This guide is designed to provide you with some essential information on best practices to aid in combating fraud effectively and safeguarding your business from potential risks. By combining the best practices outlined in this guide merchants can reduce their exposure to fraud, chargeback losses, and maintain customer trust in their brand.
Understanding Fraud
Fraud occurs when unlawful transactions or deceptive practices are used to gain unauthorised access to financial resources. Common types of fraud in payments processing include payment card fraud (which also constitutes chargeback fraud), identity fraud, phishing and skimming. By understanding the different forms of fraud, merchants can better identify potential threats and act proactively to avoid these.
Fraud vs Scams
Fraud is commonly defined as unauthorised payment/access on an account made by a third party, the fraudster, without the account owner’s authorisation. Whereas, a scammer deceives the account owner into submitting an authorised transaction for the benefit of the scammer. Scammers are usually highly experienced and use sophisticated lies to gain customers' trust. There are many types of scams, some include romance & dating scams, investment scams, IT support, and fake charities.
Types of Card Fraud
‘Card Not Present (CNP)’ Fraud
This refers to transactions that are most commonly conducted online or over the phone, where a card is not physically present at a terminal.
This is the most common type of payments fraud, in AusPayNet’s published fraud statistics in FY22 CNP fraud represented 91% of all card fraud in Australia at $454.6 million.
A fraudster in this scenario obtains a cardholder’s payment details via scams or various illegal practices, such as phishing attacks or purchasing stolen card lists online.
Fraudsters then use those payment card details to purchase goods online anonymously, often buying goods that can be readily re-sold and converted to cash. The legitimate cardholder will then raise a dispute with their bank on the unauthorised transaction and the merchant is held liable to prove that the purchase was made by the cardholder. As it was a fraudulent transaction the funds will be deducted from the merchant settlement account and sent to the cardholder's bank to then be re-credited.
Mail Order/ Telephone Orders (MOTO) is a similar CNP fraud type, whereby merchants process card payments obtained by customers over the phone or via a form received in the mail. In both cases the payment card was not physically presented by the customer for payment at a terminal, which makes it subject to CNP fraud liability for merchants if the transaction turns out to be fraudulent.
Measures to reduce this fraud include:
- Your staff are a crucial asset at being the first line of defence when it comes to detecting fraud. Maintain a high level of training amongst staff when it comes to verifying cardholders, suspicious customer behaviour, and educating employees on the latest fraud/scam trends.
- Understand the fraud risks in accepting payments via different channels. Lower fraud risks in taking in store card present payments versus payments over the phone or online.
- Implement procedures to reduce your fraud risk, as an example a merchant may decide to not accept orders over the phone for high value purchases or require photo ID to be presented when picking up goods in store that were ordered online.
- Consider utilising a fraud screening service to review online transactions to identify and reduce online fraudulent transactions.
'Card Present' Fraud
As the name suggests in this instance the physical card is present and used at the terminal at time of payment. The card user would either have transacted by entering a PIN or the PayPass/Contactless method. The fraudster would be using a legitimate customer’s card, this would be either a stolen or copied card.
Measures to reduce this fraud include:
- Educate staff to be alert for customers who test a number of cards at the check out. Especially if they appear to be in different names.
- Create procedures that ask for additional checks to be undertaken if a customer has numerous failed payment attempts, for example, check ID matches card name before allowing a third card to be used for payment.
‘First Party Fraud/ Friendly Fraud’
This type of fraud occurs when customers raise a dispute on legitimate transactions with their card issuer as being fraudulent.
This can occur in error, for example, the description of the merchant store in the bank statement was not recognised by the customer and hence raised as an unauthorised transaction. Unfortunately we also see cases whereby people knowingly seek to raise disputes on goods they purchased, or in some cases use this to resolve service disputes with the merchant.
Measures to reduce this fraud include:
- Ensure your business trading name (not the legal entity name) is the name displayed on your payments service. Customers can then reconcile the purchase they made when reviewing their bank statement.
- Understand the ‘compelling evidence’ rules Visa has introduced to enable merchants to contest friendly fraud cases when they are raised as a dispute/chargeback. The key to this is keeping good records on purchases made, enabling you to better challenge any disputes - i.e. copies of any ID provided (when necessary), delivery address details, and evidence of delivery being fulfilled.
Fraud prevention is an ongoing process that requires vigilance and adaptability. By incorporating the strategies outlined in this guide, you can fortify your business against potential threats, safeguard your customers' data, and maintain trust in your brand.
Useful Resources
Staying on the look out for fraud and scam trends within the payments space can be challenging, here are some handy resources to keep you on top of your game:
Australian Payments Network | AusPayNet
AusPayNet publishes informative content linked to payment fraud, such as statistics and reports. https://www.auspaynet.com.au/
Australian Competition and Consumer Commission | ACCC National Anti-Scam Centre
A government funded initiative to raise awareness on recognising, avoiding, and reporting scams. https://www.scamwatch.gov.au/
Payment Schemes
Visa/Mastercard provide useful insights on common payments frauds and ways to protect your business.
https://www.mastercard.com.au/en-au/business/merchants/safety-and-security.html
https://www.visa.com.au/pay-with-visa/security/fraud-prevention-tips-for-merchants.html