Common Types of Online Payment Fraud & How to Safeguard Your Business

According to recent data from the Reserve Bank of India (RBI), online payment fraud cases in India have surged significantly. The number of incidents reported in the 2023-24 financial year increased fivefold, resulting in cybercriminals defrauding people of approximately Rs 1,457 crore. Today, more businesses and customers alike are increasingly relying on digital payment systems, making them prime targets for the different types of payment frauds by fraudsters. 

This blog will help you understand the online threats and adopt safeguards to protect your business and customers.

Understanding Payment Fraud

Online payment fraud refers to any illegal transaction made online. It involves using fraudulent or stolen payment information, such as debit and card details, to obtain goods or services without the authorisation of the legitimate owner. In simple terms, it means someone uses another person’s financial information to make unauthorised purchases and payments online. 

Fraudsters often acquire payment details through various methods, including phishing scams, data breaches, malware, or tricking users into revealing their information. Other common methods include using stolen credit card numbers, making fraudulent purchases on online marketplaces, creating fake accounts with stolen identities, and initiating unauthorised bank account transfers. 

Why Online Payment Fraud is a Growing Issue

Here are some of the biggest reasons online payment fraud has grown in recent years.

• More people are shopping online and extensively using online payment methods, which has significantly increased the potential base for fraudsters. 
• The widespread adoption of mobile banking apps and payment methods gives fraudsters more opportunities to target users through malicious apps or social engineering.
• Cybercriminals are constantly developing new methods, including AI-powered methods, to deceive users and obtain payment details and other sensitive information.
• Fraudsters readily use personal data leaked from company databases due to data breaches to make unauthorised transactions.
• Sometimes, businesses and users either lack awareness or simply don’t implement any security measures necessary to prevent online payment fraud. 

What Makes Online Payments Susceptible to Fraud?

Online payments are vulnerable to fraud due to several factors, including the lack of face-to-face interaction and weak security measures. These gaps can result in fraudsters exploiting stolen credit card details to make unauthorised transactions. 

Moreover, eCommerce platforms have a high potential for data breaches, which allow cyber criminals to access sensitive payment information like debit and credit card numbers and billing addresses. Weak security measures on eCommerce websites and online marketplaces and a lack of strong verification processes for customer identification further enhance the risk of online payment fraud. 

Implementing robust security protocols not only reduces fraud but also improves the payment success rate by ensuring that legitimate transactions go through smoothly. A high payment success rate is crucial for eCommerce businesses, as failed transactions can lead to customer frustration and revenue loss.

 A Look at the Different Types of Online Payment Fraud

Let’s explore the different types of online payment frauds.

Identity Theft

Identity theft is a malicious act that involves illicitly obtaining and exploiting personal information, including users’ names, credit card details, etc., for fraudulent financial activities. It also includes creating counterfeit accounts to carry out unauthorised transactions. For example, phishing attacks and data breaches are the two most common types of identity theft. Once a user’s personal and financial information is obtained, it can be used for many purposes, including unauthorised transactions. For example, it can be used to apply for loans, create new credit card accounts, and even file false tax returns. 

Phishing

Any website or email that requires users to enter their personal or financial details is prone to phishing attacks. Phishing is a type of social engineering attack that involves deceiving users through psychological manipulation. Fraudsters trick users into disclosing sensitive information, including login credentials, bank account numbers, credit card details, etc. 

The most commonly used methods for online phishing include redirecting users from an email or SMS to a website that looks official and legitimate. 

Did you know that India ranks third after the US and Russia as the most targeted country for online phishing attacks?

Skimming

It is a type of credit card fraud in which fraudsters use a hidden device, a skimmer, to capture a user’s credit or debit card information, such as the card number and PIN, without their knowledge. They usually attach to an ATM, retail store, point-of-sale terminal, or any place where a card is swiped. This allows fraudsters to create counterfeit cards and make unauthorised transactions using the stolen data. 

Chargeback Fraud

Often referred to as lier-buyer fraud or friendly fraud, chargeback fraud occurs when a customer intentionally disputes a legitimate transaction with their bank or card issuer. This allows them to receive a refund while keeping the purchased goods or services. Chargeback fraud accounts for a major portion of all credit card fraud. 

Credit Card Fraud

Credit card fraud is the unauthorised use of a credit card to purchase or access funds. It can even damage credit scores. Some common examples of credit card fraud include stolen or lost cards, clone cards, opening new accounts, phishing, counterfeit cards, and skimming. 

Pagejacking

It is a type of online payment fraud in which a cybercriminal copies the content of a legitimate website to a fake website to redirect traffic from the original site. Pagejackers typically copy the source code of the original website, enabling the search engine to index its content and thereby improve its appearance in search results.

Business Email Compromise

It’s a type of cybercrime in which cybercriminals trick people into sharing sensitive information or sending money by accessing their work email accounts. Cybercriminals often direct these attacks at senior staff or those who can authorise financial transactions. They can do this by requesting unusual payments, sending emails containing links to dodgy websites, tricking employees into paying fraudulent invoices, wire transfers to fake bank accounts, spreading ransomware or malware, and more.

Cheque Fraud

As the name suggests, cheque fraud is the illegal use of cheques to steal money from individuals or businesses. It can take several forms, including writing cheques that exceed the bank account balance, creating fake cheques, and modifying legitimate cheques to steal money. 

Card-not-present (CNP) Fraud

It’s an online payment frauds which involves fraudsters attempting to make fraudulent transactions. They use a credit card they don’t own or have in their possession. CNP fraud is most common for orders made online, over the phone, by email, etc. It happens when a criminal uses stolen credit card details like the number, expiry date, and CVV code to make purchases without physically presenting the card, often obtained through data breaches, phishing scams, or malicious software. 

The Effect of Payment Fraud on Businesses

Here are some ways in which online payment frauds can impact your business. 

1. Chargeback and Fees

Your business may be charged back by customers who dispute fraudulent transactions. This can result in additional fees and processing costs. 

2. Financial Loss

This is one of the biggest and most immediate impacts your business might face due to online payment frauds. The direct loss of funds due to fraudulent transactions can be substantial, depending on the nature and size of your business and the scale of the fraud. 

3. Increased Operational Costs

Though implementing fraud prevention measures and investigating fraudulent activity can strengthen security, they can also increase operational costs for your business.

3. Customer Dissatisfaction and Reputation Damage

When customers experience fraudulent activities while making online payments for goods or services they buy from your brand, it can severely damage your company’s reputation. This experience is likely to decrease customer trust and loyalty. 

4. Loss of Sales Opportunities

Dissatisfied customers who perceive a high risk of fraud persisting in the future are more likely to switch to other brands that offer secure online payment methods.

5. Legal and Regulatory Consequences

Depending on where your business is registered and located, failing to prevent fraudulent transactions and protect customer data may result in legal repercussions.

The Key Benefits of Using Fraud Protection

There are several benefits of implementing fraud protection and prevention methods for your businesses, including the ones below.

1. By detecting and preventing fraudulent transactions, your business can significantly minimise chargebacks, lost revenue, and refunds associated with fraudulent online payments.
2. By implementing strong security measures, you can safeguard your customers’ sensitive data from unauthorised access. 
3. Complying with industry standards and regulations related to the security of online transactions can help your business avoid legal consequences. 
4. Preventing online payment frauds means your business can protect its image and the negative publicity associated with data breaches and other fraudulent activities. 
5. Advanced fraud prevention tools can help you monitor transactions in real time. With effective fraud prevention systems, you can minimise the time and resources you spend investigating and resolving fraudulent transactions. It gives you more time to focus on your core business operations. 

Conclusion

Fraudsters are refining their ways to deceive people and trick them into revealing their personal and financial information, making online payment frauds more prevalent than ever before. Though the surge in the number of ways and cases is alarming, you can reduce risks and protect your business and customers. Implementing security measures, proactively monitoring any signs of suspicious activities, educating employees, and using secure payment systems are the major steps you need to take to stay ahead of cybercriminals. Using safe platforms such as Shipirocket Checkout effectively helps to reduce fraud. Safeguarding your business against payment fraud will go a long way in maintaining your customers’ trust, ensuring compliance, and preventing losses.