The topic of payment fraud prevention has never been more relevant. Transactions face more payment fraud risk as transactions happen more online and fraudsters get creative. And that’s bad for business.
Take spoofing, for instance. Scammers can now use apps to show up as a trusted number, including your bank or any service you subscribe to. Even the age-old check fraud method is being supercharged by the use of social media and oher digital channels.
Losses from online payment fraud are expected to exceed $91 billion by 2028 — totaling more than $362 billion globally over the next five years, according to market research firm Juniper Research.
But the true cost of payment fraud goes beyond financial losses. Perhaps far worse, consumer trust drops and brand reputation are damaged as transactions get exposed to payment fraud risks.
Feeding the proliferation of payment scams is a rise in e-commerce transactions. Merchants experience more and different types of fraud than then they did in years prior.
The share of total e-commerce revenue lost due to payment fraud is estimated to be 3% annually, according to a report from non-profit Merchant Risk Council. Other KPIs are impacted as well, with 5.8% of orders getting rejected due to suspicious activity and fraud risk.
The impact of payment fraud on e-commerce businesses worldwide
Source: Merchant Risk Council
Payment fraud takes many forms - credit card fraud, identity theft, skimming, and chargeback fraud are just some of the common types. Other types, like malware attacks and account takeovers, are proliferating with the increased use of digital channels and online payments.
The good news is that your business can be protected from fraudulent payments. But how do you best go about payment fraud prevention to keep the fraudsters at bay while users can continue to pay?
In his article, we cover the essentials of online payment security and fraud prevention.
We discuss the types of payment fraud businesses can expect to be subject to, as well as the 7 best ways of payment fraud prevention. We cover:
- Use secure payment methods
- Implement strong authentication
- Monitor transactions
- Limit access to sensitive information
- Educate users and employees
- Update security regularly
- Partner with a trusted payment provider
Read on for everything related to payment fraud management for businesses.
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Types of payment fraud you should protect your business against
It’s important to know what fraudulent activity your business could be up against before we get into payment fraud protection. On average, the merchants surveyed by the Merchant Risk Council experienced four types of payment fraud so far in 2024.
How often you experience fraud attempts and what payment fraud methods fraudsters use might vary depending on your region and in what industry your business operates.
Industries like retail and e-commerce are at high risk due to the many transactions they process and the ease of access to credit card information and other payment information.
The same goes for hospitality, where credit card information and personal data are used and security measures aren’t always up to date.
Banks and financial institutions often targeted by fraudulent actors – not just because of the sensitive information that is processed, but because of the large amounts of monetary transactions done. Banks experience a lot of conventional payment fraud, like wire transfer fraud and check fraud.
On the other hand, merchants in retail and e-commerce are often subject to forms of fraud where customers/fraudsters attempt to get goods or services for free. They most experience refund abuse (also known as friendly fraud) and first-party misuse, where illegitimate chargebacks are requested.
Types of payment fraud merchants are experiencing
Source: Merchant Risk Council
Finally, businesses across all industries are subject to phishing attempts, botnet attacks and account takeovers. These digital fraud methods are omnipresent in digital channels and require strong online payment fraud detection.
7 best payment fraud prevention tips for businesses
Whether it's to protect your customers or how to prevent b2b payment fraud, using these tips will protect your business from vulnerabilities, detect suspicious transactions, and prevent fraudsters from attempting to take off with your money.
1. Use secure payment methods
From all the ways of how to prevent payment fraud, the payment methods you accept have the biggest impact on your fraud risk.
Conventional payment methods like checks, swipe cards, and manual credit card entry at online checkouts are easy targets for scammers. But while next-gen payment methods might offer better functionality and customer experience, they aren’t necessarily safe either.
P2P payment methods are increasingly subject to fraud, with total P2P fraud losses having reached an estimated $1.7 billion in 2022, a 90% increase over 2021. According to a 2023 Deloitte report.
With encrypted payment methods, you can protect your business from unauthorized transactions and data breaches.
Digital wallets – whether for P2P payment platforms like PayPal One Touch or Apple Wallet – can offer increased protection through encryption technology, biometrics and password protection, and other security measures.
Businesses can also use prepaid cards to make payments. Apart from being passcode-protected, prepaid cards are front-loaded and don’t offer fraudsters access to entire business bank accounts.
EMV-chip technology in debit and credit cards improves overall security by generating unique transaction codes for each purchase.
2. Implement multi-factor authentication
Verifying users before initiating a transfer is critical for fraud prevention – but one-step verification (like a password) won’t do.
Authentication company Entersekt’s Co-founder and Chief Strategy Officer Dewald Nolte argues that the consumer who might be vulnerable to social engineering is less susceptible if the bank intervenes and asks for authentication through SMS or a one-time password (OTP).
“Two channels of attack beats one,” said Nolte. “The data that passes between merchants and issuers via 3DS offers the best way to shore up defenses,” he further commented.
Without strong authentication, credit cards are easily subject to card-not-present fraud. Card-not-present fraud is a scam in which scammers carry out a fraudulent credit card transaction using a credit card they do not own or have in their possession.
This type of fraud happens often in online purchases where only credit card numbers are necessary.
Credit card companies and banks use solutions like Address Verification Service (AVS) and 3D Secure (3DS) to verify the cardholder’s identity and billing address. This adds an extra layer of credit card processing fraud prevention to online card payments.
Multi-factor authentication is a key security measure for online payment fraud detection. Think of biometrics, one-time passwords (like two-factor authentication, or 2FA apps), or security questions in addition to passwords.
By building your business’ payment automation through an experienced payment provider, you can ensure you are using the latest verification features to effectively block fraudulent transactions.
3. Monitor transactions
Using secure payment methods and setting up multi-factor authentication and hoping for the best is not enough. For effective payment fraud evention, you need to actively monitor payment requests and transfers to detect suspicious activity before it’s too late.
Businesses can now use fraud detection tools to apply machine learning models and rules to flag suspicious payment activity in real-time based on hundreds of data points.
But don't rely on AI in payments fraud detection alone. By complementing your payment fraud detection strategy with manual review by trained professionals, you can further expand your fraud risk management capabilities.
4. Limit access to sensitive information
Sensitive payment data and personally identifiable information (PII) are often targeted by cybercriminals. With this type of data, scammers commit crimes from account takeover to identity theft and worse.
Businesses should limit access to this sensitive information to only those employees who absolutely need it for their jobs.
A smart way to use sensitive data within your payment automation ecosystem is by using encryption software. This lets you tokenise data to replace sensitive information with non-sensitive placeholders to reduce the likelihood of a data breach.
5. Educate users and employees
Your employees and clients are the first line of defense against social engineering tactics used by fraudsters. After all, they’re the ones being targeted with such scams.
Put thorough employee training in place to help staff spot potential fraud attempts such as phishing, business email compromise (BEC) scams, and social media impersonation.
Educating users of your services about threats such as identity theft and unauthorised access to accounts also helps them spot red flags.
6. Update security regularly
Users expect businesses to keep their data and payments secure and safe from attacks – and they’ll demand reimbursement if you can’t. Chargeback disputes affect up to 337 million transactions in 2026, up 42% from 2023, a MasterCard report estimates.
To keep data and your payment services safe, it’s of vital importance that you always keep your fraud detection, authentication and data security up-to-date to counter new threats.
Fraud prevention is ever-changing as new vulnerabilities and attack vectors keep popping up. AI is the latest weapon in the online fraud wars, with both scammers and business using artificial intelligence to their advantage.
Some of these new tools in use can predict and prevent fraudulent transactions with high efficiency – IBM boasts that its AI models can reduce the cost of fraud by up to 90%.
7. Partner with a trusted payment provider
Partnering with an experienced payment solution provider gives your business access to secure payment automation with the latest fraud prevention technologies, analytics capabilities, and security expertise.
Turnkey payment solutions like Berkeley Payment offer secure and fast, industry-leading transactions for your employees and/or users.
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