5 Types of Payment Fraud Explained

“An ounce of prevention is worth a pound of cure.” 

— Benjamin Franklin (United States Founding Father)

Benjamin Franklin said this in the context of Philadelphia fires and hazards. And in this day and age, payment fraud is spreading like wildfire. These hazards can neither be reversed nor fixed. They can only be prevented by being alert.

You can be on either side of the transaction, customer or merchant, and be duped.

Preventive measures can only be implemented when you’re aware of the concerned attacks, with an in-depth understanding.

In this article, I’ll list the five major types of payment cheats so that you get alerted if any of the remotest symptoms of those 5 is spotted by you.

KEY TAKEAWAYS

• Payment fraud has become very common; staying alert is the only way to prevent it.
• There are mainly 5 types of payment swindles: APP, bait & switch, CNP, chargeback, and refund fraud.
• Due to better customer policies, it’s the merchants that need to be more aware.

Authorized Push Payment (APP) Fraud

A cheat poses as a legitimate party, a business, a bank, a government body, or even a family member. You send your hard-earned money thinking it’s going to the right recipient. These are called APP (Authorized Push Payment) scams. Unlike other forms of fraud, the customer actively approves the payment – but under false pretences.

Scammers will typically use phishing tactics to make customers believe they are legitimate – this could include fraudulent emails, texts, phone calls or links to cloned websites. We’ve all experienced phishing tactics before and sometimes it’s quite obvious when you’re dealing with a scammer. 

But APP swindling is getting more advanced nowadays due to technologies like email address/number spoofing and AI voice cloning. Always pause before you send over any money to someone – especially if they’ve reached out to you – and consider whether you’re actually interacting with someone you wholeheartedly trust. 

Bait and Switch Fraud

As the name suggests, “bait and switch” involves a bait and a switch. The former attracts you towards it, while the latter is the thuggery part. 

For example, you see an advertisement of a product at a low price, as you initiate the buying process, they charge you much more or deliver a product of inferior quality to what was described or photographed (such as ordering a frying pan online and receiving a toy frying pan).

It’s possible that you may have already dealt with such scams while buying products through Amazon and eBay, or by following links found on social media. It’s important to report sellers who are using deceptive tactics and to leave negative reviews where possible. 

If you cannot get a refund, file a chargeback if you have been a victim of false advertising. To help you avoid future bait and switch scams, always read customer reviews and be wary of new sellers that don’t have any reviews yet. Always question the legitimacy of a seller if the price is too good to be true (because, in many cases, it usually is too good to be true).

Card-Not-Present (CNP) Fraud

This swindle can affect either the customer or the seller. The fraudster is a third-party. It happens when a criminal uses stolen card details to make an online purchase, a phone order, or an in-app payment. There are many ways a fraudster can get someone’s card details, including:

• Physically stealing their card
• Using skimming devices like hidden cameras on ATMs or fake card readers
• Phishing (such as pretending to be a bank and asking to confirm card details)
• Data theft by hacking accounts and databases, or even by buying customer data sold illegally on the dark web

While customers can usually easily dispute such purchases and have them reversed, merchants can end up financially losing out, making them the biggest victims in this scenario. Businesses can prevent this type of fraud by using tools like 3D Secure (extra authentication steps), AVS (address verification), CVV checks, or fraud-scoring systems. Using a secure POS system is often key. 

By having POS systems explained when choosing a payment processor, you can select the most secure POS system for your company and reduce the risk of ending up as a fraud victim. Remember that a smooth checkout experience is also important and that overly aggressive security measures may put off honest customers – finding the balance between security and convenience is key. 

SURPRISING STAT
According to the European Central Bank, 80% card fraud value results from CNP swindling.

Chargeback Fraud

This is mostly done by mischievous frauds who pose as genuine customers. Also known as ‘friendly fraud’, chargeback swindling occurs when a customer makes a legitimate purchase, receives the goods or service promised, but then disputes the transaction with their card issuer. 

They might claim that the transaction was unauthorized, that the product never arrived, or that the item was not as described – even when that’s untrue. The bank then responds by pulling the money back from the merchant while also charging a ‘chargeback fee’, leaving the business out of pocket.

Not every chargeback is fraudulent – sometimes there are genuine issues that lead to a customer filing a chargeback. However, there are sadly many fraudsters out there who misuse the chargeback process as a way to get something for free. Businesses can defend themselves by keeping detailed records such as order confirmations, delivery tracking information, or proof of download/access. 

By keeping this information, it may be possible to dispute chargebacks (this can be time-consuming, but it’s worthwhile when fraudsters file chargebacks for valuable goods or premium services, which could result in heavy losses if not disputed). Strict but fair refund policies can also encourage customers to come to you for issues that are related to their card issuer. 

Refund Abuse

A similar fraud is abusing the refund policy by claiming a product did not arrive. A common form of refund abuse is bought clothes are the wrong size and then returned as ‘unworn’ even though the customer has worn them.

Refund abuse is most likely to happen when a company has a refund policy that is too lenient or if a retailer does not take adequate steps to confirm delivery. Make sure to clearly state the return window and make sure that this is not too generous (30 days may be enough for many products).

Also, make sure to clearly state the condition requirements for goods. How you provide the refund can also make a difference – for clothes that are the wrong fit, allowing a customer to swap the item could be preferable to a refund, while vouchers could be another option. 

If a product did not arrive before they needed it or was damaged when they received it, then a traditional monetary refund may be best. Always confirm that a product has been delivered by having the courier photograph it or asking for a customer signature.

Now you know everything about payment fraud. Earlier, only customers used to lose money in swindling like this. But now, due to better customer policies, many frauds dent only merchants. The only way to save yourself is to practice caution. 

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