Fraud
What is fraud?
Fraud, also called a fraudulent transaction, is any unauthorized or deceptive payment made by illicitly acquiring and misusing someone's card, banking, or identity details. It's carried out by individuals or organized groups seeking financial gain through unauthorized access to sensitive data.
In card payments, fraud is a common root cause of the involuntary losses a merchant absorbs. A fraudulent purchase often surfaces later as a , when the real disputes the charge with their bank and reclaims the funds. The merchant loses the goods, the payment, and often a dispute fee on top. Because the transaction looks legitimate at the moment of purchase, fraud is usually detected only after the money has moved, which is what makes it so hard to reverse.
Key facts
- Also known as: fraudulent transaction, payment fraud
- Common types: card fraud, identity theft, account takeover, , and
- Common techniques: phishing, skimming, hacking, and data breaches used to steal card or login credentials
- Applies to: any business accepting payments, with card-not-present channels carrying more exposure than in-person payments
- Main consequence: chargebacks, scheme fines, and lost revenue
Types of payment fraud
Payment fraud takes several forms, and a single attack often combines more than one.
- Card fraud uses stolen card numbers to make purchases the cardholder never authorized, most common in card-not-present channels like e-commerce, where the physical card is never checked.
- Identity theft uses stolen personal data to open accounts or transact in someone else's name.
- Account takeover is when an attacker gains control of a legitimate customer account and transacts from it.
- Friendly fraud is when a genuine cardholder disputes a real purchase to reclaim their money, whether by mistake or on purpose.
- BIN attacks are automated attempts to find valid card numbers by cycling through combinations tied to a bank's BIN range.
Why it matters
Fraud rarely stops at the stolen payment. Once a charge is questioned it becomes a and then a chargeback, and the merchant pays a fee regardless of the outcome. Even a dispute the merchant wins costs staff time to gather evidence and a processing fee that is rarely refunded.
High chargeback volumes carry heavier consequences than the lost sales alone:
- Card schemes place merchants that breach their chargeback ratios into monitoring programs with escalating fees.
- Sustained fraud can lead an to raise reserves or terminate the merchant account.
- Repeated fraudulent activity damages the merchant's standing with , which lowers future authorization rates.
How to prevent fraud
No single control stops every attack, so fraud prevention layers several checks across the payment flow:
- Real-time transaction monitoring and flag risky payments before they settle.
- authenticates the cardholder during checkout and shifts fraud liability to the issuer.
- Multi-factor authentication makes account takeover harder by requiring more than a password.
- Encryption and tokenization keep stolen card data useless to an attacker.
- Velocity and device checks catch automated attacks such as BIN testing.
