Online businesses are more vulnerable to fraudulent activities than ever before. Currently, an estimated 33% of the world's total population shops online, and the percentage is expected to rise even more in the future. This leaves consumers exposed to a higher possibility of fraud attacks and eCommerce merchants in greater need of specialized payment security measures.
But what classifies as a fraud activity?
What are fraud activities?
Simply put, fraudulent activities are actions performed by a cybercriminal and involve one or more false or illegal transactions.
Online and offline merchants can experience different types of fraud. However, in the case of online merchants, the risk becomes much higher as transactions are executed under non-face-to-face conditions where the order is placed on a credit card that is not present (this is fittingly called card-not-present fraud). Therefore, it has become imperative that online and MOTO merchants understand fraud risk and proactively prevent fraudulent transactions before they are executed. There are several types of fraud activities, some of which we will be covering in this article.
Types of fraud in online payments
Let's understand the many ways perpetrators commit fraud and cause significant losses for the victims of their wrongdoings.
Credit card fraud
Credit card fraud, aka payment card fraud, covers a wide variety of crimes whose theme is that a criminal steals someone's credit card information and uses it for illicit purposes without their consent and knowledge. We will cover some of its sub-types below, such as unauthorized purchases and identity theft, in more detail. Common methods of stealing customer information for the purpose of financial fraud include data breaches, phishing, and social engineering.
Unauthorized purchase theft
This type of fraud involves unauthorized purchases, where hackers illegally gain access to and use the customer's details to make purchases or fraudulent transactions for personal gain. These details may include the victim's delivery address, purchase history, and payment data.
If online merchants do not store their customers' personal and financial information securely, they will be faced with numerous illegitimate purchases that will lead to loss of sales when the victims of fraud file for order cancellations and refunds as soon as they realize that they have been scammed.
Identity theft
Identity theft is another common type of fraudulent practice in online shopping. Just like with the previous fraud type, the personal information and card details of the customer are exposed due to low-security measures from the merchant's end. However, in this case, identity theft occurs when the stolen information is used by the thief to buy goods online or offline, create a new credit card, or even create a new ID.
Identity thieves usually use phishing scams to obtain information by contacting the intended victim through a fake email address, pretending that they belong to the client's bank or other legitimate party, and deceiving them into revealing their private info. The email asks the customer to enter their login details, card details, and other critical data in order to confirm their account. This way, fraudsters not only get access to the client's financial accounts but are also free to proceed with making purchases through online stores after stealing the client's identity and credit card details.
Chargeback fraud
One very common type of fraudulent activity is chargeback fraud, also known as friendly fraud. In this type of fraud, the customer, an authorized person, carries out a legitimate transaction but later asks their credit card company for a chargeback with the fake excuse that they didn't receive their order or that they were wrongfully charged for a fraudulent transaction.
For example, a cardholder may knowingly want to get their money back for a product or service that was already delivered to them because the regret or realization of the purchase hits them after the payment has been made. They appeal to the merchant, who denies the request due to the lack of a good reason. So the customer approaches their bank directly and disputes the charge. The bank takes a decision based solely on whatever documentation the customer may provide, resulting in an unfair reversal of funds.
However, not always is the customer deliberately trying to defraud the vendor. Sometimes, the cardholder might just be confused or misguided about a purchase they made and ask the merchant for a refund. They might genuinely have forgotten that they made a purchase, or perhaps another member of the family made an online purchase without informing them. Such types of chargebacks still affect the company's financial health and revenue and thus warrant protective measures.
A high number of chargebacks can result in the business losing the right to process online payments with an acquirer, so it is vital to have a chargeback fraud management strategy in place.
Other types of fraud activity in different contexts
While we are on the topic of fraud, let's also go over some other related and unrelated activities that are classified as fraudulent in contexts outside of our own.
Wire fraud
Wire fraud is a broad term specific to the US. It covers all types of fraud activity that are carried out over any form of electronic communication channel, such as the internet, email, or even text message. This could end up in not just fraudulent transactions but even loss of cash, property, or other assets.
Tax fraud
In tax fraud, companies or individuals try to avoid paying taxes either by not filing their returns or by employing tactics such as understating revenue, overstating expenses, or falsifying other information on their financial records when filing their tax returns. Depending on the criminal's location, law enforcement agencies can impose serious punishments for tax fraud, from penalties to jail time.
Bankruptcy fraud
When a person files for bankruptcy, they must declare all their assets so that they can be accounted for to aid the repayment of their total debt. Bankruptcy fraud occurs when a person includes false or misleading information in their bankruptcy documentation to protect certain assets from being seized.
Securities fraud
Also known as stock fraud or investment fraud, this type of fraud is carried out by investment brokers, advisors, corporate insiders, new small businesses, or any other parties who are capable of influencing investors' decisions. They may misrepresent companies on the stock market, indulge in insider trading, falsify companies' performance records, etc., to cause investors to make the wrong decisions which result in a loss for them and unlawful gain for the fraudsters.
How can fraudulent activities be prevented?
Merchants can take various proactive measures to prevent fraudsters from attacking their business.
For instance, a very useful tactic for avoiding credit card fraud is to have clear and on-point descriptors for their business. By including the company's business name, you'll help your customers easily recognize the transaction on their card statement.
Tracked shipments that request a signature upon delivery are another way to avoid fraudulent activity which occurs through chargebacks. Make sure to include a tracking number for every order you send and request the customer's signature at the delivery point to avoid chargeback disputes from cardholders who will claim that they didn't receive a product they purchased.
Merchants can detect unauthorized purchases by monitoring patterns in their online orders. For example, if a customer places unusually large, high-value orders for the same items or makes purchases from a single IP with multiple card numbers, these can be seen as signs of fraud.
However, when a merchant has a large-scale operation and handles high volumes of online transactions, such manual monitoring can become a massive challenge. Digital solutions such as risk management tools or other specialized software offered by payment gateways can efficiently automate these processes.
What kind of fraud management tools are effective?
There are a plethora of fraud management tools and financial protocols integrated into a payment platform which are a must for every online merchant who is looking to take preventative measures to intercept fraudulent transactions. Here are some examples.
- 3D secure – used to prove that the card user is also its legitimate owner
- Geolocation – involves collecting location and connection data of the user to authenticate their identity without compromising their privacy
- Pre-authorization – used to reduce chargebacks caused by fraudsters by holding the client's funds for a few days
Conclusion
Payment card fraud and other types of financial fraud activities can have devastating consequences for merchants. In the case of friendly fraud and chargebacks, for instance, fraud costs can include not just the cost of shipping any returned items along with the revenue loss that it brings but also the miscellaneous fees often associated with transaction reversals. And let's not forget the merchant getting labelled as being high-risk.
Now that you know the different types of fraud activities and how you can protect yourself against them, you can take the necessary steps to stop these transactions before they hurt you.
A secure payment processor can help you effectively manage chargeback and fraud risk. payabl. offers a robust payment gateway that incorporates essential risk management tools along with other technology features like AI and ML to intelligently prevent fraudulent activities.