Online payment fraud detection: best strategies and prevention tips

Summary: 

• Online payment fraud detection protects you and your customers from unauthorised transactions using tools like 3D Secure (3DS), machine learning, and AI to identify and mitigate risks effectively.

• Businesses must stay vigilant as online payment fraud attacks like e-skimming and account takeovers are becoming more common.

• Taking proactive measures against online payment fraud can reduce monetary consequences,  and protect your business’ reputation.

Online payment fraud has evolved alongside the growth of digital transactions. As eCommerce expanded and mobile payments grew, so did the methods and sophistication of fraud. In 2023 alone, 71% of businesses experienced payment fraud attacks.¹

To combat this, businesses and financial institutions have been investing more in online payment fraud detection using advanced tools like AI-driven fraud detection, two-factor authentication, and biometric verification to tackle the constantly evolving threat of online payment fraud.

Let’s look at the different types of fraud and the tools you can use to keep your business safe.

What is online payment fraud detection? 

Online payment fraud detection is the process of identifying and preventing fraudulent transactions in digital payment systems. It involves using various technologies and methods to spot suspicious activities and protect both businesses and consumers.

Common techniques include AI and machine learning to analyse patterns and flag unusual behaviour, two-factor authentication to verify user identities, and biometric verification like fingerprint or facial recognition. These tools help ensure that transactions are legitimate and secure, reducing the risk of financial loss and improving trust in online transactions.

How can online payment fraud affect your business?

Online payment fraud can lead to direct financial losses through theft, chargeback fees, and the cost of replacing goods or services. Customer trust can erode due to insecure transactions, resulting in lost business and negative reviews. Frequent fraud incidents can also damage your brand's reputation, making it harder to attract new customers. Operationally, dealing with fraud involves additional expenses for investigations, fraud detection tools, and customer support.

Common types of online payment fraud & prevention methods

Let’s review the most common types of payment fraud you might face and how you may mitigate these.

1. Chargeback fraud  

Chargeback fraud or friendly fraud occurs when a customer places a legitimate online purchase but later disputes the charges with their bank, claiming they didn’t receive the item or authorise the purchase.

The bank will then reverse the charge and refund the customer, even though the transaction is valid. This can cause your business to lose revenue, waste valuable time, and incur chargeback fees.

With friendly fraud accounting for over 70% of all chargebacks,² strong online payment fraud detection and prevention can save your business a lot of money.

How you can prevent chargeback fraud:

• Draft clear policies regarding returns, refunds, and shipping to avoid customer misunderstandings

• Implement package tracking and collect proof of delivery (POD)

• Communicate with customers promptly

• Use a payment processor with built-in fraud detection protocols

• Challenge illegitimate chargebacks

2. Card testing 

Card testing is a form of fraud where someone makes small, low-value transactions with a card they stole to see if it works. Once the fraudster confirms that the card is valid, they may make larger purchases.

Beyond direct financial losses, card testing floods payment systems with fraudulent transactions. This forces you to dedicate valuable time to reviewing suspicious activity, managing chargebacks, and reinforcing security measures.

However, with effective fraud detection tools, you can swiftly identify anomalies, safeguard your operations, and concentrate on serving legitimate customers and expanding your business.

How you can prevent card testing fraud:

• Implement CAPTCHA to prevent bots from making multiple transactions

• Set transaction limits and set up alerts from small, low-value transactions that could indicate card testing

• Limit the number of checkout attempts allowed from a single card or IP address within a certain timeframe

• Work with payment processors that have fraud prevention measures

• Use additional layers of authentication, such as 3D Secure (3DS), to verify the cardholder’s identity

3. Skimming 

Card skimming occurs when a fraudster uses a skimming device or software (e-skimming) to steal customer payment information. When a customer inserts or swipes their card, the skimmer captures the card’s data, which fraudsters can use to create a counterfeit card or to make unauthorised transactions.

Alternatively, a hacker could access your website and insert software that steals your customers' payment information. While card skimming can put your finances, reputation, and legal standing at risk, strong website security measures can help you block these attacks, protect your customers’ data, and build even greater trust in your brand.

How you can detect skimming fraud:

• Use secure payment gateways that are encrypted and compliant with PCI DSS (Payment Card Industry Data Security Standards)

• Require additional security information during checkout, like address verification (AVS) or CVV codes

• Have robust cybersecurity to prevent hacking attempts

• Use fraud detection software to identify fraudsters' attempts to checkout with skimmed cards

• Offer your customers contactless payment methods, which are less susceptible to skimming

4. Authorised push payment fraud

Authorised push payment (APP) fraud is a type of financial scam where a fraudster impersonates businesses, vendors, banks, and other trusted individuals to convince customers that they're making a legitimate payment.

This type of fraud is on the rise and could cause US$6.8 billion in damage by 2027.³ Beyond the considerable time and effort victims spend on recovery, businesses also suffer financially through increased operational overhead and the long-term effects of damaged customer trust.

How you can detect and prevent APP fraud:

• Inform customers immediately if you discover fraudsters attempting to impersonate your business

• Educate employees on APP fraud and how to avoid it

• Verify the identity of the vendor or supplier that’s requesting the payment

• Remain wary of urgent payment requests

5. Account takeover fraud 

Account takeover fraud occurs when a fraudster gains access to a customer’s account, such as a bank account, email account, or online shopping account.

With unfettered access, they can steal account details or make unauthorised purchases using saved payment information. Nearly 1 in 4 consumers were the victim of account takeover fraud (ATO) in 2024.⁴

For businesses, proactively preventing account takeover fraud is key to avoiding costly chargebacks and maintaining positive customer relationships. By investing in robust security measures, businesses can safeguard their revenue and build stronger customer confidence.

How to detect and prevent account takeover fraud:

• Watch for repeated failed login attempts

• Track logins and look for IP addresses that don’t match the customer

• Use device fingerprinting to spot sudden changes in IP, browser type, etc.

• Add an extra layer of security with multi-factor authentication (MFA)

• Monitor password reset requests

• Implement strong lockdown policies that limit access to compromised accounts

6. CNP fraud 

Card-not-present fraud, or CNP fraud, occurs when a fraudster obtains someone’s credit card information and uses it to make an online purchase.

Fraudsters can obtain this information by using phishing attempts, exploiting data breaches, or purchasing stolen card information. This is one of the most common types of online payment fraud and often involves other types, such as skimming and phishing.

For example, in the US alone, CNP fraud in 2024 resulted in an estimated US$10.1 billion in losses,⁵ a significant portion of which can materialise as costly chargebacks for businesses. However, by implementing effective fraud prevention strategies, businesses can proactively mitigate these losses and protect their bottom line.

How to detect and prevent CNP fraud:

• Use firewalls to protect against data breaches

• Require customers to provide their CVV code at checkout

• Monitor transactions for unusual behaviour like low-value purchases 

• Use fraud filters to identify potential cases of fraud

• Implement 3D Secure to authenticate transactions

5 best practices to prevent online payment fraud 

Implementing effective detection and prevention measures can help your business mitigate risks from online payment fraud. It safeguards you and your customers’ financial information and shields your company’s reputation – the key to maintaining customer loyalty.

Here are the best online payment fraud protection methods and how to implement them.

Use advanced fraud detection technologies

Fraud detection technologies that sift through data in real time can help your business detect when cybercriminals are testing out new fraud methods.

Payment processors like Airwallex use machine learning to detect payment fraud more accurately and in real time. This technology lets your business spot, prevent, and stop online payment fraud. It identifies patterns and unusual behaviour in real time for enhanced payment fraud detection.

As these models learn and adapt to new patterns and scenarios, they become more accurate and can better identify suspicious activity. Businesses that have embraced these transaction fraud detection tools have achieved a 40% improvement in overall fraud detection.⁶

3D Secure (3DS) 

One way to prevent fraud is to verify that your customers are who they say they're through 3DS. Instead of a customer just entering a password, you can request an additional PIN, one-time password (OTP), or fingerprint before the customer completes the purchase.

To implement adaptive 3DS, you can work with a payment processor that supports this feature. Using this technology can help you balance security and user convenience in your payment processes.

Assess risk-based authentication

Risk-based authentication (RBA) is a more dynamic approach to authentication. It improves payment security by assessing and scoring each transaction to determine the likelihood of fraud, triggering additional authentication steps when risk is deemed high. RBA considers factors like the customer’s device, location, transaction amount, and historical behaviour.

Multi-factor authentication can effectively block unauthorised transactions, but applying it across the board can frustrate your customers and increase cart abandonment. That’s where RBA shines. It balances strong security with a smooth, low-friction checkout experience by only requesting 3DS when customers meet certain risk thresholds.

Ensure compliance with regulations

The Payment Card Industry Security Standards Council (PCI SSC) has established a series of guidelines to help secure cardholder data and prevent unauthorised access and fraud. These rules apply to anyone handling payment information, which includes your business, payment processor, and bank.

In addition to global regulations, your business should also be in compliance with regional and local security and legal regulations, like the EU’s PSD3 or China’s Anti-Telecom and Online Fraud Law.

Choosing partners like Airwallex helps you comply to ever-evolving regulatory standards and ensures your payment data is securely handled and protected, minimising the risk of data breaches.

Continuous monitoring and improvement

The key to preventing the constantly evolving threats of online payment fraud is maintaining, updating, and improving your security measures. Regularly update software, implement multi-factor authentication, monitor transactions, train staff, and stay informed on new fraud trends.

A global payments solution like Airwallex enhances this with advanced fraud detection and real-time monitoring. Using sophisticated algorithms and machine learning, Airwallex identifies and prevents fraudulent transactions instantly. This continuous monitoring for unusual patterns allows for immediate action, significantly reducing chargeback risks. Airwallex also offers extensive resources and tools to maximise security, protect your bottom line, and ensure a positive payment experience.

What to do if you suspect fraud 

If you experience online payment fraud, taking immediate action can limit the impact and block future attacks. Start with these steps:

1. Flag the suspicious transaction with your payment processor or bank.

2. Contact the customer to verify the transaction. Once you’ve confirmed it’s fraud, immediately report it to your payment processor.

3. Update any applicable security measures to prevent similar fraud in the future.

4. Monitor your account for chargebacks and fraud claims.

5. Ensure you follow all regulations to better protect your business and customers.

The quicker you can detect fraud and take steps to mitigate the damage, the better.

Keep your transactions secure with Airwallex

Airwallex’s global Payments solutions use machine learning-powered fraud detection systems to improve the security of your online payments. By analysing transaction patterns in real time, our fraud prevention engine efficiently identifies and blocks suspicious activity. This proactive approach not only helps safeguard your business from fraud, but creates a more reliable payment experience for your customers, driving loyalty and online sales.

Frequently asked questions about online payment fraud 

What's the most common type of online payment fraud?

Credit-card-not-present fraud (CNP) is the most common type of online payment fraud. This is largely because many other fraud types fall under its umbrella. Cybercriminals can use phishing, skimming, and identity theft to obtain customer information and commit CNP fraud.

How do I stop online payment fraud?

The best way to stop online fraud is to use a payment service provider with robust fraud prevention measures. Fraudsters constantly change tactics, so your provider must be able to stay ahead of the curve.

How do I check for online payment fraud?

Be vigilant. Look for common red flags, such as multiple password reset requests, numerous small-value orders, or a sudden increase in chargebacks. You can also use advanced tools like machine learning and AI to help you identify suspicious activity quickly.

Sources:

1. https://www.jpmorgan.com/content/dam/jpm/commercial-banking/insights/cybersecurity/highlights-afp-2022-payments-fraud-and-control-report.pdf

2. https://www.chargeback.io/blog/chargeback-statistics

3. https://www.aciworldwide.com/app-fraud

4. https://spycloud.com/blog/cybersecurity-industry-statistics-account-takeover-ransomware-data-breaches-bec-fraud/

5. https://www.emarketer.com/content/spotlight-us-card-payment-fraud-losses-forecast-2022

6. https://resources.nvidia.com/en-us-cross-industry-briefcase/how-ai-helps-fight-fraud