CATEGORY - PAYMENTS

Fraudulent transactions: What causes them and how businesses can prevent them

Payments - 5 Nov, 2024

Table of Contents

What are fraudulent transactions?

A fraudulent transaction is when a payment is made to the account without the direct authorization of the card/account holder.

Fraudulent activities like skimming devices, phishing attacks, or data breaches can steal your card information. The offenders then use the stolen information to conduct transactions on the Internet, over the phone, or in physical stores (if they can replicate your signature).

Beware of possible fraud, such as unusual online purchases, unauthorised subscriptions, or unexpected money transfers.

What is the reason behind businesses experiencing pain?

Deceptive transactions negatively impact you and the businesses you patronise, leaving a sour impression on all involved. This is the reason why:

Businesses experience financial losses when a scammer conducts a deceitful transaction, which can result in the company missing out on the genuine sale and relinquishing the related revenue.

Businesses may encounter a dual challenge with fraud: if banks reimburse the money, the business may still need to repay the funds through a chargeback procedure. This could significantly affect their finances.
Security expenses: Companies allocate funds to security measures such as fraud detection systems to address fraud. These expenses can accumulate.

By being updated, all business owners can be vigilant against these deceptive schemes, safeguard their finances, and aid businesses in sidestepping fraudsters.

Types of Fraudulent Transactions

Today’s Digital Age is convenient but filled with dangers such as fraudulence. However, it has also created new opportunities for fraud. To observe some ordinary fraudulent transactions, read these guidelines below:

Identity Theft: Identity theft involves a broader range of activities, such as acquiring personal information such as names, social security numbers, tax refunds, and unauthorised transactions. It would help to be cautious when sharing sensitive information through the web or phone and carefully monitor your financial statements for signs of deception.
Invoice Fraud: This aims at companies by sending fictitious invoices for services not rendered. A swindler can deceive you into thinking their invoices are legitimate from actual vendors and then make away with your money. Pay attention to the details on invoices twice; if anything appears suspicious, contact the vendor immediately.
Insider Fraud: When someone within the company, such as an employee or a supplier, breaches trust by stealing money, misappropriating funds, and accessing confidential data, that’s insider fraud. For businesses, this danger may be reduced through safety checks and robust internal control systems.
UPI Fraud: This system is focused on the Indian users of the Unified Payments Interface. For instance, they can manipulate you into revealing your UPI PIN or send a bogus request pretending to be an actual transaction. Keep your PIN private from everyone, and confirm that the recipient is the one they claim before signing up for any UPI payment.
Online Scams and Phishing Attacks: Such crimes are meant to get victims to disclose their identity and financial details. It can come in the form of what looks like a genuine company, bank, or even friend emailing you a hoax email or message asking you to click on a malicious link or download an attachment that steals your data.

Remember - You can avoid falling prey to these popular scam techniques by being observant. If it sounds too good, then it probably is not valid. If you suspect anything strange is happening, report it to the relevant authorities and inform your bank promptly.

Causes of Fraudulent Transactions

Digital transactions have made life more accessible and introduced new vulnerabilities that fraudsters can exploit. Here is a breakdown of the significant factors contributing to fraudulent transactions:

Money Motive: The essence is financial gain. They target cash or goods and services using unauthorised actions.
Technological Advancements: Cyber criminals are always on the move. They employ sophisticated tools and exploit weaknesses in security systems to help them implement their plans.
Digital Anonymity: This digital landscape provides hiding for fraudsters behind screens, frustrating detection and making it hard for law enforcement agencies.
Data Accessibility: Personal data breaches and leaks are like a gold mine to fraudsters, which they use to forge identities, open false accounts, or indulge in identity theft.
Complex nature of Financial Systems: Modern financial systems can be highly complex and involve many parties. This complexity results in blind spots and security lapses that fraudsters can take advantage of
Unawareness of Fraud Risks: Traders, buyers, and even users do not pay adequate attention to the consequences they may encounter while transacting online. The J Harsh attitudes and this lack of attention make them easily conned and fall prey to fake activities.
Psychological Manipulation: Criminals are very experienced in social engineering. Generally, this is a type of manipulation and deceit by which the criminal makes the victim give them information, such as the password, OTP via SMS, or account numbers.
Security Weaknesses: Laxity in security matters, ageing software packages, and shallow passwords may compromise online systems. Such weaknesses make it easy for fraudsters to surpass all the laid-down measures and procure the desired information.

In this light, individuals and business entities can prevent frequent fraudulence in such transactions if they know the underlying causes. Some steps that could be taken to minimise the chances of being defrauded include avoiding neglecting security measures, being cautious, and learning new scams.

How Payment Gateway can help prevent fraudulent transactions

They are the virtual checkpoints that protect your eCommerce transactions, giving another layer of security against fraud. This is how they help in preventing fraudulent transactions:

Verification Tools:

Card Verification Value (CVV): The CVV code printed behind your card is one of the problematic pieces of information to obtain, which fraudsters usually need. The payment gateways screen transactions based on Matches of CVV.
Address Verification Service (AVS): Gateways may check to see if the billing address entered during checkout matches what is on file with the issuing bank. It signals known instances when stolen card details might be employed.

Extra level of security:

3-D Secure: This is an authentication protocol that creates an additional security layer when using your credit cards for online shopping; customers will be asked for their password/pin or even fingerprint while checking out from the cardholder bank (Also known as 3DS2)
Fraud Scoring: Payment gateways can consider multiple data points that are part of a transaction, such as IP address, billing address, and purchase history, to give the transaction a fraud risk score. They may identify it and flag the transactions; higher-scored transactions may be sent to be reviewed manually.
Device identification: Gateways can scrutinise the operating system and browser of the device used for the transactions. To find the suspicious activity pattern
IP Address Pointer: This helps to identify the geographical location of the device used for the transaction.
Pattern-based Transaction Monitoring: This involves analysing transaction patterns to identify anomalies and potential fraud.
Checking for Hotlisted Cards: This involves checking if the card used in the transaction is on a list of compromised cards.
FCORD Initiative: This is a collaborative effort between banks and merchants to combat fraud.
Link Analysis: This involves analysing the links between different transactions to identify potential fraud rings.

Security Standards Compliance:

PCI DSS Compliance (Payment Card Industry Data Security Standard): Payment gateways comply with PCI DSS, a stringent standard for securing cardholder data.
Machine Learning: Some gateways further the fraud detection game by incorporating machine learning algorithms to sift through large transaction data troves to spot recurring patterns that may signal an impending fraudulent attempt.

Payment gateways act as a gateway between merchants and consumers that helps to protect online transactions for both parties by utilising these methods. This is an inevitable consequence of fraud prevention systems — no system is perfect, and, as we highlight throughout this guide, the level of sophistication with which a scammer will try to evade your security measures will always be challenging.

Conclusion

Recognizing how these fraudulent transactions occur is necessary to safeguard individuals and businesses against financial loss. That is, fraudsters are motivated financially and facilitated by technology to maintain digital anonymity to access data that allows them to steal with impunity through Machiavellian acts such as payment card fraud or identity theft. By increasing the implementation of the given statement, we can protect ourselves from these frauds through solid security and payment gateway technologies. Understanding reasons and taking precautions allows us to surf the online wave without being drowned in a fraudulent transaction.

FAQ's

How can my business recognize a fraudulent transaction?

Spot fraudulent transactions: Look for inconsistencies like different billing and shipping addresses, unusual purchase times/locations, or mismatched IP addresses.

What are the common types of payment fraud that businesses face?

Common types of fraud: Be aware of credit card fraud (stolen numbers), account takeover (unauthorised access to existing accounts), and phishing scams.