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  • Writer's pictureRoy Urrico

Payment Fraud, a Growing Concern for Merchants and Financial Institutions

By Roy Urrico

Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.

Recent surveys and reports reveal payment fraud as a growing concern, especially for businesses and financial institutions (FIs). Many rip-offs are aimed at both businesses and sellers, consequently everyone holding a stake in transactions online must know how to recognize and evade the scams.

Inside the Numbers

Several reports shed light on the concerns and seriousness of payment fraud.

  • As business operations have become mainly digital, payment fraud has become a pain point for small businesses. That is according to a Cleveland-based KeyBank’s small business survey of nearly 2,000 small-to-medium size businesses with annual revenue of less than $10 million. Their top concerns: 44%, unauthorized transactions or unauthorized electric fund transfers; 37%, identity theft; 28%, malware and ransomware attacks; and 27%, phishing and email scams.

  • Payment fraud attempts on U.S. businesses spiked 71% in 2023, discloses fraud prevention firm Trustpair research taken from a survey of more than 260 senior finance and treasury leaders. In addition, 96% of U.S. companies were targeted with at least one fraud attempt in 2023, and 90% of those companies were hit with at least one successful attack. Also uncovered is 83% of U.S. companies saw an increase in cyberfraud attempts. Fraudsters primarily used text messages (50%), fake websites (48%), social media (37%), hacking (31%), business email compromise (BEC) scams (31%) and deepfakes (11%) to dupe organizations. CEO and CFO impersonations (44%) was the third most common type of fraud.

  • A PYMNTS Intelligence and Hawk report, Leveraging AI and ML to Thwart Scammers, surveyed 200 U.S. FIs with more than $1 billion in assets between March 20, 2023, and June 16, 2023. The report explored the impact of authorized fraud scams on FIs and their customers. It found 43% of the fraudulent transactions that FIs report are authorized fraud, which targets customers or financial institution employees. The most common type of authorized fraud involves parties modifying payment information or instructions, and this type of fraud accounts for 40% of all authorized fraudulent payments. The second-most common type are scams, where a fraudster manipulates or deceives the authorized party to make a payment, representing 34% of authorized fraud.

Trying to Educate Consumers

Despite continuing efforts to instruct consumers and businesses about protecting themselves against financial crime, increasing authorized fraud and scam instances continue to haunt credit unions and banks and their commercial and personal customers.

With that in mind, Dennis Pedersen, CEO of Estonia-based PayFasto, compiled a list of five common payment scams (condensed here) that online sellers could face and how to protect themselves against them.

  • Phishing scams. “Where criminals try to trick people into sharing their sensitive information, such as credit card details and passwords,” said Pedersen. Fraudsters typically do this by sending fake texts or emails that direct consumers to a third-party website that resembles a legitimate business. Phishing can compromise the privacy and security of consumers and stakeholders. They can cause financial and data losses and cause the public to lose trust in the company, leading to a damaged reputation and further monetary loss. “To spot phishing scams, it’s important that sellers educate themselves on phishing red flags and regularly train their employees to spot them,” he added.

  • Chargeback fraud. Also known as “friendly fraud” is when a seemingly well-intended customer makes a purchase with their credit card and then disputes the legitimate charge with their credit union or bank. “These people request a chargeback after receiving their order, typically claiming that they did not receive the item or that the payment was unauthorized in an attempt to receive a refund,” noted Pedersen. These scams can be destructive to internet vendors, who must pay much of the losses when a financial institution accepts the dispute. “It’s important that online businesses put merchant names and transaction details in banking apps to avoid customer confusion and that email confirmations are sent promptly after purchases are made,” explained Pedersen.

  • Return fraud. Similar to chargeback fraud, this occurs when a customer attempts to receive a refund by manipulating the seller’s returns process. “This might involve returning a different item, claiming the product arrived defective or exploiting the terms of the returns policy,” said Pedersen. To lower the chance of experiencing return fraud, sellers should develop and share clear, non-negotiable return policies and always follow them while processing returns.

  • Merchant fraud. This activity is defined as scammers posing as real businesses to deceive customers and make illegal profits. “They might create fake online stores that let consumers unwittingly make purchases, often at temptingly low prices. They may then send a counterfeit or low-quality product, or no product at all. While this directly targets consumers, businesses are hurt as a result,” said Pedersen. He added, “merchant fraud can harm a company’s reputation and incur financial loss through chargebacks and other financial liabilities. A major way that businesses and sellers can combat this is by ensuring that the company name, logo, and transaction details appear on financial statements to distinguish legitimate purchases from fraudulent transactions at fake stores.”

  • Wire transfer fraud. Involves a fraudster deceiving someone into sending money through a banking transfer. Pedersen cautioned, “They may impersonate trusted individuals and organizations, such as suppliers or the CEO of the business. They create fake invoices urging the victim to send money, often playing on their emotions, and exploiting the pressure they may be under. These scenarios can be very realistic and convincing, and the victims often send the money over in a rush to remedy the situation.” As a rule, sellers should never send money in an unplanned, unexpected manner, and transactions should always be approved by multiple people, he noted.


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