Payment fraud is a major issue for many businesses and can result in significant losses. We cover some of the main areas where payment fraud occurs, and explain what you can do to help keep your business secure. The types of payment fraud we discuss include payroll fraud, credit card transaction fraud, and chargeback fraud.
Every business relies on collecting revenue from customers and sending payments to suppliers, employees, partners, and others. Of course, criminals are also interested in these areas and how they can exploit them for fraudulent gains. It’s important to understand how payment fraud can happen, and what you can do to protect your business. We’ll cover three main areas:
- Payroll fraud
- Credit card transaction fraud
- Credit card chargeback fraud
Let’s get into it.
“According to the Association of Financial Professionals, 81% of businesses reported a business payments fraud attempt in 2019 and the FBI cites business email compromise as one of the top cybersecurity threats with more than 23k complaints in 2019.”—Payments Journal, Dirty Little Secret – Business Payments Fraud Is Real and It’s Coming For You.
Payroll Fraud Causes Overpayments to Employees for Work They Didn’t Do
Payroll fraud happens when an employee claims and receives wages for work that they did not do. Common ways this can happen include:
- Employees requesting an advance on their wages that they do not pay back, or that you forget to deduct from their next paycheck.
- Employees inflating the hours or days they worked in their timesheets, when they were not working at those times.
- Employees getting other workers to “clock in” for them or carry out otherwise fraudulent behavior.
- Employees stealing the paychecks of other workers and cashing them for themselves.
How to Reduce and Avoid Payroll Fraud
There are several things you can do to deal with payroll fraud:
- Carry out background checks on employees to identify historical bad behavior.
- Create policies that require managers and supervisors to carefully review and discuss employee timesheets with workers.
- Implement biometric scanning so that it’s impossible for one employee to clock in for another.
- Use a centralized, SaaS-based payroll system that all managers, supervisors, and HR have access to.
- Regularly audit payroll to check that everything makes sense and to identify problem areas early on.
Use payroll prepaid debit cards to pay wages to your staff, speed up and protect their payments, and provide transactional security. Payroll cards protect you and your employees and help you reduce costs.
Credit Card Transaction Fraud Means You Never Get Paid for Products and Services Provided
Perhaps the biggest issue for retailers is the use of stolen or fake credit cards to purchase goods and services. Identity theft and data breaches often result in lists of card credentials being circulated on the Dark Web, that criminals can then use to make purchases.
Online retailers are especially vulnerable, as “card-not-present” transactions are much more likely to result in fraud.
“Card-not-present (CNP) fraud occurs when someone fraudulently uses a credit card number online, over the phone, or in another manner where they don’t have to provide the physical card. According to Juniper Research, retailers could lose as much as $130 billion from CNP fraud over a five-year period.”—CreditCards.com, How entrepreneurs can protect themselves from credit card fraud
How to Protect Against Credit Card Transaction Fraud
Fortunately, there are several good techniques to reduce the risk of credit card transaction fraud:
- Use strong credit card verification methods and fraud detection—there are many sophisticated software solutions that can identify problematic transactions in real time using artificial intelligence and machine learning.
- Identify problematic patterns in orders like unusual types of purchasing or buying large quantities of items.
- Require additional identity verification from the customer for large or unusual purchases.
- Use an address verification service to check that the address provided by the customer is the same as the address the credit card is linked to.
- Turn on additional verification, like two-factor authentication, in your payment processing software.
Credit Card Chargebacks Create Significant Costs for Merchants
If you sell products as a traditional retailer or via online or social media channels, then most of your transactions are likely to be credit or debit card payments. One of the biggest issues with these types of payments are chargebacks—where a bank or other payment party orders you to refund money to a customer, and then implements a chargeback fee on top of that!
Fraudulent chargebacks happen as follows:
- Someone places an order for one of your products.
- They pay by credit card or debit card.
- You send out the item and they receive it.
- The customer claims never to have received it and reports this to their bank or credit card company.
- Their bank then demands a refund from you.
- You refund the money, losing the value of the original purchase.
- You also have to pay a chargeback fee, further reducing your revenue.
The fraudulent part of this process is that the customer received the goods and then demands a refund anyway.
In some cases, chargebacks might be requested by a customer without criminal intent—for example, if they do not recognize a charge on their credit card statement, even if it is legitimate. This is known as “Friendly Fraud” and even if it’s not intentional, it can still prove to be expensive.
“On average merchants will spend 3-5% of their revenue combating fraud. However, up to 1% of orders are still missed and those often will result in chargebacks.”—BigCommerce, How Fraud Can Impact Your Business
How to Reduce Chargeback Payment Fraud
There are some effective ways to combat chargeback fraud:
- Use strong credit card verification methods and fraud detection—fraudulent chargebacks often happen when the original credit card is fraudulent. Using good credit card verification and fraud detection technology will help to protect against chargebacks.
- Confirm customer addresses—fraudsters will often give false addresses, so checking that locations are legitimate can reduce this risk.
- Identify problematic patterns in orders like unusual types of purchasing or buying large quantities of items, as these can lead to chargeback fraud.
- Confirm all orders with customers and email them to let them know about the purchase. Keep them informed throughout the processing and shipment of their order.
- Use shipment tracking and require signature confirmation to get proof of delivery.
- Have a clear return policy, for example, if you don’t offer refunds.
- Record interactions with the customer so that you have proof if you’re a victim of chargeback fraud.
We hope you’ve found this guide to common payment fraud helpful, and that you can take the right steps to significantly reduce potential losses.