• “I woke up to a debit alert of X amount from my bank account.” 

• “I tried paying with my card, but it didn’t go through, and then I received a message that I had insufficient balance.” 

These are just some of the alarming realizations experienced by victims of payment fraud. In many cases, they either lose access to their accounts or find out their funds have been wiped out. Payment fraud can pose a significant threat to the finances and privacy of both businesses and customers, making it critical to implement robust defensive solutions to thwart fraudulent actors.

Despite substantial investments in technology and user education by e-commerce platforms, payment gateways, and other players in the payments space, fraud remains a persistent issue. Fraud is constantly evolving, and newer and more sophisticated methods are emerging regularly. According to Statista, the e-commerce industry lost $41 billion to payment fraud in 2022—an increase from the previous year, with losses expected to keep growing. 

In this article, we’ll cover what payment fraud is, explore its various types, and outline effective strategies to protect your business.

What is Payment Fraud?

Payment fraud occurs when someone uses stolen or false payment information to complete a transaction. A common example is when an individual who is not the legitimate owner of a debit or credit card uses it to purchase goods online or withdraw funds.
The aftermath of online payment fraud is often devastating for businesses, resulting in financial losses, reputational damage, and legal liabilities.

Types of Payment Fraud

As businesses leverage technology to create multiple channels for customers to purchase goods and services, bad actors are also evolving. These fraudsters continuously reinvent themselves, devising new and creative ways to commit payment fraud. Below are some of the most common types of payment fraud:

Skimming

Skimming is a type of fraud in which a fraudulent actor uses a device called a skimmer to steal credit or debit card information from ATMs, payment terminals, or fuel pumps. The stolen data is then used to create counterfeit cards for unauthorized purchases or withdrawals.

While skimming typically involves some technological sophistication, a similar approach involves fraudulent POS agents discreetly taking pictures of card information. They then use this information to make unauthorized online purchases.

Phishing

Phishing is a type of payment fraud that involves deceiving people through psychological manipulation. The actor uses fraudulent emails, text messages, or websites that look like they’re coming from a trusted source, such as a bank or a reputable brand, to trick individuals into disclosing sensitive payment information.

via Luis Ricardo on GIPHY

Bank Transfer Fraud

Bank transfer fraud occurs when a fraudulent actor gains access to someone’s bank information and uses it to transfer money from one account to another. This information is often obtained through phishing or by hacking into phones or computers.

Cheque Fraud

Cheque fraud occurs when a bad actor creates or alters a cheque to obtain funds fraudulently. This includes forging signatures or altering the specified amount on the cheque.

Mobile Fraud

Mobile fraud occurs when fraudulent actors use payment services like Mobile Money, which is connected to phone numbers, to make purchases or transfer funds. This can happen when the victim loses their phone or when their payment information is compromised. 

Mobile fraud could also happen when fraudulent actors create a mobile money account using someone else’s information. See how Flutterwave protects you and your customers from mobile fraud here.

Card Fraud

Card fraud is the unauthorized use of credit or debit cards to make purchases or withdraw cash. This might involve the use of stolen credit cards, card information, or the creation of counterfeits. 
Between 2014 and 2021, the incidence of payment fraud involving credit and debit cards nearly doubled. This trend is projected to result in an increase of over $10 billion in fraud losses between 2022 and 2028.

Payment fraud takes many forms and evolves constantly, posing a dynamic threat to individuals and businesses. Its impact can be far-reaching, disrupting personal plans and causing significant setbacks. For businesses, the challenge is even greater, as combating fraud is critical to building trust and sustaining growth in an increasingly competitive marketplace.

Next, let’s explore the effects of payment fraud on businesses in more detail.

How does Payment Fraud Affect your Business?

Below are some of the serious effects of payment fraud on businesses:

Damaged Reputation

When frequent fraudulent activities are associated with your business, customers lose trust in the business. This can affect your long-term customer retention and reduce lifetime value.

Increased Operational Cost

The cost of detecting and managing payment fraud is high because it often requires businesses to hire specialists or use internal resources away from their primary assignment.

Chargeback Fee

You may be liable for a chargeback fee if a customer disputes a charge on their card because most payment gateway providers charge additional fees to process it.

Legal and Compliance

Businesses are obligated to prevent payment fraud, and failure to do so could result in hefty fines and legal actions. It also exposes the business to the risk of non-compliance with regulatory standards like the Payment Card Industry Data Security Standards (PCI DSS). 

Financial Loss

When a fraudulent actor gains access to a business’s funds, the business often bears the burden of the missing money. Alternatively, they might pass the cost onto customers by increasing prices. Either choice can harm the business: absorbing the loss impacts profitability while raising prices could lead to customer churn and a reduced retention rate.

How to Protect Your Business from Payment Fraud

Below are some strategies that businesses can use to reduce fraud and differentiate genuine customers from fraudsters:

Monitor Accounts Regularly

To detect and prevent fraud, implement fraud detection tools to regularly monitor transactions and flag suspicious activities, such as sudden changes in payment methods. While these tools are effective in helping businesses combat fraud, it is equally important to have dedicated individuals review transactions manually to identify anomalies that automated systems might miss.
Businesses that use Flutterwave payment solutions already have access to built-in fraud prevention & security tools with no additional integration overheads.

Enforce Strong Authentication System

Two-factor authentication, biometric authentication, 3D Secure 2 (3DS), and other security measures can help ensure that only authorized users access sensitive data. As technology evolves and best practices for combating payment fraud change, it is crucial to integrate with payment gateways (such as Flutterwave) that stay up-to-date with these advancements, which allows your business to focus on growth without being burdened by the overhead.

Response Management Plan 

While preventing fraud is paramount, it’s equally important to be prepared for the possibility that it may occur. Developing a comprehensive incident response plan is essential. This plan should include:

• Clearly defined roles and responsibilities for team members
• Effective communication strategies
• Specific response procedures for various types of breaches or incidents

Having such a plan helps your team respond swiftly, recover quickly, and minimize damage in the event of a security incident.

Controlled Access to Information

Sensitive information like transaction history, bank account information, and credit or debit card details should be restricted and only be accessed by teams or individuals who need it to make business decisions. Learn more about how Flutterwave protects you against identity theft in this blog post.

Educate Both Customers and Employees

Preventing payment fraud is not a one-time effort but an ongoing process that requires awareness from both employees and customers. Educate customers on how to identify phishing emails and other fraudulent activities, and train employees to recognize and report suspicious behavior promptly.

via Pudgy Penguins on GIPHY

Next Steps

Payment fraud can have devastating effects on your business and customers, leading to financial loss, legal challenges, customer churn, and more. That’s why incorporating fraud protection measures into your business workflow is essential. These measures provide peace of mind, enhance your reputation with customers, and safeguard your financial assets and customer data.

However, while fraud protection offers significant benefits and mitigates fraud-related risks, implementing it can be time-consuming and resource-intensive. This is why having a partner to handle the complexities for you is invaluable.

At Flutterwave, we offer built-in systems like encryption, tokenization, multi-factor authentication, and more to protect your business and customers from payment fraud. Learn more about how we protect your business and customers in this article.

Get started with Flutterwave today!