What Is Payment Fraud and How to Avoid It?

What Is Payment Fraud and How to Avoid It?

Online payment solutions provide consumers with a more convenient shopping experience and merchants with more possibilities for expanding their online businesses.

However, new payment solutions also open doors to growing risks of payment fraud –particularly online payments. Experts predict that online payment fraud losses will exceed $206 billion globally in the next four years.

Read on to learn more about payment fraud types and how merchants can improve the safety of their online store and payment system.

What is payment fraud

Payment fraud is the act of stealing and using another person’s payment information to make unauthorized purchases or money transfers. Fraudsters typically use stolen credit or debit cards to complete transactions, but other types of payment fraud are also on the rise.

How Does It Happen?

Fraudsters steal or buy sensitive information such as banking data, social security numbers, and login credentials, and use them to make unauthorized purchases. With the prevalence of fraud in ecommerce shopping, most payment frauds happen online.

Cybercriminals use different types of fraud to scam their victims and obtain the information they need.

Types of Payment Fraud

Some types of payment fraud are highly technical, while others rely on human error.

To improve ecommerce website security and minimize fraud-related losses, merchants should learn to recognize different payment fraud types.

Credit Card Fraud

Credit card fraud is among the most frequent types of identity theft. Fraudsters use lost or stolen credit cards to obtain goods, services, or funds without paying for them.

Card-not-present (online) transactions pose the greatest risk. Even if the criminal doesn't have the PIN, they can make the purchase with basic information, such as the cardholder's name, the credit card number and card expiration date.

Clean Fraud

A subtype of credit card fraud is clean fraud. Clean or true fraud is when a fraudster uses a stolen credit card to make a transaction. It's called "clean" because the transaction appears to be legitimate. The only way to stop a clean fraud is multi-factor authentication.

APP Fraud

Authorized push payments (APP) fraud involve the use of different scams, like social engineering or phishing, to trick victims into authorizing a payment to the fraudster's account.

Authorized push payments are instant transactions and cannot be revoked. Fraudsters use that to their advantage and quickly get the funds out of the account once the transaction is approved.

Friendly/Chargeback Fraud

Friendly fraud occurs when a consumer orders a product and then requests a chargeback. On some occasions, the chargeback request is genuine and happens when the customer doesn’t recognize a charge on their bank account. However, most friendly frauds occur when the customer wants to receive a product or service for free.

Note: Learning the difference between chargebacks and refunds helps merchants bring the right refund policy to prevent excessive chargebacks and, consequently, reduce chargeback fraud.

Online Phishing

Online phishing

Online phishing is a type of scam where people are manipulated into sharing sensitive information by responding to scam emails or text messages. Online phishing scammers create a sense of urgency and create a circumstance in which the victim should provide personal information.

Often, scammers pose as consumer support representatives of popular brands. As a merchant, it’s important to identify such scams and warn your consumers about it. That way, you minimize the damage to your brand reputation.

Merchant Fraud

Merchant fraud involves creating a fake website to collect payments from customers without sending them purchased goods. The fraudsters usually take down the fake website after tricking a certain number of consumers, only to open a new fake website and trick new unsuspecting visitors.

Triangulation Fraud

Triangulation fraud is when fraudsters create a fake ecommerce website selling goods at attractive prices. When a customer buys a product, the fraudsters order the same product from an authentic website using the customer’s payment information. The customer ends up paying twice – once to the actual retailer and once to the fraudsters.

Account Takeover Fraud

Account takeover fraud occurs when someone unauthorized takes over a bank account or gains access to an online account. Usually, this type of payment fraud occurs in combination with other types, such as phishing and credit card fraud.

To take over a bank account, the fraudster uses social engineering and calls up the bank in an attempt to cancel an existing credit card and have a new one sent to them instead. Then they use the new credit card to make unauthorized purchases. However, most banks have built-in procedures that stop this type of fraud.

So, attackers have turned to gaining unauthorized access to digital bank accounts, e-wallets and ecommerce shop accounts. Once in, the attackers order goods, withdraw funds, or otherwise manipulate the account.

How to Prevent Payment Fraud?

How to prevent payment fraud

Payment frauds inhibit business growth and damage the merchant’s reputation and customer trust. For that reason, it’s essential to coordinate efforts to improve the business’s payment system security.

The following strategies help minimize the risk of payment fraud:

  • Maintain awareness of payment fraud strategies. Fraudsters continually invent new ways to commit payment fraud. Keeping up with ecommerce fraud trends helps you combat them. For example, reduce friendly fraud attempts by introducing clearer chargeback policies. Better security software, frequent password changes, and multi-factor authentication help avoid phishing scams.
  • Partner up with a reliable payment processor with robust security. The safety of your customers’ transactions largely depends on your payment processor. Before you partner with a payment provider, check the level of their security measures. A good payment processor should be PCI and PSD2 compliant, have advanced fraud screening tools, SSL-encrypted online payment forms, and should not experience outages.
  • Carefully monitor transactions for any suspicious payments or inconsistencies. If you notice unusually small transactions, different credit cards from the same IP address, or other transaction details that raise your suspicions, don’t process the transaction until you verify the payment.
  • Require customer account login to make a purchase on your website. Requiring user accounts adds a level of verification before a transaction is made. Fraudsters can still hack into user accounts, but it’s an added level of difficulty that many fraudsters will avoid.
  • Regularly require use password updates. Set up a password policy for user accounts on your online store. Require users to set up strong passwords and set up a password update policy. Password policies minimize the chances of account takeover and confidential data breaches. Remind your customers to frequently change their user login passwords.
  • Regularly update your online store’s software. Fraudsters look for leaks in software protection to hack into accounts and steal confidential information. Up-to-date firewalls, security patches and hosting solutions make it hard for cyber attackers to get into the system and wreak havoc.
  • Invest in fraud detection software. Fraud detection tools help online businesses reduce fraud-related losses and improve customer experience by monitoring transactions, identifying security breaches, and sending alerts for potentially fraudulent behavior.
  • Be upfront about data breaches. If you experience a data breach or if any scammers are specifically targeting your consumers, be upfront with your buyers. Let them know about it and minimize the potential damage the scammers might make.

Note: CCBill provides an advanced fraud scrubbing system to all of its merchants. The system applies hundreds of checks on each transaction before the data is sent to banks and credit card associations. CCBill’s fraud protection system minimizes your exposure to fraud and chargebacks.


With the popularization of diverse digital payment options, new payment fraud types emerge. Banks, payment processors, and financial institutions invest a lot of money in securing their systems, so criminals target less protected organizations.

Merchants need to recognize the growing threat of payment fraud and implement strategies to protect customer information.