What Is Payment Fraud Detection? + Prevention Tips

It’s no secret that ecommerce has taken over. The pandemic only expedited this shift, increasing online transaction values by 20% and initiating a surge in online business for many organizations. Lesser known, however, is that as online business grows and machine learning improves, so does the risk of fraud. Local businesses are projected to lose over $343 billion to online payment fraud between now and 2027. 

For local businesses with fewer resources to spare, detecting and preventing fraud is becoming increasingly important. When someone scams you, it’s not the same as Amazon or Apple–it can have a direct impact on your ROI in a devastating way. What you need is a quick tutorial to get the know-how. And we’re here to help.

Read on for our guide to detecting and preventing payment fraud without breaking the bank. We’ll also share how Podium can help you deal with payment processing more securely and efficiently.

What is payment fraud?

Payment fraud is a transaction made without the consent of the legitimate owner of a payment instrument. Essentially, it’s a high-level type of theft that occurs when an individual steals someone’s payment information and proceeds to use that information to make unauthorized purchases or perform fraudulent activities. 

As payment types have evolved, so have methods of fraud. And if you don’t know what to look for, an unfortunately-timed scam can set you back quite a bit. Depending on the type of fraud and the way someone’s payment information was obtained, your customers may also be at risk, leading to a breakdown of trust in the security of your operations. 

This is why payment fraud detection and prevention is essential to maintaining strong relationships with your customers as well as protecting your business and employees. 

Types of Payment Fraud

As we mentioned, increased methods of payment have definitely taken a load off of small businesses and consumers, but they’ve also increased the number of ways someone’s payment information might be stolen or abused. 

The first step to detecting and preventing payment fraud is knowing how to identify the different types of payment fraud. Below, we’ve included six common types of payment fraud and how to detect each. 

1. Identity Theft

If you’ve seen the comedy Identity Thief, you know the gist of the nightmare that is identity theft. This type of fraud occurs when an individual attempts to steal someone’s identity via intimate identifying information, such as your name or social security number, and use it without permission. Identity theft is the big umbrella under which most types of fraud rest and can significantly damage customers’ credit, reputation, and more. 

How do you detect it? For starters, always apply technology that analyzes consumer behavior to detect transactions that raise suspicion (like multiple purchases with the same phone number or ordering an unreasonably high volume of goods). Be on the lookout for unfamiliar charges and unreceived bills. 

2. Credit Card Fraud

Credit card fraud occurs when an individual steals someone’s card (or card numbers and card details) and uses it to make fraudulent transactions with your business or remove money from the account it’s attached to. And it’s a national problem. The number of credit card fraud victims in America increased to 150 million this year alone. Nowadays, fraudsters have a number of devices that allow them to swipe or “scrape” credit card information from a distance, making this type of fraud very popular. 

How do you detect it? Again, behavior analytics technology is your friend. You can also easily implement card identification (CID) or address verification (AVS) into your checkout process to confirm that a physical card is present and verify the location of the payment. 

3. Card Testing

Individuals perform card testing fraud when they “test” stolen cards on your website (or in person) to see if they’re still active. These “tested” cards can then be used to make unauthorized purchases or sold on the dark web for a hefty price. Typically, a scammer will test a card by signing up for a free trial of a subscription. 

How do you detect it? Apply behavioral analytics tech (are you starting to see a pattern?) and take the time to really understand the patterns and frequencies of your customers’ purchasing behavior. For example, always take time frames into account. Card testers will often initiate a number of transactions in a very small window. 

4. Account Takeover

With this type of card-not-present fraud, fraudsters gain access to your customer’s account and make changes to key account details. Typically, they create deceptive websites that steal credentials when customers make an account (or transact, etc.), or hack into websites where people keep accounts that include saved payment information.

How do you detect it? For starters, apply timeline visualization to track and project what is typical of your customers and compare this to what happens when accounts are taken over. (Detecting fraud really centers around understanding your customers and their behavior at a granular level.) You can also require customers to re-verify every time they change information on their account. 

5. Refund Fraud

An individual commits refund fraud when they make money by requesting refunds from your business. This can involve requesting a refund for a good that was never ordered, requesting for a good that has been delivered, or requesting for a “returned” product that is actually counterfeit. This type of fraud is one to keep a close eye on as it’s growing rapidly and is not as easily detected as others. 

How do you detect it? Bring all of your transactions together into a single payments channel. Having all of your transactions, whether online, in-app, or in-store, register in the same system can really help you understand the lifecycle of your customers and their purchasing patterns. You can also apply customer risk rules. 

6. Gift Card Fraud

This type of fraud is a doozy because gift cards are hard to trace. (And because they’re not linked to a personal account, they’re also much less regulated than other types of cards.) Someone might use stolen credit or debit card information to purchase a gift card or purchase a good from you and then return it for a gift card.  

How do you detect it? Apply a personalized combo of customized risk checks and blocking (based on these checks). Perform double verification when providing refunds, and use custom risk rules to keep your customers safe. 

How to detect payment fraud?

While advancements in technology have made it easier for people to commit fraud, they’ve also made it easier for businesses to detect and prevent it faster, allowing you to protect your revenue and provide the reliability and high-quality customer experience your business is known for. 

1. Monitor account activity.

One of the best ways to detect fraud is to monitor account activity. Implement technology that allows you to track customer activity and flag for irregular or suspicious activity, like sending a number of the same items to the same address using various purchasing details or changing a shipping address multiple times. 

2. Manually monitor chargebacks and refunds.

A chargeback fraud, or friendly fraud, is when a fraudster makes a purchase and receives the product or service but claims they never got it in order to get their money back. Like refund fraud, this is an increasingly popular method to scam your business. To mitigate this fraud risk, take the time to manually review and approve chargebacks and refunds and investigate or verify suspicious claims or patterns. 

3. Analyze customer behavior.

We’ve said it before and we’ll say it again–fraud detection and prevention is all about analyzing and understanding your customer behavior. Because you don’t have the time to personally understand each customer profile, make sure to invest in technology that carefully analyzes behavior and flags irregularities that break the pattern.

4. Review account reconciliations.

Looking for another layer of account protection? Take the time to review each account at designated intervals (typically the end of a financial period)  and verify that the listed balances are accurate. 

5. Establish alert systems.

A helpful way to detect fraud is to establish alert systems. Besides the basics, the most helpful systems are personalized to each customer, centering around custom risk rules and checks, risk scoring, and advanced algorithms. As always, remember that detecting fraud correctly starts with storing data and information safely. 

6. Utilize fraud monitoring tools.

Yes, fraudsters have gotten better–but so has fraud detection. Take advantage of fraud monitoring tools for your risk management. Top providers of 2023 include: SEON. Fraud Fighters, ClearSale, Signifyd, IPQualityScore, Eye4Fraud, CertifID, TruValidate, Sift, Nofraud, and DataDome. 

How to prevent payment fraud?

Having multiple, effective detection systems in place is a no-brainer when it comes to protecting yourself and your customers. But ultimately, the best way to detect payment fraud is by preventing it. That’s why we’ve included six simple steps for fraud prevention. 

1. IP Address Analysis

On top of geolocation verification, use an IP analysis tool to check if a fraudster is using a proxy, emulator, or VPN to hide their connection. 

2. Email and Phone Analysis

Always check if a phone number or email address was sent from a suspicious (disposable or free) address, was noticeably difficult to authenticate, or has appeared in any data breaches. 

3. Regularly Update Security Software

Fraudsters are always changing, and you should be too. Make your systems a moving target by regularly updating your security software to get rid of weaknesses and bugs. 

4. Stay Updated on Security Measures

To consistently protect your business, you need to stay updated on the latest security measures–and the latest scamming methods. Luckily, there are several organizations dedicated to keeping businesses in the know. Periodically read blog posts and articles such as those put out by the Better Business Bureau. 

5. Implement Strong Authentication

Double, or even triple, authentication is a no-brainer in the current business atmosphere. Use personalized questions and even quizzes to keep your customers safe. 

6. Social Media Lookup

Double-check a customer by seeing if their card information matches their social media profile. You can use this method to verify names, locations, etc., and confirm whether certain accounts belong to bots, cyber-criminals, or legitimate customers. 

Payment Solutions for Every Business

As we mentioned, having a single payments system for all of your transactions can make all the difference in providing a critical layer of fraud protection for your business–and your customers. 

Podium Payments protects every payment method, bringing all of your transactions together into one place with world-class tracking and behavioral analytics that give you data in real-time. With top-tier tools, it helps local businesses automate their payment processes and significantly reduce risks–even when using high-risk methods. Podium offers an all-in-one solution for processing payments and achieving business growth, making effective payment fraud management feasible for a team of any size. Try it for free today. 

Hungry for more? We thought so. Check out 5 Ways to Protect Your Business Against Fraud this Holiday Season to further reduce your fraud rates and optimize your fraud solutions.