Payment Fraud: What It Is, How To Prevent It & Top Solutions
Cash Flow Conundrum: Even after a big sales win, concerns about cash flow and financial stability can cloud the joy and satisfaction of the achievement.
Profit and Anxiety: Big transactions come with the excitement of profit but also the anxiety of ensuring the deal's long-term success and financial health.
Balancing Act: Enjoying financial gains is tricky when you also have to maintain a holistic view of the business’s overall financial health and future profitability.
Mental Tug-of-War: The thrill of closing a lucrative deal often competes with the mental strain of managing the implications and associated risks.
Sunny Day Blues: Even a substantial financial win can feel bittersweet when underlying concerns about sustainability and future stability linger.
It’s hard to fully enjoy the satisfaction of making a large, profitable transaction when in the back of your mind you’re wondering:
“Is this true or fraud?”
Especially since cybercriminals are becoming more adept at operating in stealth mode, making it harder to catch spot their fraudulent deeds ASAP.
Need expert help selecting the right tool?
With one-on-one help, we guide you to your top software options. Narrow down your software search & make a confident choice.
This growing threat requires watchfulness, awareness, and proactive action—all of which will become part of your anti-fraud playbook once you’re done with this blog post.
Let’s look at the ways fraudsters get the information they need to weasel their way into your business, as well as how you can beat them to the punch.
What is Payment Fraud?
Payment fraud refers to false or illegal transactions where someone, usually a cybercriminal, uses someone else's payment information to acquire goods or money.
Payment fraud is a problem for every business, regardless of industry. But ecommerce brands are at particular risk—let’s look at why and how this is the case.
The state of payment fraud for ecommerce brands
Ecommerce businesses are especially vulnerable to fraud since they process a high volume of digital transactions daily.
Online shopping is estimated to account for $6.3 trillion worldwide in 2024, so you can just imagine how lucrative this target is in the eyes of cybercriminals.
This is likely why in North America, the region with the highest fraudulent transaction value worldwide, online retailers deal with 40% more fraudulent transactions than primarily brick-and-mortar retailers.
Incidents of payment fraud tend to peak during the holiday shopping season.
In 2022, research showed an alarming 82% increase in suspected digital fraud activity globally during the BFCM weekend compared with the rest of the year (the period from January 1 to November 23).
When confronted with this type of cybercrime, financial losses are inevitable.
Ecommerce companies worldwide are expected to suffer a cumulative loss of $343 billion from fraud.
Merchants estimate that 3% of ecommerce revenue is lost each year to fraud, and a similar share of orders turn out to be fraudulent as well.
Besides revenue loss, your brand can also suffer from loss of credibility and customer trust. It indirectly affects your ability to increase sales and grow its customer base.
Susceptibility to fraudulent activities can also ring the alarm bells for regulatory bodies, which can lead to penalties if your business is found to be non-compliant.
The figures and the consequences sound scary, I get it…
But there are many things you can do to keep your business and customers safe.
In this post, I’ll share with you industry-approved payment fraud prevention strategies to strengthen your security measures.
But First, How Does Payment Fraud Happen?
Fraudulent actors have plenty of tactics up their sleeves to commit payment fraud.
Here are some of the most common ways they gain access to your customers’ payment information or even your digital store:
1. Phishing
Phishing uses bait to gather information like credit card details and personal data. It’s usually done via email or social media.
In online shopping, however, ecommerce platforms have become a magnet for such attacks. In 2023, they were involved in 43.5% of all phishing incidents.
In the first ten months of the year alone, there were 6,232,882 phishing pages impersonating popular shopping sites like Amazon, eBay, Walmart, AliExpress, and Mercado Libre.
Here’s an example of “Amazon” phishing email asking customers to update their payment info:
And “Shopify” trying to get into a seller’s account:
2. Skimming
Skimming involves installing illegal devices on or inside payment terminals to capture a customer's credit or debit card details and PIN.
Armed with this information, the perpetrator can produce counterfeit cards or withdraw funds from an ATM.
Just because ecommerce companies don’t use payment terminals doesn’t mean they’re safe from skimming.
In online retail, it takes the form of e-skimming or digital skimming.
Hackers introduce malicious code to an online store's web page. They then proceed to capture payment card details on the spot as shoppers submit their information to the payment gateway.
One of the most significant threats to ecommerce brands is Magecart, or web-skimming style attacks, which involve injecting malicious JavaScript code into the payment pages of websites designed to steal credit card details or customer credentials.
While some may be under the false impression that Magecart attacks don’t happen as frequently, they are more alive than ever—and getting harder to detect.
3. Malware
Malware is a portmanteau for “malicious software,” which bad actors use to access or control an unknowing victim’s device.
It’s used to steal personal and financial information, as well as log-in credentials.
Hackers can also use malware to get into your digital storefront and perform important admin tasks, such as changing product data, stealing customer data, and changing your website into something else.
4. Identity theft
Identity theft is the act of committing illegal transactions by using someone's personal information (like credit card details, name, address) to commit fraud.
Fraudsters find their way in through a variety of methods like phishing and malware.
It can involve something as simple as making fraudulent purchases, or more elaborate like obtaining a new credit card or a loan.
With 83% of consumers willing to share their personal data for better customer experiences, it becomes easier for fraudsters to commit identity theft and pose as legitimate individuals on the internet.
They’ll lean on stolen information to exploit your ecommerce business and make money through unauthorized transactions.
5. Business email compromise (BEC)
BEC combines phishing and social engineering tactics to target employees within an organization.
The FBI dubbed it “one of the most financially damaging online crimes.”
It usually plays out like this: An employee will receive an email from a fraudulent actor claiming to be a trusted source (ex: a manager) requesting sensitive information.
Ecommerce SMBs might not encounter this often—enterprises with siloed departments make for easier targets.
6. Account takeover
Account takeover arises from a cybercriminal accessing an account that belongs to a legitimate user and taking ownership of it to commit fraud.
In 2023, it topped the list of digital fraud globally, reaching 7%. The data also shows it typically results in payment fraud.
These hackers gain access to these accounts by stealing passwords or usernames, or purchasing them on the dark web. In some cases, they use phishing to obtain credentials.
These deceptive methods, sometimes used together, harm both online shoppers and merchants.
If left unnoticed, the shopper bears the brunt of the fraud.
But when they do notice, and they likely will, they can raise the issue to your brand for compensation. You'll have to pay the price tag and other fees yourself.
The Most Common Types Of Payment Fraud To Watch Out For In Ecommerce
Once the fraudulent actors grab hold of sensitive data, they can commit various types of ecommerce fraud.
Here are the most common ones:
Credit or debit card fraud
Credit or debit card fraud occurs when an unauthorized individual takes another individual’s payment information to make a purchase or retrieve money from it.
One of the most common problems in ecommerce is card-not-present, since shoppers only need to input credit card details to get away with the purchase.
Recommended reading: Check out our ecommerce credit card processing guide and how to authorize its use to set it up as safely as possible and prevent credit card fraud.
Triangulation fraud
Triangulation fraud occurs when a customer purchases a product on an online marketplace like Amazon and receives an item obtained from another retailer using stolen payment information.
Simply put: the fraudster serves as a secret middleman. The person whose details were stolen can file a report and request a refund from the original shop.
Chargeback fraud
Chargeback fraud occurs when a shopper—not necessarily a professional hacker—purchases an item and disputes the purchase without returning it or returning it used.
It’s also called friendly fraud and was considered the biggest threat during the holidays in 2023.
In fact, it’s estimated to set businesses back some $40 billion every year.
I remember a particularly tough instance where we received an order that seemed perfectly normal.
The payment went through without a hitch, but a few weeks later, we were hit with a chargeback.
The buyer claimed they never made the purchase, and we were left dealing with the financial loss.
BNPL fraud
Buy now, pay later (BNPL) fraud occurs when a fraudster signs up to a BNPL platform using stolen or fabricated information to make purchases with no intention of paying.
Because most BNPL platforms don't require advance payments, fraudsters can make as many purchases as they want.
Before BNPL comes to collect, they've already left the platform. In the case of stolen info, the providers have to provide chargeback fees.
Sometimes, consumers also take advantage of BNPL schemes, knowing that providers don’t have the ability to go after them to collect funds.
It might not hurt your brand financially, but affected shoppers might see your business in a different light.
Buy Now Pay Later (BNPL) schemes are particularly vulnerable given the increasing frequency and scale of data breaches that compromise consumer data (including card information), as well as their widespread use
Refund fraud and refund abuse
Refund fraud occurs when a shopper or a group of people requests a refund or reimbursement for a product they never bought or returned.
It differs from refund abuse, wherein a shopper who happened to purchase a product asks for a refund with no intention of sending back the item or sending it back used.
Gift card fraud
Gift card fraud occurs when fraudsters buy a gift card using stolen card information in order to cash it in for money or merchandise.
A more sophisticated technique involves hacking into an ecommerce platform and generating new gift cards.
Card testing fraud
Card testing fraud occurs when bad actors get their hands on several stolen credit card numbers, and then make purchases from online retailers to verify which cards are still active.
Our website was hit with numerous fraud orders as identity card testing attempts and was a significant challenge for our store.
These were all low-value transactions, where fraudsters test stolen credit cards to see if the card is still active and can be used for larger purchases or selling them on the black market.
How To Protect Your Brand Against Ecommerce Payment Fraud
As I’ve said earlier: The online shopping industry is growing quickly—and that’s good news for your business!
But this growth comes with the need for heightened security, as it also creates a larger attack surface for cybercriminals.
If you agree with the many online merchants (75%) who decided to expand their fraud prevention budgets in 2023, allocating your funds to improving business processes like payment processing can serve you well.
Learn these strategies below:
Choose the right payment processor
Payment processors could become the gateway to fraud if you don’t choose a reputable one.
Fraudsters can easily capture sensitive customer data like credit or debit card numbers during transactions when they aren’t secure.
Look into the security and reliability of your existing processor to see how well it fits the purpose. If it’s not up to the task, take it as a sign to switch to a better one.
When you do, select one that’s PCI DSS (Payment Card Industry Data Security Standard) compliant, which means the processor implements strict security protocols like end-to-end encryption and tokenization to safeguard sensitive payment information.
Trustworthy providers like Stax Pay and Helcim have PCI level 1, the highest level of compliance.
Helcim, for one, employs AES-256 encryption for all sensitive merchant and cardholder data, such as name, card numbers, and expiry dates to meet PCI compliance.
Furthermore:
We don’t store CVV, PIN, EMV, or mag data.
Any data in transit is encrypted and maintains its integrity with TLSv1.2 and strong cyphers, excluding outdated SSLv3, TLSv1.0, and TLSv1.1 from our systems.
Select the one that fits your needs best.
According to Popkey, doing so “makes it easier for business owners to focus on running their business without having to take on rigorous audits, testing, and inspections”.
Here are our recos:
Use secure payment methods
The process of transferring funds for ecommerce payments differs—and these differences determine their security.
These payment systems reign supreme:
- EMV (Europay, Mastercard, and Visa) chip cards that you see on debit, credit, and prepaid cards. Every purchase generates a special one-time-use code, deterring fraudsters from making use of the credit card info.
- Digital wallets. Encryption keys are unique and privy to each user. Even if someone steals your smartphone, they won’t be able to use your digital wallet.
- Bank transfers/ACH. Once a transfer is ordered, it’s rarely reversible. For ecommerce brands, having a merchant account offers greater benefits than a regular bank account.
It also helps to keep a close eye on future-oriented solutions.
Branden Korf of EbizCharge, mentions that the addition of “biometric authentication has added a second layer, making it harder for fraudsters to impersonate legitimate users, as biometric data is unique to each individual.”
Biometrics payment adds extra security to mobile payment processing for ecommerce shoppers. It’s also relatively new.
As of 2024, Wink is the only biometric identity and payments platform.
CEO Deepak Jain explains how it helps ecommerce companies fight off fraud:
We’ve developed a three-factor authentication system that combines biometrics, such as facial and voice recognition, with traditional methods like tokens.
Human-based authentication is superior because it relies on unique, immutable characteristics that are difficult for fraudsters to replicate.
Recommended reading: Discover the top 20 payment gateways for ecommerce businesses.
Implement strong yet convenient authentication measures
Authentication measures refer to any approach you take to confirm that your shopper and their transaction are genuine.
If you’re wondering at what points in the customer journey should you implement these measures, Christine Ferrusi Ross of Akamai shares a good piece of advice:
Start with understanding how the security protections will be implemented across the user’s journey on your ecommerce website or app.
This ensures that you can spot any holes in your process, especially since fraud now occurs across the customer journey.
But if you’re looking for key areas to focus on, Maanas Godugunur, senior director of fraud and identity at LexisNexis Risk Solutions points out: “Most fraud losses accrue at new account creation, but more attacks occur at the payments stage.”
This is why it’s essential to encourage customers to create unique passwords.
You can also implement multifactor authentication (MFA) measures, such as an authentication app and one-time passwords (OTP).
But be careful not to go overboard because doing so can complicate the customer journey. Your goal is to make the shopping experience frictionless for your shoppers.
Imagine requiring someone to authenticate at login, then use multifactor authentication with a one-time-passcode, then authenticate again at checkout can cause some users to get frustrated and abandon carts.
But if a security solution offers strong detections and mitigations when a user logs in to prove that user is or isn’t the account holder, then the extra steps can be eliminated for trusted users.
According to 43% of merchants in a 2024 survey, 2FA (a form of MFA that involves two steps) should suffice.
They deem it the most effective anti-fraud measure, with the lowest payment failure rate.
Monitor accounts and transactions regularly
Let this be a reminder:
Vulnerabilities exist in your systems until your business finds them. What one hopes is that your team finds any vulnerabilities before attackers do.
Keeping a close eye on customer accounts and transactions can help you do just that.
Take account takeover, for instance. It’s rapidly becoming a go-to tactic for cybercriminals, with incidents surging by 354% in a year.
Addressing this growing threat requires identifying and sealing the gaps in your security.
One approach is to partner with cybersecurity platforms like Akamai, which helps businesses, including ecommerce brands, protect user accounts throughout their lifecycle.
This includes detecting account takeover attempts, new account fraud, and other types of account abuse.
As for dealing with high-risk orders, ecommerce brand GroomsDay doesn’t just rely on its anti-fraud measures.
Managing Partner Chris Bajda explains how the brand goes further: “We call the customer to confirm their orders before shipping.”
Another way the brand monitors its transactions is by keeping a very close eye on GroomsDay’s chargeback rates.
Higher chargeback rates could mean customer dissatisfaction, but it could also stem from online payment fraud.
If you monitor this closely, you can figure out the cause.
Regardless, you need to improve your product descriptions and be transparent with your business operations so you can safeguard your business from illegitimate and unreasonable claims.
For B2B ecommerce, manual and siloed systems can leave businesses wide open to risks like 'fresh air invoicing'—a type of fraud where struggling companies issue invoices for goods or services never delivered.
It works similarly to wire transfer fraud. Instead of sending invoices, they issue wire transfer requests.
Monitoring transactions requires automation to counteract these payment fraud tactics.
Automated verification processes systematically cross-reference invoices with purchase orders, delivery receipts, and other relevant documents, ensuring that only legitimate invoices are approved for payment.
Use fraud detection software
The best prevention is detection, so consider putting additional safeguards in place.
Pair your payment processor and strong authentication measures with fraud detection software to cover all the bases.
Smart investments in varied solutions pay off: Organizations that build a more robust posture against fraud throughout customer journey stages report lower fraud losses.
Eliot Vancil, CEO of diesel delivery company Fuel Logic LLC shares that doing so helps them stay on top of phishing scams and credential stuffing:
We use advanced fraud detection tools that analyze transaction patterns and regular security checks to keep these threats at bay.
This proactive method helps us find holes in our defenses before they can be used against us.
Unlike authentication measures, these technologies work in the background, monitoring how customers interact with your business and catching any anomalies without disrupting their experience.
As more consumers create online accounts with stored payment information, these accounts become valuable targets for fraudsters.
Cybercriminals are using increasingly sophisticated methods to gain unauthorized access to customer accounts, often through phishing schemes or by exploiting weak passwords.
We combine AI’s speed and pattern recognition with human expertise to evaluate complex cases and adapt to new fraud tactics quickly.
This balanced strategy allows us to leverage AI’s power while maintaining the flexibility and contextual understanding that only human analysts can provide.
According to Rafael Lourenco, fraud detection systems like ClearSale are well-equipped to handle cybercriminals’ advanced tactics and safeguard customer accounts.
Here are our top recommendations:
Educate employees and customers
Your proactive attitude shouldn’t only center on your processes and platforms; it should extend to the people as well.
First, your staff.
Kate Hill of Kate Hill Flowers, a floral design and flower delivery company, states that investing in your employee’s continuous education about emerging threats is one of the most effective strategies to combat fraud.
She suggests:
Regularly update your team on potential scams and the latest fraud detection technologies.
Encourage open communication about security concerns within your organization.
It also helps to teach them what suspicious activities could look like.
In the subject of phishing, for instance, the following fraud indicators can signal the alarm:
- Multiple orders using different credit cards
- Unusual purchase paths
- Mismatched shipping address
- Data anomalies (ex: a shopper with a Spanish IP number making a purchase using a US credit card)
- Quick back-to-back transactions or sudden bulk orders
Next, your customers.
Karen Cheng of Journaling Supplies, an online seller and wholesaler of stationery tools, shares:
We’ve found that educating customers about safe payment practices and maintaining a transparent security posture builds trust and enhances overall protection.
To do this, you can provide regular security tips through newsletter emails and blog posts.
Speaking of emails, you can safeguard customers even further by:
Clearly stating what kinds of emails you will be sending out.
Clarifying what your users can expect from your business will help to give your customers the confidence they need to clearly recognize certain emails as spam or phishing attempts.
Clear and open communication with your customers will help to protect them from scams, which will save your company on chargeback fees and fraudulent payments in return.
Reminder: Whenever chargebacks occur, merchants shoulder the penalty and fee associated with them.
Data shows that they can only win 17.4% of disputes against chargebacks, so it pays to be proactive.
Collaborate with other businesses
Ecommerce companies can also gain an advantage by sharing information about threats and working collaboratively.
As Lee Clark, cyber threat intelligence production manager at the Retail and Hospitality Information Sharing and Analysis Center (RH-ISAC), points out:
Scammers are talking with each other to share information, so the businesses fighting fraud also need to collaborate.
Ecommerce brands may compete in the marketplace, but fighting fraud, we’re all in the same boat.
Non-profit organizations like RH-ISAC coordinate information sharing among companies to combat fraud and cybercrime industry-wide.
You can also join forums, provide support to fraud investigations, and participate in online retail-related conferences like Ecom World.
Stay up-to-date with security measures
Ecommerce payment fraud attacks evolve. So should your security measures. It’s your company’s job to stay in the know.
Defending against these threats requires continuous learning and understanding of fraud trends.
Also, we can’t discuss modern fraud prevention without mentioning AI.
AI is currently doing a good job analyzing transaction data, customer behavior, and external information to create a baseline for the normal user activity. This is how it helps flag fraudulent actions.
But it’s just in its early stages.
Ferrusi Ross shares, “Security vendors are experimenting with other ways to use AI, so expect to see more applications of AI in payment fraud protection.”
While AI isn’t flawless—it’s only as effective as the data it’s trained on—it’s a technology worth keeping an eye on as it continues to develop and enhance fraud prevention strategies.
Online Payment Fraud: Final Thoughts
Ecommerce payment fraud, is, in some ways, a cost of doing business. But that doesn’t mean you should take it lying down.
The costs of payment fraud are too damaging, so you need to fend it off as much as you can.
Be vigilant by implementing the right tools, training your staff, and staying up-to-date with your security measures.
I’ll leave you with some more resources on how to foolproof your payment processes.
On ecommerce payment processing:
- Ecommerce Payment Processing: The Best Tools & Strategies for Success
- 14 Expert Ecommerce Payment Processing Tips For Savvy Ecomm Brands
On credit card payment processing:
- 20 Best Credit Card Processing for Ecommerce
- Credit Card Authorization vs. Authentication: What’s the Difference?
- Setting Up Credit Card Authorization for Your Business: Best Practices
On mobile payment processing
- 15 Mobile Payment Types For Your Online Store (+ Benefits & Tools)
- 19 Best Mobile Payment Solutions, Reviewed & Compared
On subscription payment processing:
Happy reading and staying away from fraud actors!
Keeping up with ecommerce trends isn't easy. Subscribe to our newsletter with the latest insights for ecommerce managers so you can save hours researching industry trends yourself.
Payment Fraud FAQs
Payment fraud is such a thorn in any ecommerce business’ side, so there’s no doubt you still have some questions.
The answers might be here:
How can I tell if an email is a phishing attempt?
Here are some of the red flags pointing to phishing:
- Suspicious sender’s address
- Spelling and grammar
- Confusing email layout
- Subject lines conveying false urgencies
- Generic greetings
Here’s also a good example:
What steps should I take if I suspect fraudulent transactions in my ecommerce store?
The tips above should guide your business away from deceptive practices. But if you still run into fraudulent transactions, be quick on your feet.
John Gilda, Head of Payments Compliance at Vixio and an ex-regulator at the Financial Conduct Authority (FCA) has a tip:
“An ecommerce brand must act quickly to report to the relevant authorities, inform affected customers, and preserve evidence for legal proceedings.
Once the issue is resolved and communicated with relevant parties, the next steps are to document the incident response and adjust preventative measures accordingly thoroughly.”
What steps can small businesses take to protect against payment fraud?
Choosing the best payment processor and fraud detection software can handle much of the workload for you. But understandably, they can be quite steep for businesses operating on a small budget.
Take advantage of your ecommerce platform’s built-in capabilities. Shopify for instance has its very own fraud detection system set up.
You can also limit your payment methods at first and train your employees to recognize fraud signals regularly.
