Types of Payment Fraud and Solutions for Them

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Types of Payment Fraud and Solutions for Them

All online industries are booming since the COVID-19 pandemic started, as people had to shift the majority of their activities to the Internet. However, where the money goes, online payment fraud follows. Various types of payment fraud exist, from eCommerce scams to online dating fakes, synthetic identities, friendly fraud, and chargebacks. Today we cover the most prevalent types of payment fraud and what fraud solutions exist for dealing with them.

This overview is based on insights from Covery and data from public sources. As enterprise-grade risk mitigation, transaction monitoring, chargeback management, and anti-fraud system, Covery has quite a lot of know-how on the matter. For example, you might not know that while AmEx cards are used for almost 18% of payments at online dating and eCommerce sites in the USA and Canada, they only amount to 0.5% of fraud cases. Read on to discover more insights that will help you enable reliable anti-fraud solutions for your business!

What are the three types of fraud?

As a brief introduction, while Covery provides fraud detection tools to deal with financial fraud, we have sufficient knowledge about all three major types of fraud, according to the ACFE classification:

  • asset misappropriation (from internal larceny to fraudulent refunds and cash payout schemes)
  • corruption (from bribery to money laundering and terrorism financing)
  • financial fraud (from Card Not Present fraud to impostor identities and chargeback scams)

However, Covery mostly deals with Fintech, dating, gambling, and eCommerce scams like bonus abuse, synthetic identity theft, affiliate fraud, friendly fraud, chargeback schemes, and account takeovers. Thus, let’s take a closer look at different payment fraud cases that can occur at your website.

What are the different types of payment fraud?

According to Investopedia, the most common online payment fraud types are as follows:

  • Identity theft. It occurs when someone gets hold of your PII like credentials, Social Security Number, bank account ID, credit card details, and more. This enables scammers to forge identities using your personal data, open new bank and eCommerce accounts, charge payments and start fraudulent chargebacks for them.
  • Mortgage fraud. While not necessarily an online payments fraud, this type of illegal activity involves forcing victims to perform fishy payments and requires money laundering afterward, so Covery fraud detection software can investigate it too.
  • Credit/debit Card Not Present fraud. When someone steals your credit card data, they can abuse it in many ways, from direct cash withdrawals to making unwarranted purchases online. Credit card payments you don’t recognize, lots of attempts to charge your card for small sums of money, uncalled for subscriptions — these and many other types of CNP fraud can be detected and prevented by the Covery platform.
  • Credit rate reduction robocalls. A relatively new branch of eCommerce scams, it involves calls from fake “credit rating solicitation” companies that promise to lower your credit rates (for a fee). Needless to say, any money paid on these offers is wasted and any PII provided can later be used in identity fraud schemes.
  • Fake charities. Lookup any charity calling you, as fake ones are booming according to the FTC report on charity fraud. They can even copycat texts from real charities, but any donations there will be wasted. Covery helps prevent this by checking any bank account info or other details provided for a record of involvement with fraudulent schemes.
  • Prize and Lottery fraud. Primarily aimed at elderly people, who often become naive and desperately want to believe in wonders. This fraud involves a requirement to pay some minuscule sum (for document processing, etc.) in order to collect a big prize at some lottery ( or inherit big money from a charitable prince, or any such schemes). Yet another FTC report on lottery scams goes into detail regarding the alerting signs of such scams.
  • COVID-19 fraud. With the COVID-19 pandemic still not fully contained, online fraudsters continue to peruse various governmental support opportunities. They then need to hide their ill-gained fortunes through various money laundering schemes, mostly eCommerce scams. This is where Covery shines, detecting such cases quite early in the customer journey and enabling you to minimize damage from them.

There are other scams like fake debt collection bureaus, but these prefer to operate in cash or prepaid debit cards, and are outside the scope of Covery’s fraud detection tools. But how do we detect payment fraud anyways?

How is payment fraud detected?

Covery deploys a combination of several features for online payment fraud detection and prevention: Trustchain, device fingerprinting, behavioral analysis, automated initial and ongoing KYC/KYB checks, AI-powered risk logic engine, and chargeback management tools.

We have covered each of them in detail in other articles, so below we merely describe their functionality briefly:

  • Trustchain. A global database of reputation records maintained by all the members of the Covery community. It is built using blockchain logic, so any information update is immediately propagated to all users — if some client details are marked as fraudulent, all the other Covery customers are immediately alerted. When coupled with an AI-powered risk logic engine, this means the automated application of required scenarios to ensure adequate response to fraud attempts.
  • Device fingerprinting. A proprietary device intelligence technology stores unique software and hardware identifiers of every device used to connect to your website. This allows for forming digital fingerprints, which help validate customers and prevent account takeovers and other fraudulent activities.
  • Behavioral analysis. An important part of Covery operations, it uses AI power to analyze the logs and discern normal — and abnormal — user behavior patterns on your website. As a result, it can detect suspicious activity on the fly and help you prevent fraud before it occurs, with automated rule engine scenarios.
  • Rule-based risk logic engine. Covery comes with 15 pre-configured scenarios catering to the most common business challenges of 23 industries. We also provide a flexible rule editor, enabling every merchant to create as many additional rules and scenarios as needed to fit their unique business needs.
  • Automated KYC/KYB. Covery is integrated with various KYC providers and is able to perform initial and ongoing KYC checks on registration and during every transaction in under 1 second. This way, we can minimize the risk of your business becoming a part of a money-laundering scheme.
  • Chargeback management. Through the partnership with EthocaVerifi, and Visa, Covery can fetch in-depth information about any transaction mentioned in a chargeback claim against you. This helps to minimize the number of chargebacks that make it to the dispute stage, thus it helps reduce your chargeback ratio and save you a ton of time, money, and nerves.

What is the most common type of online fraud?

This infamous title still belongs to synthetic identity fraud. It surged during the COVID-19 pandemic, and the Big Three credit bureaus in the US (ExperianTransUnion, and Equifax) project its further ongoing growth, with their counterparts in Europe following suit.

Scammers steal PII through hacking, phishing, whaling, and other methods, then use this data to forge identities, open eCommerce and other accounts and commit various fraudulent schemes.
Getting prepared to withstand this menace is crucial if you want your business to survive and prevail. Covery can help you achieve this goal, among other business objectives.

To see the full extent of our services and know firsthand the value Covery can provide for your company, order a free demo and let’s talk business!