Fraud hurts businesses on many fronts. Each dollar of fraud costs US businesses an average of US$4.60, a figure that is expected to continue growing. Beyond financial loss, the secondary effects of fraud – such as reputation damage and the loss of customer trust – can affect a business's long-term success.

With the rapid rise in global e-commerce and digital transactions, there are more opportunities for e-commerce cybercriminals to exploit weaknesses in security systems. As the methods employed by fraudulent actors become more sophisticated, e-commerce businesses must evolve their strategies to mitigate risks and prevent financial loss.

Below, we'll discuss the different types of fraudulent transactions, the conditions that create opportunities for a high volume of fraudulent transactions and how businesses can prevent, detect and respond to these attacks.

What's in this article?

• What is a fraudulent transaction?
  
• Types of fraudulent transactions
  
• Why do fraudulent transactions happen?
  
• How to prevent fraudulent transactions
  
• How Stripe Radar can help
  

What is a fraudulent transaction?

A fraudulent transaction is an unauthorised or illegal activity involving the use of payment instruments or financial systems, typically for the purpose of obtaining money, goods or services without proper consent or authorisation from the account holder. This type of transaction often involves identity theft, stolen payment information or deception and is intended to cause financial harm to the account holder, business or financial institution.

Online payment fraud is growing rapidly, with global losses projected to reach US$91 billion in 2028. In response, businesses are investing heavily in advanced technologies such as AI to enhance fraud detection and prevention.

Biometric authentication, which offers a more secure and reliable way to verify user identities before a customer makes a purchase, is also on the rise. The market size for biometric point-of-sale terminals is expected to increase by US$18.34 billion between 2024 and 2029. These trends highlight the importance of understanding what constitutes a fraudulent transaction, and what steps businesses can take to prevent them.

Types of fraudulent transactions

There are many types of fraud that can occur within financial systems. Here are a few examples:

Credit card fraud

Credit card fraud is unauthorised use of a credit card or its information to make purchases, withdraw cash or transfer funds without the cardholder's permission. Common types include:

• Card-not-present (CNP) fraud: Card-not-present fraud occurs in online or phone transactions where the physical card is not required.
  
• Counterfeit cards: Counterfeit cards are fake cards that use stolen card information.
  
• Card testing: Fraudulent actors make small purchases with stolen credit cards to test if the cards are active, before making larger purchases or reselling the card information.
  

Identity theft

Identity theft is the act of impersonating someone else to gain access to their financial accounts, obtain credit or make transactions without their knowledge or consent. This may involve using stolen personal information, such as US social security numbers or dates of birth.

Cheque fraud

In this scenario, fraudulent actors use altered, counterfeit or stolen cheques to withdraw funds or make payments without authorisation. Tactics include:

• Forged cheques: Creating fake cheques, using someone else's account information.
  
• Cheque washing: Removing information from a legitimate cheque and replacing it with fraudulent details.
  
• Stolen cheques: Using cheques that were taken without permission from the rightful owner.
  

Wire fraud

Wire fraud is unauthorised use of electronic communication or financial systems to transmit funds, often through false pretences or misrepresentation. This may involve phishing scams, business email compromise (BEC) schemes or other methods of deception.

Online payment fraud

Online payment fraud consists of unauthorised transactions via online payment platforms or digital wallets. This may include account takeovers, phishing scams or using stolen payment information.

Mortgage fraud

Mortgage fraud is providing false or misleading information on a mortgage application to obtain a loan or better loan terms. This can involve income misrepresentation, inflated appraisals or fraudulent documents.

Insurance fraud

Fraudulent actors make false claims or provide misleading information to an insurance company to receive undeserved benefits or payments. This can involve staged accidents, exaggerated damages or injuries or false documentation.

Investment fraud

Investment fraud is manipulating investors or financial markets with deceptive practices, such as selling fraudulent investments or securities. Examples of investment fraud include Ponzi schemes, pump-and-dump schemes and insider trading.

Businesses and customers should assume that types of fraudulent transactions will increase in number and evolve as technology and globalisation continue reshaping our economies and payment systems.

Why do fraudulent transactions happen?

Understanding the motivations and systemic conditions behind fraud is an important step in building a plan to protect your business. Some common drivers of fraudulent transactions include:

• Financial incentives: Monetary gain is the primary motivation for most fraudulent actors. Perpetrators may be enticed by the prospect of acquiring funds, goods or services without paying for them or by making a profit through illegal means.

• Technological advancements: The increasing sophistication of technology has provided fraudulent actors with new tools and opportunities to commit fraud. Cybercriminals can exploit security vulnerabilities, develop malware or use social engineering techniques to gain access to sensitive financial information.

• Anonymity: The internet makes it easy for fraudulent actors to operate anonymously, making it more difficult for authorities to identify and apprehend them.

• Information accessibility: The widespread availability of personal and financial information through data breaches, social media and public records makes it easier for criminals to gather the data needed to commit identity theft and other types of fraud.

• Financial system complexity: The intricate nature of financial systems creates opportunities for fraudulent actors to exploit weaknesses or gaps in security, regulation and oversight.

• Lack of awareness: Many customers and businesses may not be fully aware of the risks associated with fraudulent transactions and the importance of taking ample security measures, making them more vulnerable to fraud.

• Social engineering: Fraudulent actors often use psychological manipulation techniques to deceive their victims, taking advantage of trust or authority to extract sensitive information and gain unauthorised access to accounts.

• Weak security measures: Insufficient security protocols, outdated systems and weak authentication processes can make it easier for criminals to breach accounts and commit fraudulent transactions.

How to prevent fraudulent transactions

Businesses must proactively prevent, detect and respond to fraudulent transactions to safeguard their financial assets, protect customer data and uphold their reputation. Implementing a comprehensive fraud management strategy can minimise the risks associated with fraudulent activities.

The approach each business should adopt depends on its unique needs and vulnerabilities, but here are steps that will benefit most businesses:

• Implement robust security measures
  Implement state-of-the-art security technologies to protect sensitive data and systems. This may include using multi-factor authentication (MFA), encryption and secure communication channels and regularly updating software and systems with the latest security patches.

• Employee training and awareness
  Establish a comprehensive training programme to educate employees about common fraud schemes, red flags and best practices for safeguarding sensitive information. Foster a culture of security where employees feel empowered to report suspicious activities and incidents.

• Monitor transactions and accounts
  Use advanced fraud detection tools, such as AI, to identify unusual patterns or anomalies in transaction data. Implement transaction limits, velocity controls and regular account reviews to swiftly detect and mitigate high-risk transactions.

• Implement strong internal controls
  Develop and maintain a system of checks and balances within your organisation to minimise the risk of internal fraud. This may involve segregating duties, conducting background checks on employees and regularly auditing internal processes and controls.

• Enhance customer verification processes
  Implement rigorous procedures to verify customer identities and prevent account takeover or identity theft. Collaborate with third-party databases or credit bureaus to validate customer information.

• Collaborate with other businesses and financial institutions
  Forge strong relationships with other businesses and financial institutions to share information on fraud trends, prevention strategies and best practices. Engage with industry associations or organisations dedicated to combatting fraud to stay ahead of emerging threats.

• Develop a fraud response plan
  Develop a well-defined fraud response plan, including clear protocols for investigating and addressing fraudulent activities. Designate a dedicated fraud response team that is responsible for managing incidents and connecting with law enforcement agencies, if necessary.

• Maintain clear communication with customers
  Inform customers about potential fraud risks and encourage them to monitor their accounts vigilantly. Offer guidance on how they can protect themselves from fraudulent activities, such as creating strong passwords and exercising caution when sharing personal information.

By taking these steps, businesses can create a more secure environment that is more difficult for fraudulent actors to penetrate. Read more about how to take an aggressive, global approach to detecting and preventing e-commerce fraud and how to prevent credit card fraud.

How Stripe Radar can help

Stripe Radar uses AI models to detect and prevent fraud. These models, trained on data from Stripe's global network, are continuously updated based on the latest fraud trends, protecting your business as fraud evolves.

Stripe also offers Radar for Fraud Teams, which allows users to add custom rules addressing fraud scenarios specific to their businesses and access advanced fraud insights.

Radar can help your business:

• Prevent fraud losses: Stripe processes over US$1 trillion in payments annually. This scale means Radar can accurately detect and prevent fraud, saving you money.
  
• Increase revenue: Radar's AI models are trained on real dispute data, customer information, browsing data and more. This enables Radar to identify risky transactions and reduce false positives, boosting your revenue.
  
• Save time: Radar is built into Stripe and does not require any code to set up. In a single platform you can also monitor your fraud performance, write rules and more.
  

Learn more about Stripe Radar, or get started today.