What are the Main Types Of Payment Fraud?

What is Payment Fraud?

Payment fraud, sometimes called card fraud or purchase fraud, is the illegal use of payment methods such as credit cards, debit cards, net banking, or digital wallets to obtain money, goods, or services illegally. 

The fraudster aims to steal funds or personal financial details from unsuspecting victims. Payment fraud occurs when cybercriminals access sensitive payment information without permission.

How Big is the Payment Fraud Problem?

Statistics show that the problem of payment fraud has grown significantly in recent years as financial transactions have moved online. According to the Nilson Report, card-not-present (CNP) fraud, which includes online and mobile transactions, accounted for $130 billion in losses globally in 2021. 

That represents a 21.4% increase compared to 2020. With e-commerce sales continuing to rise, experts expect the total costs of payment fraud to surpass $200 billion by 2024 if no new preventative measures are taken.

Main Types of Payment Fraud

Understanding the primary types of payment fraud is essential for identifying vulnerabilities and implementing protection mechanisms. Here are the key types of payment fraud:

1. Credit Card Fraud:

Credit card fraud is one of the most common types of payment fraud and occurs when fraudsters obtain unauthorised access to a victim’s credit card information to make purchases or withdraw funds. This can happen through methods like:

Card skimming: Using small devices attached to ATMs or POS terminals to capture card information.

Card not present (CNP) fraud: Fraudsters use stolen credit card information for online or phone purchases, bypassing the need for a physical card.

2. Phishing and Social Engineering Attacks:

Phishing is a type of social engineering attack where fraudsters impersonate legitimate entities, such as banks or e-commerce websites, to deceive individuals into sharing sensitive information, like passwords and card numbers. These attacks are often carried out via email, SMS, or phone calls, with messages designed to appear authentic.

In 2022, phishing scams accounted for nearly 30% of all reported payment fraud cases, with businesses and individuals targeted equally. More forms, like spear phishing, target high-value victims or businesses, resulting in potentially significant financial losses.

3.  Friendly Fraud

In friendly fraud, a consumer makes a legitimate purchase but later disputes the charge with their credit card issuer, claiming they did not authorise it. This is often an attempt to obtain a refund while keeping the goods or services received. Friendly fraud can be challenging to prove and costly for businesses, especially small e-commerce vendors. Friendly fraud has increased with the growth of e-commerce. It’s estimated that 60%- 80% of chargebacks are due to friendly fraud, costing businesses millions annually. Companies often invest in chargeback management services to mitigate these losses.

4.  Identity Theft and Account Takeover:

Identity theft occurs when fraudsters steal a victim’s personal information (such as name, address, Aadhar and PAN card) to impersonate them and commit fraudulent activities. Account takeover (ATO) is a related type of payment fraud in which fraudsters gain control over an individual’s bank or payment account and drain funds or make prohibited transactions.

This type of fraud often involves complex hacking techniques or exploiting weak passwords, making it essential for individuals to use multi-factor authentication and strong, unique passwords.

5. Chargeback Fraud

Chargeback fraud occurs when a consumer contacts their bank to reverse a legitimate transaction after receiving goods or services. While similar to friendly fraud, chargeback fraud is intentional and deliberate. Fraudsters exploit the chargeback system to benefit from products or services without paying, often using stolen credit card information to make the initial purchase.

A study by the Merchant Risk Council found that chargeback fraud resulted in $1.9 billion in losses in 2022. Chargebacks are a significant pain point for online retailers, who may face penalties and additional fees if fraud prevention is inadequate.

6. SIM Swap Fraud:

SIM swap fraud is a newer type of payment fraud where criminals manipulate mobile service providers into switching a victim’s phone number to a SIM card in the fraudster’s possession. This enables the fraudster to intercept two-factor authentication codes and gain access to the victim’s accounts.

With an increasing number of banking and payment platforms requiring phone-based two-factor authentication, SIM swap fraud has grown in prevalence. The Federal Communications Commission (FCC) reported a 200% increase in SIM swap cases in the past three years.

How to Prevent Payment Fraud

To combat these types of payment fraud, individuals and businesses must adopt proactive security measures let see how to prevent payment fraud 

1) Use Multi-Factor Authentication (MFA): 

MFA adds an extra layer of security by requiring multiple verification steps, making it harder for fraudsters to access accounts even if they have stolen passwords.

2) Implement Real-Time Fraud Detection Systems: 

AI-powered fraud detection tools analyse transaction patterns to identify and block suspicious activities in real time, helping to prevent unauthorised transactions.

3) Educate Consumers and Employees: 

Many types of payment fraud rely on social engineering, making awareness critical. Regular employee training and clear consumer guidance on phishing and scam avoidance can significantly reduce risk.

4) Limit Data Access and Perform Regular Audits: 

Companies can detect and address security vulnerabilities before they are exploited by controlling who has access to sensitive data and conducting frequent audits.

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Conclusion:

As financial crime continues to evolve digitally, understanding the main types of payment fraud has become important. Criminals constantly develop new scams and techniques to trick victims. While perfect prevention is impossible, following essential cybersecurity best practices significantly reduces the risk of fraud. Educating people about the problem is key to protecting personal information and funds online.

FAQs

1) What is payment fraud?

Payment fraud is the illegal use of payment methods like credit cards, debit cards, net banking or digital wallets to obtain money, goods or services illegally without the permission or knowledge of the victim.

2) What are the main types of payment fraud?

The main types are credit card fraud, phishing and social engineering attacks, friendly fraud, identity theft, chargeback fraud, SIM swap fraud, etc.

3) What is credit card fraud?

Credit card fraud involves fraudsters illegally obtaining credit card information to make unauthorised purchases or withdraw funds from the victim’s account without their consent. It can happen via card skimming, card-not-present fraud, etc.

4) What is phishing?

Phishing is a type of social engineering attack in which fraudsters impersonate legitimate entities via email, SMS, or calls to trick victims into sharing sensitive financial details like passwords, card numbers, etc.

5) How can payment fraud be prevented?

Adopt measures like multi-factor authentication, real-time fraud detection, employee education, data access limitation, and regular audits.