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Digital Payment Fraud Detection and Prevention

Date: 13-09-2023

According to the Federal Trade Commission, a new report shows that customers suffered a loss of nearly US$8.8 billion due to fraud in 2022, which is a 30% increase compared to 2021. Fraudulent activities have a negative impact on both customers and businesses. It is estimated that online payment fraud caused a massive global loss of US$41 billion in 2022, reflecting a significant rise of 105% from the previous year. It is predicted that this figure will rise to US$48 billion by the end of 2023. Therefore, companies must equip themselves with knowledge of payment fraud prevention and detection to safeguard their financial assets, build customer trust, and stay ahead of emerging threats.

Payment fraud 

Payment fraud pertains to any illegitimate or unlawful transaction conducted by a cybercriminal. Using the Internet, the criminal deprives the victim of money, valuables, interests, or private information.

There are three ways to define payment fraud:

  • Fraudulent or unauthorized transactions
  • Lost or stolen merchandise
  • False requests for a refund, return, or bounced check

 E-commerce companies charge clients for goods and services mainly through electronic transactions, which has led to an increase in fraudulent operations. 

What are the types of payment fraud? 

Payment fraud arises in numerous ways, as fraudulent actors use many techniques to take advantage of weaknesses in payment systems. Some of the most popular techniques are as follows: 


Criminals utilize the skimming technique to steal credit or debit card information. They attach tiny gadgets known as “skimmers” on card readers at ATMs or point-of-sale (POS) terminals. The skimmer captures card information when a user swipes their card at an ATM, which fraudsters use to make fake cards or conduct unauthorized transactions.

Identity theft

Identity theft happens when a fraudster acquires and utilizes another person’s personal information, such as their credit card number, bank account information, or social security number, to open new accounts, make unauthorized transactions, or engage in other types of fraud. Hackers can penetrate firewalls by using outdated security measures or by stealing login credentials from public Wi-Fi.


Phishing is when people try to trick you into giving them sensitive information like your login details, credit card numbers, or personal data. They might pretend to be someone you trust, like your bank, but if you don’t recognize the source, it could be a scam. Be careful and always double-check before giving out any important information.

False chargebacks

Chargeback fraud occurs when a customer uses their credit card to make a purchase and then falsely disputes the charge with the card issuer, claiming that they did not receive the merchandise or that the transaction was unauthorized. This type of fraud is also known as “friendly fraud.” The fraudster aims to obtain a refund while retaining the goods or services.

Business email compromise

BEC is a type of payment fraud where scammers pretend to be executives or vendors to trick employees into giving them money or personal information. They do this by hacking or spoofing email accounts and using social engineering tricks to deceive the victims.

Card-not-present scam 

CNP fraud is a fraudulent transaction that occurs when the card is not physically present, like in online or over-the-phone purchases. Fraudsters use stolen credit card information to make unauthorized purchases, which can be challenging to detect and prevent since there is no physical verification of the card.


E-commerce website owners should be aware of potential hacking threats. Hackers can steal a portion of the website and redirect traffic to a harmful website, which could lead to a breach in network security. Vigilance is necessary to prevent any dubious internet activity from causing harm to the business.

Merchant identity fraud 

Scammers utilize a particular strategy to utilize stolen credit cards by creating a merchant account that seems like it belongs to a legitimate company. The hackers vanish before the cardholders realize the unauthorized payments and try to cancel the transactions. Consequently, the payment facilitator becomes accountable for the financial loss and additional expenses linked to credit card chargebacks.

Advanced fee and wire transfer scams

Hackers frequently target credit card users and e-commerce store owners by tricking them into paying in advance for a credit card or by offering money at a later date. This deceitful tactic is aimed at exploiting unsuspecting individuals and businesses with the ultimate goal of stealing money or sensitive financial information. 

Everyone needs to remain vigilant and cautious when dealing with such offers and to always verify the legitimacy of any requests before making any payments or divulging personal information.

How does fraud happen?

Fraudsters have become clever at stealing personal information online. They often pose as legitimate representatives and use various methods to trick credit card users into providing sensitive data.

  • Phone calls 
  • Email
  • Texting malware to smartphones
  • Instant messaging 
  • Rerouting traffic to fraudulent websites
  • Online auctions 

In addition, cybercriminals collaborate to breach network security measures by looking for bugs or outdated patches. These loopholes enable hackers to easily penetrate a firewall and get sensitive data without authorization.

Payment fraud detection and prevention 

Businesses must be vigilant and take action to prevent payment fraud. They need to understand the various types of fraud, assess their risks, and implement prevention and detection measures to protect their finances and customer data and maintain customer trust in their brand. Regularly updating and improving their security measures is crucial.

Here is a summary of how organizations should identify and react to the most typical types of payment fraud:


  • Encourage employees to practice safe browsing habits, identify phishing emails, and verify the sender’s identity.
  • Use DMARC (see the “Business email compromise” section below) for sender authentication and implement filtering and scanning technologies to block or flag suspicious emails.
  • Integrate firewalls, intrusion-detection systems, and network segmentation to safeguard internal systems. Also, make sure all software and systems are up to date.
  • Require multi-factor authentication for critical systems to reduce unauthorized access using stolen credentials.
  • Analyze logs, network traffic, and system data to detect and respond to phishing attempts and suspicious activity.
  • Ensure that third-party vendors adhere to your organization’s security standards and not expose your company to phishing attempts.
  • Have a clear plan for containing, reporting, and communicating in the event of a successful phishing attempt.


  • Check ATMs and POS terminals often for any indications of tampering or unauthorized equipment.
  • Use tamper-evident security precautions, such as security locks or seals.
  • Make sure that card transactions involve encrypted and secure data transmission.
  • Upgrade to contactless or chip-and-PIN payment methods, which are less prone to skimming.
  • It is important for employers to provide their employees with training on how to identify and report suspicious activity related to skimming devices.
  • Collaborate with partners in the industry and law enforcement to exchange valuable information and share best practices.

Identity theft

  • Deploy strong data measures in place, including encryption, safe storage, and access limits. 
  • Keep an eye out for any suspicious behavior in transactions and account activity. 
  • Implement multi-factor authentication for online transactions and accounts. 
  • Verify the customer’s identification, particularly for extravagant transactions or account changes.
  • Educate customers on how to prevent identity theft and protect their personal information.

Chargeback fraud 

The following actions can be taken to stop chargeback fraud and deal with it when it happens:

  • During transactions, confirm the customer’s identification and billing details.
  • Product descriptions, delivery details, and return policies should all be clear and precise.
  • Use fraud detection tools to mark and investigate dubious transactions.
  • Maintain thorough records of all transactions, including customer communication and delivery confirmation.
  • To address issues and reduce disagreements, maintain open communication with clients.
  • Keep an eye on chargeback trends and adjust your tactics as necessary.

Business email compromise

  • It is important to provide training to employees on how to spot and report any suspicious emails. 
  • Deploy email security measures to authenticate the sender’s identity and prevent spoofing. Such measures consist of the following:

DMARC: Domain-based Message Authentication, Reporting, and Conference (DMARC) is a system that ensures emails are authentic and prevents suspicious emails from appearing to come from your domain. 

DKIM: Domain Keys Identified Mail is a method of adding a digital signature to emails to verify that they were sent from trusted sources and were not tampered with. 

SPF: Sender Policy Framework is a method to verify that an email is sent from a server that is authorized to send emails for a specific domain and prevent unauthorized senders. 

  • Establish multi-level approval protocols for the exchange of sensitive information and financial transactions. 
  • Promote secure communication channels and verify requests through a phone call or in person when uncertain. 
  • It is important to consistently update and patch your software, operating systems, and security tools to ensure optimal performance and protection against potential threats. 

Card-not-present fraud

  • Employ the address verification service (AVS) and card verification value (CVV) for online transactions. 
  • Use multi-factor authentication for customer accounts. 
  • Integrate fraud detection systems, such as machine learning algorithms, to identify and flag fraudulent and suspicious transactions in real-time. 
  • Monitor transactions for odd patterns and velocity checks. 
  • Encourage clients to use digital wallets and tokenization services to improve security.
  • Protect sensitive cardholder data by adhering to the Payment Card Industry Data Security Standard (PCI DSS). 

Ways to mitigate payment fraud for your business 

Businesses should adopt a methodical approach that includes evaluation, prioritization, implementation, and continuous improvement to develop a payment fraud plan tailored to their particular business needs and threats. 

A step-by-step guide for developing and implementing a payment fraud strategy:

Risk evaluation 

To effectively prevent payment fraud, it’s important for companies to conduct a comprehensive risk assessment that considers their industry, size, customer base, and transaction methods. This assessment should evaluate the existing systems, procedures, and controls for any potential vulnerabilities and identify areas for improvement.


Prioritize the most serious risks and vulnerabilities based on the risk assessment, considering the possible cost, reputational risk, and chance of occurrence. This will assist in determining which fraud prevention measures should be adopted first.

Strategy development 

Develop a precise plan that includes preventive, investigative, and responsive steps to address the prioritized risks and vulnerabilities. Include both short-term and long-term objectives and tailor the strategy to the particular requirements and risks of the company.

Resource allocation 

To ensure the successful implementation of chosen tactics and best practices, it’s important to allocate the necessary resources, such as personnel, budget, and technology. It’s also crucial to assign clear roles and responsibilities to team members and establish a strong governance structure to oversee the implementation and ongoing management of the strategy.


Implement the determined strategies and best practices, ensuring that they are integrated into the current procedures and systems. This could entail conducting training and awareness campaigns for staff members, investing in new technologies, or revising policies and procedures.

Monitoring and evaluation

Regularly monitor the effectiveness of implemented measures using KPIs and metrics. Conduct audits to improve compliance with standards and regulations.

Adapting and improving

After analyzing the monitoring and evaluation outcomes, make the necessary changes to the plan and incorporate new techniques to tackle new challenges or changing business requirements. Keep a proactive stance toward preventing payment fraud and stay up-to-date with the latest trends, technologies, and best practices in the field.


You might already have some form of fraud protection in place, depending on the advanced technologies you have employed to facilitate your payment processing infrastructure. Working with a reputable company such as Copperchips, specializing in fraud mitigation and prevention services, can greatly enhance your ability to combat fraudulent activities. 

Our organization provides advanced fraud management solutions by leveraging our expertise in analyzing extensive and intricate data sets. Our services include the detection of anomalies, reduction of false positives, and end-to-end solutions to safeguard against fraudulent activities. We utilize cutting-edge technology and industry-leading practices to ensure accurate and reliable results. Our team is committed to delivering exceptional results to our clients and mitigating risk in the ever-evolving landscape of fraud.

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