Combat Payments Fraud with the Right Identity Verification Solution

Payment fraud poses a significant risk to both business finances and customer privacy. Combating this threat demands advanced and adaptable defensive measures that match the sophistication of fraudulent tactics.

There are various forms of payment fraud, ranging from the theft of credit card numbers via unprotected card readers to deceptive, malicious emails. Research by Tessian in 2021 revealed that employees in the US receive an average of 14 emails per year that attempt to induce financial fraud. This figure is notably higher in certain industries, such as retail, where workers encounter an average of 49 fraudulent emails annually.

Phishing is among the most prevalent types of payment fraud, responsible for 44% of all data breaches in 2020. Identity theft, where personal information is stolen to make fraudulent purchases, accounted for 24% of nearly 6 million fraud reports in 2021, according to the FTC. These examples highlight just a few of the many types of payment fraud that businesses must guard against.

Although payment fraud is a serious threat, businesses can mitigate its impact with a range of effective defensive strategies. Understanding the common types of payment fraud, how they operate, and the best practices for protection is essential for safeguarding your business and customers.

What is Payment Fraud?

Payment fraud is a form of financial fraud where false or stolen payment information is used to acquire money or goods. It can manifest in various ways, often involving the theft of credit card or bank account details, forging checks, or using stolen identity information to conduct unauthorized transactions.

Types of Payment Fraud

Criminals employ various methods to commit payment fraud. Here’s a closer look at some of the most prevalent tactics and how to protect yourself:

Phishing Attacks

Phishing is a social engineering attack where fraudsters try to trick individuals into revealing sensitive information like login credentials and credit card details. They achieve this by creating fake emails, text messages, or websites that appear to be from legitimate sources like banks or reputable online retailers.

Phishing emails often urge the recipient to click a link to update account information, verify a recent transaction, or claim a prize. Clicking the link directs the victim to a fraudulent website designed to steal personal information upon entering login credentials or credit card details. Phishing attacks can also occur via text messages (smishing) or social media platforms (pharming).

Here’s how to stay safe from phishing scams:

Be cautious of clicking links or opening attachments from unknown or suspicious sources.
Watch out for common tactics used by fraudsters, such as urgent or threatening language, misspelled words, or suspicious links.
Using antivirus software can offer additional protection.
Phishing scams evolve over time, so staying informed and educating yourself and your employees about how to recognize and avoid these attacks is crucial.

Identity Theft

Identity theft is a serious crime where a fraudster steals a person’s personal information, such as their name, Social Security number, or credit card number, to make unauthorized purchases or open accounts in the victim’s name. This can have severe financial and legal consequences for the victim and cause significant stress and anxiety.

There are several ways identity theft can occur. Phishing attacks are one method. Data breaches, where a hacker gains access to a company’s database and steals personal information on a large scale, are another. Stealing mail, dumpster diving, or stealing wallets or purses are other techniques used by fraudsters. Once they obtain personal information, they can use it to open new credit card accounts, apply for loans, or even file false tax returns.

Here’s how businesses can help prevent identity theft:

Ensure customer data is stored securely using encryption and other security measures to prevent unauthorized access.
Limit access to customer data to employees who specifically need it for their jobs.
Require strong passwords and multi-factor authentication for all accounts and systems that contain customer data.
Train employees on security best practices, including how to identify phishing emails and create strong passwords.
Monitor customer accounts for suspicious activity, such as unauthorized logins or changes to account information, to detect identity theft early and minimize damage.
Implement a plan for responding to data breaches, including notifying affected customers and offering services to protect against identity theft.

Chargeback Fraud

Chargeback fraud, also known as friendly fraud, occurs when a customer disputes a legitimate transaction. They may claim they did not make the purchase themselves or that they never received the product or service they paid for. In some cases, the customer might receive a refund while keeping the product or service, resulting in a financial loss for the business. Chargeback fraud can have significant financial consequences for businesses, including losing revenue from the sale and being subject to chargeback fees and penalties.

There are a few ways chargeback fraud can occur:

A customer makes a legitimate purchase but later disputes the charge with their credit card company, claiming the item was not as described or that they never received it.
A customer intentionally uses a stolen credit card to make a purchase and then disputes the charge as unauthorized.

Here’s how businesses can protect themselves from chargeback fraud:

Verify the customer’s identity and ensure they are the rightful owner of the credit card used to make the purchase. This can involve requiring a signature or CVV code for card-not-present transactions or implementing fraud-detection tools like address verification or IP geolocation.
Maintain a clear refund and return policy and a process for handling chargeback disputes.
Keep clear records of all transactions, including receipts, shipping information, and customer communications, to provide evidence in a chargeback dispute.

Business Email Compromise (BEC)

Business email compromise (BEC) is a type of payment fraud where criminals trick employees into transferring money to fraudulent accounts. The criminals gain access to a business email account, often through phishing or social engineering tactics. They then use the compromised account to send emails to employees or vendors requesting bank transfers or other payments.

BEC scams can take many forms. Often, they involve a criminal impersonating a high-level executive or vendor and requesting an urgent payment or transfer. The email may look legitimate, using the company’s branding and a familiar email address. However, if the employee follows the instructions in the email, they will transfer the money to a bank account controlled by the criminals.

BEC scams can be difficult to detect as they often involve social-engineering tactics that exploit human trust in authority. However, there are some signs that point to a BEC scam, such as:

Urgent requests for payment
Unusual payment instructions
Emails that contain unusual grammar or spelling errors

Here’s how businesses can protect themselves from BEC scams:

Educate employees on how to recognize and report suspicious emails.
Implement strong email security protocols, such as two-step authentication and encryption.
Establish a clear payment-approval process that includes verifying payment instructions through a secondary channel, such as a phone call or in-person conversation.
Regularly monitor bank accounts for suspicious activity.
Have a plan in place for responding to a BEC scam, including contacting law enforcement and notifying customers or partners who may have been affected.

Card-Not-Present (CNP) Fraud

Card-not-present (CNP) fraud is a type of payment fraud that occurs when a criminal uses stolen credit card information to make purchases without physically presenting the card, usually online or over the phone. CNP fraud has become increasingly common with the rise of e-commerce. What’s more, it can have significant financial consequences for businesses, which may be liable for chargebacks or fraudulent purchases.

CNP fraud usually occurs when a criminal obtains stolen credit card information through data breaches or other means, and then uses that information to make unauthorized purchases online. Another method is when a criminal uses social-engineering tactics, such as phishing, to obtain the card information directly from the victim.

Here’s how businesses can protect themselves from CNP fraud:

Use fraud detection tools, such as address verification or IP geolocation, to verify the identity of the customer and detect suspicious activity.
Implement strong authentication protocols, including two-step authentication and tokenisation, to protect card information.
Maintain clear, accessible records of all transactions, including delivery information and customer communications, in case of chargeback disputes.
Create a thorough refund and return policy that is clearly communicated to customers, as well as a process for handling chargebacks and fraudulent transactions.

By understanding these payment fraud schemes and the measures you and businesses can take, you can be better equipped to protect yourself and your finances.

How Does Payment Fraud Impact Businesses?

Payment fraud adversely affects businesses in several ways:

Financial Losses: Direct monetary loss from fraudulent transactions.
Increased Chargeback Fees: Higher costs due to disputed transactions.
Reputational Damage: Loss of customer trust and potential decrease in business.
Legal and Regulatory Challenges: Potential fines and legal issues related to compliance violations.

Why Effective Identity Verification Matters

Implementing robust identity verification measures is crucial for businesses utilizing payment technologies. Effective identity verification solutions confirm users’ identities during account creation, login attempts, and high-risk transactions. By accurately authenticating identities, often through biometric methods, businesses can prevent fraudulent activities and safeguard customers’ sensitive data.

Key Considerations for Selecting an Identity Verification Provider

When choosing an identity verification company, businesses should prioritize the following factors:

Accuracy and Reliability: Seek a provider known for delivering precise and dependable identity verification services. Utilize advanced technologies like biometric authentication and machine learning to enhance accuracy and minimize false positives.
Compliance with Regulations: Ensure the solution complies with relevant regulations such as KYC and AML laws. Compliance is critical for industries like finance and healthcare to avoid legal issues and maintain regulatory trust.
Scalability and Integration: Select a solution that can grow with your business and integrate seamlessly with existing payment systems. The verification process should be smooth across various channels—web, mobile, and in-person.
Fraud Detection Capabilities: Look for providers offering robust fraud detection and prevention measures alongside identity verification. Integrated solutions combining real-time monitoring and analytics can preemptively identify and block fraudulent activities.
User Experience: Consider how the verification process impacts user satisfaction. A user-friendly interface, especially features like selfie verification, enhances customer experience and reduces abandonment rates.
Security and Privacy: Prioritize solutions adhering to industry standards for data encryption, storage, and transmission. Ensure compliance with privacy regulations like GDPR to protect user data from unauthorized access or misuse.
Financial Stability: Evaluate the financial health of potential providers amidst market shifts. Ensure they have the resources to invest in technology, stay ahead of fraud trends, and support your business long-term.

Businesses can ensure alignment with security needs and compliance obligations while enhancing user experience by carefully assessing these factors when selecting an identity verification provider. A robust solution not only defends against identity fraud but also builds trust and customer loyalty.

In today’s commerce landscape, payment technologies are indispensable yet vulnerable to identity fraud. To mitigate these risks, businesses must prioritize accurate identity verification solutions that authenticate users effectively and prevent fraudulent activities. Partnering with a reputable provider such as IDcentral enables businesses to strengthen their payment technologies, safeguard assets, and protect sensitive customer data amidst evolving threats.