How to Detect and Prevent Payment Fraud

Payment fraud costs businesses billions of dollars each year. From stolen payment credentials and phishing scams to fraudulent chargebacks, fraudsters continuously refine their tactics to exploit vulnerabilities in financial systems and processes.

Organizations that lack strong fraud prevention measures risk more than just financial losses — reputational damage and operational disruption can have long-term consequences.
To stay ahead of evolving threats, businesses need secure, automated payment solutions that enhance fraud detection and mitigation. Priority integrates advanced fraud prevention tools into its merchant services, payment processing, and commercial payment systems. These tools enable businesses to proactively reduce fraud risks by verifying transactions, detecting suspicious activity, and securing accounts payable workflows.

What Is Payment Fraud?

Payment fraud occurs when an individual uses false, stolen, or manipulated information to make unauthorized purchases or gain access to financial accounts. It can take many forms, including unauthorized credit card transactions or counterfeit checks created using stolen banking details. As businesses increasingly rely on digital payments, fraudsters constantly develop new tactics to exploit weaknesses in payment processing systems and bypass security measures.

9 Types of Payment Fraud

The first step in preventing payment fraud is understanding the various forms it takes, which include:

1. Bank Fraud

Bank fraud refers to deceptive tactics used to illegally access or manipulate banking systems. Common examples include check forgery, unauthorized withdrawals, and account takeovers (ATOs).

2. Chargeback Fraud

Also known as friendly fraud, chargeback fraud happens when a customer falsely disputes a legitimate transaction to receive a refund while keeping the purchased goods or services. This type of fraud can be difficult to detect because it often mimics genuine customer complaints.

3. Check Fraud

Fraudsters commit check fraud by altering, forging, or counterfeiting checks to illegally withdraw funds from business accounts. Organizations that use checks for payments are particularly vulnerable because they can be easily manipulated or duplicated.

4. Credit Card Fraud

Credit card fraud occurs when stolen credit card details are used to make unauthorized purchases. For example, a fraudster could clone a physical credit card using stolen data to commit counterfeit card fraud. Businesses that store customer payment information must safeguard their systems to prevent unauthorized transactions.

5. Debit Card Fraud

Similar to credit card fraud, debit card fraud involves unauthorized transactions using stolen or skimmed card information. However, because debit cards are directly linked to bank accounts, victims may experience immediate financial losses — often before they realize the account has been compromised.

6. Stolen Card Fraud

Fraudsters use stolen physical credit or debit cards to make unauthorized purchases before the cardholder reports the loss. Many transactions still rely on basic card verification methods, which means criminals can quickly rack up charges. This type of fraud is especially effective when merchants do not require PINs or contactless authentication.

7. Mobile Payment Fraud

Cybercriminals exploit weaknesses in mobile payment platforms to conduct fraudulent transactions. Often using social engineering tactics, they may use stolen device credentials, create fake accounts, or hijack digital wallets linked to compromised payment methods.

8. Wire Transfer Fraud

Scammers deceive businesses into sending wire transfers under false pretenses, often by impersonating executives, suppliers, or financial institutions. They may use tactics like email spoofing to create a sense of urgency, pressuring employees to authorize payments. It’s difficult to reverse a fraudulent wire transfer once completed, which makes this type of fraud particularly dangerous.

9. Money Laundering

Fraudsters disguise the origins of illicit funds by funneling them through businesses or financial institutions, making the money appear legitimate. By integrating illegal funds into the financial system of a legitimate business, these fraudsters can evade law enforcement and continue their activities undetected.

How Does Payment Fraud Happen?

Payment fraud happens when bad actors take advantage of gaps in financial systems and human oversight, like weak security awareness. Knowing the most common tactics helps businesses strengthen defenses and reduce risk.

Phishing Scams

Cybercriminals craft deceptive emails, text messages, or even fake websites to trick employees or customers into revealing sensitive payment information. Once victims provide login credentials or credit card details, fraudsters use this data to make unauthorized transactions or gain deeper access to financial accounts. These scams often mimic legitimate communications, making them difficult to identify.

Malware

Malware is a type of malicious software designed to infiltrate systems and steal sensitive data. It can capture keystrokes, extract payment credentials, and grant cybercriminals remote access to financial and business networks. Once installed, malware can run undetected in the background, modifying and collecting data for fraudulent use.

Data Breaches

Bad actors use tactics like malware and phishing to infiltrate systems and access databases containing sensitive payment information. After gaining entry, they can steal credit card details, account credentials, and personally identifiable information (PII). Cybercriminals can use this information to carry out further fraudulent activities or sell it on the dark web.

Credit Card Skimming

Sophisticated cybercriminals install skimming devices on ATMs or point-of-sale systems to steal card information during legitimate transactions. These devices read data from the card’s magnetic stripe, allowing fraudsters to clone the card and use it for unauthorized purchases or withdrawals.

Identity Theft

Fraudsters use stolen PII such as Social Security numbers, bank details, and driver’s license data to commit fraud. They may use this stolen information to open fraudulent accounts, secure loans, or make unauthorized purchases. Identity theft can have long-lasting consequences for victims, from financial losses and damaged credit scores to serious legal complications.

Account Takeover

Cybercriminals gain unauthorized access to legitimate accounts by exploiting weak passwords, using phishing scams, or executing credential-stuffing attacks. When a cybercriminal gains access, they can alter account details, initiate fraudulent transactions, or even lock out the rightful owner. Account takeovers can be hard to spot since fraudsters disguise their activity to look like regular user behavior.

Business Email Compromise (BEC)

Fraudsters impersonate vendors, executives, or employees using fake email accounts to trick recipients into transferring funds or sharing sensitive financial data. BEC scams rely on social engineering tactics, often using urgent or carefully worded messages to appear legitimate and bypass security filters.

How Does Payment Fraud Affect Businesses?

The impact of payment fraud extends beyond financial losses. It can damage an organization’s reputation, expose it to legal risks, and even increase operational costs due to chargebacks and fraud investigations.

Business Reputation

A company’s reputation is one of its most valuable assets. When a business experiences fraud, customers may lose confidence in the business, leading to decreased loyalty, higher churn rates, and lower sales. Negative press, social media backlash, and damaging word of mouth can further tarnish a business’s image, making it difficult to rebuild credibility.

Financial Loss

Payment fraud can result in substantial financial losses depending on the scale and frequency of fraudulent activity. Businesses can lose revenue from unauthorized transactions and incur costs related to chargebacks, fraud investigations, customer reimbursements, and potential legal disputes. Over time, these financial burdens can strain cash flow and impact overall profitability.

Chargeback Fees

When customers dispute legitimate transactions, businesses don’t just lose revenue from chargebacks — they also incur penalties from payment processors. High chargeback rates can lead to increased fees, stricter fraud monitoring requirements, or in serious cases, the suspension of payment processing services.

Operational Disruptions

Fraud incidents force businesses to divert time and resources toward investigation and resolution efforts. Teams must handle disputes, investigate incidents, and address customer concerns, all of which can pull focus away from core operations and reduce productivity. In some cases, businesses may need to take payment systems offline to investigate incidents, further disrupting daily operations.

High Operational Costs

Beyond lost revenue, payment fraud can drive up operational expenses. Organizations must dedicate time and resources to managing chargebacks, investigating fraudulent transactions, and implementing security upgrades to prevent future fraud. Frequent fraud instances can also lead to higher payment processing fees, compliance costs, and potential legal expenses. Additionally, reputational damage from fraud may require extra marketing efforts to help rebuild customer trust.

Legal and Regulatory Issues

Businesses that fail to comply with payment security regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), risk substantial legal penalties. Noncompliance can result in hefty fines, increased regulatory scrutiny, and potential lawsuits from impacted customers or partners.

How to Detect Payment Fraud

Payment fraud detection requires a combination of advanced technology and proactive monitoring. Consider the following detection tools to significantly reduce your organization’s exposure to payment fraud.

Behavior Analytics

Modern fraud detection systems use AI and machine learning to analyze transaction patterns and flag suspicious activities. For example, an AI-powered fraud detection tool may identify an unusually high number of transactions from one account within a short time frame. This type of anomaly often signals fraudulent behavior, enabling you to detect and mitigate fraud early.

Address Verification System (AVS)

AVS is a fraud detection tool that compares the billing address entered during a transaction with the address registered with the card issuer. If an individual enters a billing address that differs from their usual location, the system automatically flags the transaction for review. AVS is particularly effective for detecting card-not-present fraud in which stolen card details are used to make purchases online without physical verification.

Device Fingerprinting

Device fingerprinting tracks unique attributes of a user’s device, such as its browser settings, operating system, and IP address, to detect fraud. If a fraudster tries to create various accounts using the same device but different credentials, the system flags the suspicious behavior and blocks access.

Geolocation

Geolocation technology helps detect fraud by identifying discrepancies between the location of a transaction and the business’s typical financial activity. For example, if a supplier payment is typically initiated from an organization’s headquarters in New York but suddenly originates from an IP address in another country, the system can mark the transaction for further review.

How Can Businesses Prevent Payment Fraud?

Fraud prevention demands a proactive strategy that strengthens security measures and equips employees with the knowledge to recognize and respond to threats.

Avoid Using Checks

Paper checks are susceptible to fraud schemes like forgery, counterfeiting, and check washing. Switching to electronic payments, such as ACH transfers or virtual cards, enhances security by reducing exposure to check fraud. With solutions that enable you to pay vendors with a credit card, you gain additional fraud protection while experiencing benefits such as cash-back rewards and improved cash flow management.

Verify Customer Identities

Verify customer identities through multi-factor authentication (MFA) and government-issued ID checks to ensure that only legitimate users can complete transactions. This is especially crucial for high-value transactions where fraudulent activity can result in significant financial losses.

Train Employees

Employees serve as a critical first line of defense against most types of fraud. It’s smart to offer training that teaches employees how to recognize phishing emails and suspicious payment requests, as well as how to escalate potential fraud incidents.

Leverage Fraud Detection Tools

AI-powered fraud detection tools analyze transactions in real time, identifying and flagging suspicious activity as it occurs. While implementing advanced fraud detection tools requires upfront costs, it strengthens your security posture and helps prevent costly instances of fraud in the future.

Implement Strong Authentication Measures

Authentication measures like biometrics, one-time passwords, and token-based authentication add an extra layer of security by requiring users to verify identities with multiple methods, beyond just passwords. These safeguards make it significantly harder for fraudsters to gain unauthorized access.

Watch for Suspicious Emails

Fraudsters often use email-based scams to infiltrate financial systems. In your employee training, emphasize the importance of verifying payment requests and checking emails for red flags, such as unexpected attachments or urgent demands. Consider testing employees’ understanding of these learnings through simulated phishing emails.

Monitor Transactions

Real-time transaction monitoring enables you to detect and respond to suspicious activity instantly. Rather than trying to put out fires, you can set up proactive alerts that flag scenarios like high-value transactions, rapid purchases, or location changes to prevent fraudulent charges.

Secure Payment Gateways

Encrypted payment gateways with tokenization and end-to-end encryption safeguards can significantly boost protection against cyberthreats. By partnering with trusted payment processors that offer advanced fraud prevention tools, you can identify and stop suspicious activities before they escalate.

Enforce Strong Access Controls

Limiting access to financial systems ensures that only authorized personnel can process transactions and manage sensitive data. Implementing MFA and role-based access controls that grant permissions based on job responsibilities reduces the risk of both insider threats and external fraud. Additionally, audit logs and real-time activity monitoring can help you detect and respond to unauthorized access attempts before they lead to financial losses.

Prevent Payment Fraud Risks With Priority

As fraudsters constantly evolve their tactics, you can’t afford to take a wait-and-see approach to fraud prevention.

Priority equips your business with the tools to stay ahead of payment fraud. Our robust payment solutions — from merchant services and commercial payments to AP automation — are designed with built-in security features that help detect and prevent payment fraud. With advanced monitoring, secure transaction processing, and compliance-driven safeguards, you can reduce risk while ensuring seamless payment operations.

Get in touch with Priority to learn how you can fortify your payment processes against fraud.