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5 common types of online fraud

Can you guess how many credit card details are stolen globally? According to a Motley Fool report on credit card fraud for 2020 — more than 5 million daily. Credit card fraud makes up 41% of all the cases registered by FTC last year, and the number is steadily growing year over year (32% more than in 2019). With the consequences of recovering from a single online fraud scheme ranging anywhere between $94.000 and $148,000, it’s obvious why startups, SMBs, and all kinds of online merchants want to prevent various types of financial frauds to secure their bottom line.

Combating fraudsters is not easy, as different types of fraud use different approaches to defraud your business. However, each of the types of fraud has some distinct signs, that help identify it. Looking for these signs and halting or blocking such transactions help reduce your losses from all kinds of fraud, including the nastiest of them all — the chargeback fraud.  

Read on to learn of the 5 most common fraud categories, their modus operandi, notable signs — and the ways you can prevent and mitigate them.

Chargeback fraud

There will always be legitimate chargebacks due to various issues. Unfortunately, there will also always be fraudulent ones. When a customer commits a chargeback fraud, he/she wants their issuing bank to forcibly refund the money taken from their account by you as payment for any goods or services. 

As a result, the bank withdraws the money, files a chargeback claim and you have to pay the dispute fee and try to prove you are innocent. In the majority of cases — you can’t, you lose the cost of goods/services/delivery, lose the refund sum, and lose the money paid for the dispute fee.

Warning signs: For this type of fraud, they are literally impossible to list, due to the sheer variety of examples of credit card fraud. Your customer can be a wronged party, a fraudster, or an accomplice — and you will not know their role in most cases. This is especially hard to counter as the crooks use synthetic identities to fool your KYC checks, which leads us to the next point.

Synthetic identity theft

People leave their real-life details (addresses, email accounts, names, and other details) all over the internet, so fraudsters need only collect them from social media, forums. DIscord and other sources. They can alternatively get the info by fooling the victims to be a rep of some government structure, sociological research, or any other means. 

All the crooks have to do then is to forge new, synthetic identities from the components of real identities to preserve their anonymity on the web and commit fraud undetected. Synthetic identity fraud accounts for a whopping 71% of all the reported fraud cases.

Warning signs and solution: Repetition of the same details over and over again within different accounts. While hard to detect manually, it can be done using Trustchain — a global reputational knowledge base. With it, whenever a fraudster uses any of the compromised details, a merchant gets an alert, and this account is denied registration, or banned.

Overpayments and alternative refunds

Quite a popular scheme involving psychology rather than technology. Fraudsters seem to want to buy some goods, but ask to deliver them overseas, into one of the countries your standard delivery options do not cover. They offer an alternative route, like a “local shipping company” and offer you an additional payment as a tip. 

This way, you pay for the services of a third-party logistics company — but the parcel is never picked up from your storehouse until you are hit with a chargeback from a real cardholder. Needless to say, he did not purchase your products and never tipped you, so you lose the money you were given — and the money you paid to that non-existing logistics company.

Alternatively, a customer might state they overpaid for the purchase, especially if your cart supports open numbers. The fraudster then states he intended to pay only $30, but ended up paying you #300, for example. He politely asks for a refund but mentions the original payment card is already closed, so you should transfer the funds to another card. Should you do that — you lose both the initial $300 when a chargeback comes through and the $270 you paid to an alternative refund card.

Warning signs and solution: As described above, the warning signs for such types of fraud are customer requests to change your normal delivery/refund workflows. The best way to prevent them is to deny such requests, always deliver using your standard options, and refund only to the original source of payment. Even if the card is blocked, the issuing bank will automatically reroute the payment to the new card.

Triangulation fraud

This is one of the harder-to-detect frauds as there are several steps and several victims. Fraudsters create a replica of your site but set the prices for all items with HUGE discounts, attributing it to a limited-time marketing campaign. When your customers try to log in to their accounts, they provide their real login credentials to fraudsters. Should they decide to buy the discounted goods — they provide their credit card details. And once they understand they got scammed — they blame you. 

The villains can even use those login credentials and credit card details to log into your real platform and purchase the actual goods and deliver them to a shipping address on file. As a result, the customers get the goods and don’t get suspicious — until the fraudsters steal all of their money sometime further down the track.

Warning signs and solution: Purchases to an address different from the one on file. Should such orders be made, you must raise an alert and contact the customer directly to request confirmation of the changed delivery address. A legitimate customer will explain the reason, a fraudulent transaction will be blocked and you will inform your customer of them possibly becoming a victim of fraud, as well as the need to block access to that card and update their login and password with your platform.

Affiliate fraud

This is a very well-known online fraud. If your business provides an affiliate referral commission, there always is a risk that an affiliate network you partner with will mix some junk traffic into good traffic to receive their commission for clicks, registration, or any other user conversion numbers. Meanwhile, those numbers never actually convert into leads and revenues, as those are bots, synthetic identities, or page refresh scripts.

Warning signs and solution: Rapid increase in website traffic that does not result in increased revenues. Lots of spam emails or account registrations, which never perform any activity again. This is best solved using a combination of Covery functions — from automated KYC checks and device fingerprinting to behavioral analysis and business risk logic rules engine. Using these features helps reduce affiliate fraud by 80% or more.

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We listed only 5 of the most popular types of financial frauds. The list is much bigger, unfortunately. Credit card fraud chargeback comes in a huge variety of forms and preventing them is vital to ensure your business does not become a high-risk merchant and does not suffer from Visa and Mastercard sanctions.


How to do this best? Covery lends a hand! With a wide range of features, Covery provides immense risk mitigation, chargeback prevention, anti-fraud protection, transaction monitoring, and risk scoring capabilities. This helps cull the herd and identify fraudsters on the move while improving user journeys for legitimate customers. Should you need more info on how Covery can help your business or a demo of its features at work — contact us, we are ready to help!