With around 120 million payments made in the UK every day, secure payment services are absolutely essential for businesses and consumers alike. As your business grows, the number of payments you make and receive will increase, along with the risk of payment fraud. However, understanding common fraudulent payment techniques and how to use fraud detection tools can safeguard your business and protect your customers’ personal information.
In this guide, we’re going to provide valuable insights into providing secure payment services and using fraud detection tools, helping your business to safeguard customer data and minimise financial risks.
First of all, let’s take a look at what payment security is, and what it entails.
Understanding payment security
Payment security refers to the measures taken to protect sensitive financial information during transactions, including credit card numbers, bank account details and personally identifying information. By implementing safeguards such as using a secure payment gateway, implementing fraud detection tools, and following fraud prevention best practices, businesses can maximise the integrity of each transaction.
What does a fraudulent payment mean?
A fraudulent payment is a transaction that is unauthorised or deceptive, conducted with the intent to steal money or personal information. They could be made by someone looking to steal money, purchase items to use or to sell, launder money, or as part of a larger identity theft scheme.
Payment fraud is a serious concern, with millions of pounds being stolen every year by criminals. In particular, online payment security is an essential consideration for businesses, as 295 million online card transactions are made every month in the UK. By safeguarding this data, businesses and financial institutions can minimise the risk of unauthorised access, theft or fraud.
For consumers, the consequences of payment fraud include a loss of money, potential negative impact on their credit score, and emotional distress caused by being a victim of crime. For businesses, the loss of money is also a key concern, along with damage to their reputation or even being hit with a fine if they’re found not to comply with UK payment regulations.
Common payment fraud techniques
Various fraudulent techniques are employed in payment processing, posing significant risks to businesses and individuals. It is essential to understand these techniques in detail to recognise their impact on businesses and individuals. Some common payment fraud techniques include:
1. Identity theft
Identity theft involves stealing someone’s identifying information, such as their name, address or credit card details, to impersonate them and make unauthorised transactions. By making fraudulent payments, a person may be able to gather additional information that can then be used for additional illegal activities. With this type of fraud, the criminal may have the additional details required to pass security checks that may otherwise prevent the fraudulent payment from being accepted.
2. Account takeover
Account takeover is when a fraudster gains unauthorised access to a user’s account by stealing their login credentials or using phishing techniques. This could be an online banking account, a login to an ecommerce site, or an online membership. Once the fraudster has control of the account, they can make purchases and payments, access additional personal information, and change the user’s login details to prevent them from accessing the account.
3. Card-not-present fraud
This type of fraudulent payment is when a person makes a transaction without physically presenting the card, such as online or over the phone. Fraudsters can obtain card details using techniques such as hacking, phishing or card skimming, and can use them to make unauthorised purchases. It is particularly challenging to combat card-not-present fraud because the physical card isn’t required, making it harder to verify the cardholder’s identity.
4. Phishing
Phishing is technique employed fraudsters to deceive unsuspecting individuals into divulging their confidential information, like credit card details or login credentials. They will often act as trustworthy entities through email, text messages, or phone calls, luring their victims into a trap. Phishing has become an all too familiar tactic in the realm of payment fraud, exploiting the trust we place in legitimate institutions.
5. Merchant identity fraud
In this method, criminals set up a merchant account on behalf of a seemingly legitimate business and charge stolen credit cards. They disappear before the cardholders discover the fraudulent payments, leaving the payment facilitator liable for the loss and associated fees
Best practices for payment security
Unfortunately, it’s impossible to fully remove the risk of fraudulent payments. However, businesses can enhance their online payment security and minimise the risk of fraud by implementing security best practices.
1. Multi-factor authentication
Implementing multi-factor authentication adds an extra layer of security by requiring users to provide more than one form of identification when they log in or make a transaction. This could include a combination of a variety of different authentication methods, such as a password, a unique code sent to their email address or mobile device, biometric verification, security questions, push notifications or physical card readers.
2. Encryption
Encryption involves scrambling sensitive data during transmission and storage to prevent unauthorised access. Even if the data is intercepted, it’s unreadable without the encryption key, making it useless to fraudsters. It’s an effective defence against data breaches, maintaining the confidentiality and integrity of valuable data across digital platforms.
3. Tokenization
Tokenization replaces sensitive data, such as credit card numbers, with unique tokens. These tokens are meaningless to attackers, and can’t be exploited even if they’re intercepted. This technique allows for the safe storage and transmission of data without the risk of exposing sensitive information to unauthorised parties.
4. Fraud detection tools and prevention strategies
The use of fraud detection tools and risk management software plays a crucial role in safeguarding payment transactions. Implementing these strategies can significantly mitigate fraud risks and protect businesses and customers from financial losses and other negative impacts.
5. AI-powered fraud detection systems
Artificial intelligence algorithms can analyse large volumes of data in real time to identify patterns. This means that, as well as learning what a normal transaction would look like for a particular user, they can also identify anomalies that are indicative of fraudulent activity. These systems are able to flag and prevent fraudulent payments almost instantly, making them an effective tool for detecting payment fraud.
6. Machine learning algorithms
Machine learning algorithms are able to analyse historical data to detect patterns and predict payment fraud. These patterns may include unusual spending behaviours, transaction times or purchasing locations. Machine learning algorithms can monitor and flag transactions in real time, as well as continuously adapting and refining their detection criteria to improve accuracy.
7. Transaction monitoring tools
Transaction monitoring tools analyse payments as they occur, enabling the immediate detection of suspicious patterns or anomalies. They use rules-based alerts such as predefined spending thresholds or unfamiliar payment locations to flag suspicious activities, before assigning a risk score to the transaction based on its likelihood of being a fraudulent payment. High-risk transactions are then prioritised for further action, such as additional verification steps or automatic rejection.
Collaborative efforts to combat payment fraud
Industry collaboration is essential in combating payment fraud effectively. By working together to share insights, define best practices and create new initiatives, payment processors, financial institutions and regulatory bodies can enhance fraud prevention measures. We’ve already seen a number of successful collaborative efforts in the industry that have helped to increase online payment security and, as technology continues to develop, more initiatives are sure to follow.
For example, the Payment Card Industry Security Standards Council (PCI SSC) is a global forum established by major payment card companies including Visa, MasterCard and American Express. Its key responsibilities are creating and maintaining security standards for payment processing, providing training and education programs, and offering certification for professionals who help businesses to comply with PCI standards.
Other notable payment fraud initiatives in the UK include:
- Dedicated Card and Payment Crime Unit (DCPCU)
- Joint Fraud Taskforce (JFT)
- National Cyber Security Centre (NCSC)
- Payment Systems Regulator
- Take Five - To Stop Fraud
Compliance and regulatory considerations
Compliance with industry standards and regulations is crucial for ensuring secure payment processing. A key Payment Card Industry initiative governing the protection of payment card information is the Data Security Standard (PCI DSS). This comprehensive set of standards has been designed to ensure that all companies that process, store or transmit payment card information maintain a secure environment. Essential requirements include maintaining a secure network, using encryption to protect cardholder data, and implementing strong access control measures.
Failure to comply with payment security standards opens up businesses and their customers to the risk of fraudulent payments, which can result in a loss of money and reputational damage. Noncompliant businesses may also incur financial penalties that could be devastating. Staying up to date with regulatory requirements as the payment security landscape evolves is therefore absolutely essential, whatever the size and nature of your business.
Keep on top of payment fraud
By regularly reviewing and updating your online payment security measures and fraud detection tools, you can minimise the financial risk to your customers. Implementing fraud management software is a great way to keep on top of the latest industry standards and best practices, supporting compliance and protecting your business.
Get in touch with us for more information about managing the risk of payment fraud for your business.