometimes face penalties. This type of payment fraud is also called friendly fraud, refund fraud, or double dipping.

7. Business email compromise (BECs)

BECs are similar to phishing, but the criminal writes from a stolen business email account posing as a third party vendor or company executive. The emails ask employees to pay fraudulent invoices or transfer money into fraudulent accounts. The messages often contain a sense of urgency to encourage employees to act quickly.

Thankfully, payment systems have extensive and sophisticated fraud detection controls in place to minimize criminal activity. The most important thing to do with payment fraud is to defend yourself and your business against it. Fraud protection is necessary for peace of mind – for business owners, employees, and customers. Measures need to be in place to protect both financial assets and customer data and ensure regulatory compliance.

We’ll share detection and prevention tips and techniques in a future blog. For the time being, you can feel confident that being aware of the range of payment fraud types is half the battle.

Would you like to offer your customers a faster, more convenient, and fully secure payment experience in-store and online? Call today and speak to one of our specialists at OTT Pay.