What is an Online Payment Fraud?

6 mins

What is Payment Fraud?

What is online payment fraud? E-commerce/online payment fraud is one of the most common fraudulent activities, which stands for any type of illegal online transaction performed by cybercriminals. A victim is usually an online user who experiences the following types of losses: loss of money, interest, sensitive information, or personal property through an online means.

With the increase in online transactions, plus unlimited access to internet technology, online customers face a plethora of risks to their personal information and a breach of security policies. Another major problem with online payment systems is the management of fraudulent entries. The high demand and user preference in e-transaction has allowed new fraudulent methods to increase aggressively. A survey conducted by CyberSource suggests that businesses in North America are expected to have a loss of 0.8% of total revenue because of fraud. In the case of India, this figure is somewhere between 4-5%. Since online payment fraud is an issue of global scale, the measures to tackle this must be proportionate.

E-payment/online payment fraud can be categorized into two categories: online and offline frauds. Theft or misuse of important credentials (personal identification number, credit card details), phishing, and spoofing attacks are all different types of online fraud. Offline fraud examples include phone solicitation or mail frauds. Compared to the growth rate of transactions every year, detection and prevention of such fraud are near to impossible, because of its sophistication and short time period with which the transactions take place between two people or more.

What are the Different Ways of Payment Fraud Detection?

Payment fraud can happen in one of the three following ways:

  1. Being robbed of the article that is supposed to be delivered at the given address after purchasing
  2. Online payment transactions that are unauthorized
  3. False demand for refund, or bounced checks

Online Fraud Detection - Types of Payment Fraud

Online Fraud Detection: online payment fraud isn’t limited to the traditional type of fraud, which is known as email fraud. Today, with the high rate of internet adoption, various methods and technologies are used, which are more evolved. Globally, almost 1 out of 3 consumers is victimized by card fraud. According to new global benchmark data from ACI Worldwide and Aite Group, 30% of consumers around the world have experienced card fraud in the last five years. The study on global fraud, with more than 6,000 consumers across 20 countries, revealed that, compared to a study in 2014 on card fraud rates, illegal activity on different payment cards (debit, credit, and prepaid) is on the global rise. There was an increase in online payment fraud in 14 out of the 17 countries between 2014 and 2016.

Some behaviors can prove risky, such as leaving a smartphone unlocked. This has a direct correlation to fraud, so much so that the landscape of risk for online payment fraud is rising, alongside the global shift in an increase of smartphone/tablet usage. With such existing loopholes in a system, with regard to payment systems or online transactions, criminals will be enticed to exploit them. However, it’s not just consumers who are at risk when it comes to online fraud detection. Indeed, recent data detects that major retailers have increasing incidents of fraudulent emails, as their businesses are at risk of email and online payment fraud. The precautions for online safety that apply to consumers can also protect various businesses. But, at the same time, it’s also important for businesses to have a security plan in place, to ensure that employees are able to protect sensitive data. Businesses should have an IT department dedicated to protecting the company’s data from illegal groups/hackers or activities, whilst taking all the necessary precautions.

Here are some common practices to protect your personal information.

  • Identity Theft: Some of the most common types of online fraud detection are identity theft, phishing, and account theft. This may include the use of credit cards, as fraudsters can easily carry out a card-not-present transaction. Identity theft isn’t something new, since it also exists outside the digital world. This is a type of fraud that typically involves a cybercriminal - one who attempts to steal the personal information of a customer/user by hacking their systems. After this, the hacker uses this information for illegal online payment transactions. Because cybercriminals have all of the customer’s personal information, this makes it easy for them to bypass any fraud detection firewalls or restrictions. However, since the e-commerce website doesn’t know the difference, and mistakes the person purchasing as the original owner of the credit card, the payment is easily made. In most of these scenarios, it's the hacker who purchases most of the items.
  • Phishing: There are many websites and email subscriptions that prompt the user/customer to opt for newsletters and alerts. Most of the time, these subscriptions will require the user to provide some of their personal data, including their credit card information. In case the email is not from a trusted source, the user’s data will be stolen and used for carrying out illegal transactions/online payment fraud. To prevent this from happening, search engines and web tools have made it possible for the user to identify trusted sources (banks, registered businesses, etc.). This way, they can guarantee that their data will be in safe hands.
  • Advanced Wire and Fee Transfer Scams: With the vast space of the internet, there are chances that a person may come across fake sites asking for a small amount of down payment, which they promise to return after the initial payment has been made. This is a technique for hackers/scammers to trick the users into giving out their credit card information. The hackers want customers/users to complete their payment for a service or product that is false via an advanced money wire transfer - before any payment fraud detection can happen.
  • Merchant Identity Fraud: This is a type of online payment fraud that involves the cybercriminal coming up with a merchant account that is similar to that of a legal business. The criminal then places fallacious charges on credit cards, all of which are stolen. This type of fraud activity is done so quickly that the original cardholder is far from realizing the truth of what has happened.
  • Pagejacking: E-commerce/online business sites are targeted by cybercriminals who use their website to hijack their customers and direct them to an untrustworthy website source. The purpose behind this is that the unwanted website will probably contain some malicious programs that can breach the website’s security systems and acquire the users’ funds falsely.

Payment Fraud Prevention 

Payment Fraud Prevention: E-commerce websites use online payment systems, such as Paypal and Amazon Pay, which allow their customers to pay their bills/complete their payment for the commodities they’re purchasing. Moreover, the majority of the businesses have taken it as their responsibility to facilitate these online financial transactions on their websites, as a way to increase their business revenues.

This constitutes the fact that billions of dollars are transferred electronically between several accounts using this online payment system. This results in more and more criminals trying to steal some of these funds through fraudulent payment schemes, which leads to online fraud detection.

Online Fraud Prevention - How to Prevent Payment Fraud

Online Fraud Prevention: Businesses online have now become aware of such schemes and have started raising awareness about online payment fraud activities/schemes and online fraud prevention. Although it may not be possible to completely get rid of cybercriminals, there are still a few methods to curb online payment fraud:

  • Take a cue from the latest trends in online fraud for online fraud prevention
  • Try to opt for a verified payment system
  • Be sure to use antivirus software in order to run constant checks for payment fraud detection
  • Be sure to regularly change your login and token credentials
  • Keep strict policies for accessing crucial and sensitive information
  • Use encryption for emails and transactions with confidential information


The Financial Action Task Force (FATF) published its first report on New Payment Methods in October 2006, which initially looked into the potential money laundering and terrorist financing (ML/TF) implications of payment innovations. This provided the opportunity for the user to make payments directly through technical devices (personal computers, mobile phones, or data storage cards). It confers that one of the important goals in the online payment system is to prevent fraudulent entries and ensure better security. Achieving this objective requires different payment fraud detection measures and technological support. In recent years, there has been a huge increase in the number of online shoppers and digital transactions, leading fraudsters to devise new ways and techniques to illegally obtain money. So, most of the payment fraud detection techniques are trying to maximize the accuracy rate and minimize fraud at a minimum cost. No single tool can identify all types of fraudulent entries, but a combination of strategically designed policies for payment fraud detection, along with strong technical support and the right kind of fraud management, is the ideal support for fraud mitigation.

Payment fraud prevention and online fraud detection techniques are our safest bet to mitigate fraudulent entries in the online payment systems. There should be a focus on developing a mechanism with the combination of different techniques and strategies by which revenue loss can also be controlled. For identifying non-complying countries, FATF also has a FATF grey countries list, which is also known as ‘jurisdictions under increased monitoring’.

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