What are Fraud Activities

Payments Learning Resources

What are Fraud Activities

What are fraud activities? Simply put, they are actions performed by a cybercriminal and involve one or more false or illegal transactions. 

What are fraud activities and how can they be prevented

payment security system graphic on white background

Online businesses are exposed to fraudulent activities more than ever before. Currently, an estimated 21.8% of the world’s total population shops online and the percentage is expected to rise even more in the next few years. This leaves consumers exposed to a high possibility of fraud attacks and e-commerce merchants in great need of specialized payment security measures.

Online and offline merchants can experience different types of frauds. 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. It, therefore, becomes imperative that online and MOTO merchants understand fraud risk, and prevent fraudulent transactions before they are executed. There are several types of fraudulent activities.

The types of fraud

an illustration of fraud activity protection with a lock and credit card displayed

Unauthorized Purchase theft

One type of fraud involves unauthorized purchases where hackers access and use the customer’s details to make purchases. These details may include their delivery address, purchase history, and payment data. If online merchants do not store their customers’ information in a secure manner, they will be faced with numerous illegitimate purchases that will lead to loss of sales.

Identity theft

Identity theft is another common fraud practice that occurs 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, the stolen information is used by the thief to buy goods online or offline, to create a new credit card, and even create a new ID. Identity thieves usually use phishing techniques to get that information, by contacting the customer through a fake email address pretending that they belong to the client’s bank. The email asks the customer to enter their login details, card details, etc, in order to confirm their account. This way, fraudsters get access to the client’s bank account and proceed with making purchases through online stores, stealing the client’s identity and credit card details.

Chargeback Fraud

The third type of fraudulent activity refers to chargeback fraud where the customer asks the bank who issued their credit card for a chargeback, with the fake excuse that they didn’t receive their order. 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.

Friendly Fraud

Another common fraud type and one of the most difficult to prevent is friendly fraud. In this case, the cardholder is confused or misguided about a purchase they made and ask the merchant for a refund. For example, a cardholder knowingly wants to avoid paying for a product or services that were already delivered to them. Or, they might genuinely have forgotten that they made a purchase, or another member of the family made an online purchase without informing them. Such cases affect the company’s revenues and require a lot of procedures to be resolved.

How can fraud activities be prevented?

graphic illustration of a secure transaction

Merchants can take various proactive measures to prevent fraudsters from attacking their business. A very useful tactic used in order to avoid friendly fraud is to have clear and on-the-point descriptors for their business. By including the company’s business name, you help your customers easily recognize the transaction on their card statement. Tracked shipments that request a signature upon delivery is 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.

There are ways in which merchants can detect unauthorized purchases, by monitoring patterns in their online orders. If a customer is placing unusually large orders of the same items or makes purchases from a single IP with multiple card numbers it can be a sign of fraud. When a merchant has a big operation and takes large volumes of transactions online, such ‘manual’ monitoring becomes a challenge and it is automated by specialized software or risk management tools offered by the payment gateway utilized by the merchant.

What Fraud Management Tools Are Effective

an illustration of effective fraud management having been implemented

There are a plethora of fraud management tools integrated into the payment platform that is a must for every online merchant who is looking to take preventative measures that would interrupt the completion of fraudulent transactions. Such functions include:

  • 3D Secure – used to prove that the card user is the legitimate owner of the card
  • Geo-location – involves 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, and many more

Card fraud is indeed very costly to merchants. Once a friendly or chargeback fraud occurs, the cardholder initiates a request to their issuing bank in order to reverse the transaction and the amount ultimately gets deducted from the merchant's account. When a chargeback is initiated, the merchant has to be in a position to dispute chargebacks with supporting evidence that will prevent the financial loss involved in a chargeback.

Hopefully, we have given you a clearer understanding of what are fraud activities and how they can be protected against. Given how costly fraudulent transactions and the chargeback dispute process can be merchants need to take sufficient steps to prevent these transactions before they even happen. A secure payment processor can help you effectively manage chargeback and fraud risk. Powercash21, offers a robust gateway that supports the risk management tools mentioned above, along with other technology features that prevent fraudulent activities before they occur.

Article Source:

Thomsen, R. 2018

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