Payment Fraud Types, Detection and Prevention in E-Commerce

E-commerce has completely changed the way of business and payment since the day it emerged. It also brought dangers such as payment fraud to the business world. Before getting into the subject, let's start with the definition of e-commerce. E-commerce is defined as an electronic business model that has emerged with the increasing use of the internet. It makes possible to sell goods and services over the internet. Of course, online payments are the most important element of e-commerce and the method used in carrying out transactions. Although there are many benefits and conveniences of online payments, the possibility of fraud has also increased in correlation with demand. Payment fraud has opened a new window for fraudsters. In this case, it is necessary to protect the business and customers from payment fraud that may arise.

Common Types of Payment Fraud in Ecommerce

1. Friendly Fraud (Chargeback Fraud)

2. Card Testing Fraud

3. Identity Theft

4. Refund Fraud

5. Triangular Fraud

6. Account Takeover Fraud

Payment frauds can take different forms as we can see. In order to prevent them, it is necessary to know where and how they occur. To beat them, you need to know your enemies first! Let’s find out how these various fraud types take place.

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Friendly Fraud (Chargeback Fraud):

After purchasing a product or service, customers may request a refund, claiming that they did not receive the product or that the transaction is invalid, even if it’s not true. In this case, the banks pay the customer the repayment of the transaction. People may also aim to receive free products or services. In some cases, although the consumer is right, this method is a method for payment fraud.

Card Testing Fraud:

Fraudsters steal someone's card data or buy it from the dark web. To see the transactionability of these cards, they try shopping sites and make small payments with the cards. These small payments are hard to spot, but once fraudsters find out that one of these cards is transactionable, they can spend big and causing huge losses. Also, if these small payments turn into chargebacks, it's also a loss for merchants.

Identity Theft:

Fraudsters will try to steal consumer’s information by imitating a website or online store and request personal data from people. Phishers can steal names, emails, contact numbers and payment information. This is the most common type of payment fraud.

Refund Fraud:

After stealing credit card information, fraudsters want a refund for their transactions with the stolen card and they want this refund to be transferred to a different account or they want to be paid by an alternative method.

Triangular Fraud:

There are three actors in this fraud: fraudster, merchant and customer. The fraudster sets up another online store with competitive prices and attracts customers. After customers place an order, fraudsters get their card information and send products or services to the customers by taking the products from this e-commerce store with the stolen information. The stores use these stolen cards for payment and send the products to the fraudster.

Account Takeover Fraud:

When users (customers) log into any online banking or store site, fraudsters can gain access to these accounts. This is usually due to a low security password or using one password on multiple accounts. After capturing these accounts, they can make purchases, make payments and change the account information of the customers.
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How to Detect Payment Fraud?

There are some points that we should pay attention to and monitor in payment fraud detection. Some of them are:

• Locations that the cardholder has not ordered before
• Large payment amounts
• Multiple card usage from the same IP address
• Too many orders for the same product
• Multiple shipping addresses
• Too many transactions in a short time
• Delivery and order addresses that are not the same
• First-time ordering accounts

How to Fight with Payment Fraud?

In your fight against payment fraud, a smart helper might be a great ally. By a smart helper we mean fraud detection tools such as Formica. Thanks to its advanced features, it’s capable of protecting your business by optimizing the process profitably and increasing the success rate in payment fraud prevention. With the support of the artificial intelligence powered real-time fraud detecter Formica, you can prevent fraud before it happens.

Especially on holidays and on days such as Black Friday, New Year's and Valentine's Day, the transaction volume is very high. Customers may ignore some security steps and merchants may have difficulty in tracking suspicious transactions due to large amounts of transactions. These days, one should be careful and follow the steps to payment fraud prevention and get help from software.

When sending documents within the company or related to payment information to customers, it is necessary to ensure that only designated people can access these documents and that encryption and data are secure.

Finally, it is necessary to constantly monitor information such as transaction amount, address, card number related to the transactions made. As a result of these investigations, a blacklist should be created from the fraud detections made in the past so that the same fraudulent transactions do not occur again.  

Now you know what payment fraud is, its importance, its types, the points we need to pay attention in detecting fraud and what needs to be done to fight against it. If you want to learn about other types of fraud in e-commerce and develop solutions to protect against them, you can check our e-commerce fraud prevention piece!

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