Online Payment Fraud: Types of Payment Fraud and How It Affects Online Transactions

Fraud refers to any unauthorized or deceptive transaction intended to gain financial advantage, often involving stolen credentials, account takeover, or manipulation of digital payment systems. A dispute is filed when the original holder of the payment card discovers an unauthorised breach into his or her account.

This is where business owners run into trouble, as they will have to settle the dispute, pay several penalties such as chargeback expenses and investigation fees, and face a total loss of time and resources. In rare cases, customers will initiate a chargeback, denying ever receiving the product. This is also a form of money fraud.

Because of the potential of fraud, merchant account providers such as banks may decide to cancel a business’s merchant account if they consider that participating in the business’s transactions is becoming increasingly unsafe. The possibility of fraud posing a concern for business owners is easily comprehended.

Here are some of the most common types of fraud that could harm your company.

Common Types of Payment Fraud

Identity Theft

When someone conducts identity theft, they are committing fraud under the guise of someone else, which is called identity theft. Fraudsters simply steal another person’s personal and banking informatio and use it to create a new identity to make fraudulent purchases or conduct fraudulent activities. This type of fraud accounts for the vast majority of online fraud.

Friendly Fraud

After obtaining a product or service, a consumer may fraudulently initiate a chargeback, falsely claiming they never received what they paid for. This results in the customer keeping both the item and the refunded money. Friendly fraud is one of the most common forms of fraud in eCommerce and often goes unnoticed because the transaction appears legitimate.

Clean Payment Fraud

“Clean” fraud is the most challenging type of transaction fraud to commit. To defeat fraud-detection systems in businesses, fraudsters thoroughly scrutinise the systems in place and steal authentic information.

Refund Fraud

Refund fraud occurs when a customer falsely claims that a product was not delivered, was defective, or didn’t meet expectations — even though everything was in order. The scammer then requests a replacement or refund, despite having already received the original item. This form of deception can result in merchants issuing duplicate shipments or refunds for a single transaction. Without buyer protection, it’s difficult to contest such claims, especially if the fraudster provides a convincing story or manipulates shipping data. In many cases, this is a type of confidence scam that exploits the seller’s goodwill and lack of transaction-level dispute tracking.

Money Mule and Laundering Fraud

This scheme involves fraudsters recruiting individuals to move illegally obtained funds on their behalf — often under the pretense of freelance work, "payment processing," or acting as a personal assistant. These individuals, known as money mules, are promised generous commissions in exchange for transferring money between accounts or across borders. Criminals often claim they’re unable to make the transfers themselves due to travel, business restrictions, or banking delays.

Participating in such schemes — even unknowingly — is illegal and can result in severe consequences, including fines or imprisonment. While the job may sound legitimate, processing funds for strangers without verifying the source is a red flag. Fraudsters vanish unpunished, while the mule is left to face legal liability for laundering money.

Escrow Scams

Escrow services are designed to offer security by holding funds in trust until both parties fulfill the terms of a transaction. However, fraudsters exploit this trust by setting up fake escrow companies or spoofing legitimate platforms. In these scams, the buyer is typically redirected to a counterfeit escrow website through a phishing invoice or fraudulent link provided by the seller.

Once funds are transferred, they are stolen, and the fake escrow service vanishes — often overnight. Because the website and company appear legitimate at first glance, victims may not recognize the fraud until it’s too late. Always verify the authenticity of escrow providers independently and avoid using unfamiliar services suggested by the other party. Emails requesting transfer through a specific escrow site may be part of a phishing scheme.

Advance Fee Fraud

Advance fee fraud occurs when a seller offers an unusually attractive deal to build trust, often asking for a small upfront amount to “reserve” or “initiate” the purchase. Instead of requesting full payment, the fraudster convinces the buyer to send a partial amount — typically outside a secure e-commerce platform.

Once the payment is made, the seller disappears, never delivering the promised goods or services. Because the initial amount seems small and the transaction happens off-platform, many victims don’t realize they’ve been targeted until it’s too late. Recovering funds is especially difficult, as such scams are considered a form of social engineering and often bypass marketplace protections.

Advance fee scams are particularly common in high-value categories like electronics, collectibles, or rental properties — where urgency and limited availability pressure the buyer into fast decisions.

Red Flags of Online Fraud

When you’ve negotiated a good bargain, most individuals believe that making the payment is the easiest part. However, as we’ve seen, it’s not always the entire hoax. It’s essential to use the safest method regardless of whether or not you trust the other party unless you don’t mind losing money.

The payee can use spoofing to operate in your area by concealing his or her physical address and IP location. Often, the person who contacts you claims to be an agency, collector, or previous lender to get money from you right away.

Be wary of any message requesting that you re-enter your username and password via a link in the body of the message. Another phishing variation proposes that you give money to hook more victims instead of asking you for money. Tax refunds or “stimulus checks” are the promises they make.

This offer will not be valid until the specified method is used. It might be a wire transfer, a P2P transaction, a Bitcoin transaction, a Gift Card transaction, or some other type of unique method altogether. An error or a ruse may have duped payees who claim they didn’t get a payment.

How to Prevent Payment Fraud

We have earlier mentioned the most typical means by which fraudsters steal money from their victims. While businesses cannot totally eradicate these assaults, you can reduce the likelihood of them harming your business by taking the appropriate precautions. Examine a few of them now.

Use Real-Time Fraud Monitoring

You must ensure that you keep track of every transaction, particularly those that require shipping and IP addresses, as well as quantities and dates. This makes it easier to keep track of the progress of your transactions and decreases the possibility that a third party will modify something critical without your knowledge or approval.

Restriction on Who Has Access to Confidential Information

Placing restrictions on who has access to personal information will significantly reduce the risk of sensitive information, such as credit card details or financial account numbers, falling into the wrong hands. Access to confidential information should only be granted to individuals whom you trust and to those employees whose job responsibilities need such access.

Encryption of Emails

We recommend that emails sent to recipients are encrypted so that only they can access the document and that no one else can tamper with any of the data included inside it. Customers would be unable to access or update sensitive information, making it impossible for them to utilise it for illegal purposes.

Risks of Documenting Transactions on Paper

Furthermore, documenting business transactions on paper exposes your information to theft, which is annoying but necessary.

Strong Customer Authentication (SCA)

Make use of multi-factor authentication methods to ensure further that no unidentified individual has access to your financial data.

Stay on Top of Fraud Schemes

Ensure you’re abreast of new fraud schemes. Fraudsters are always finding new and profitable ways to obtain and use private information as commerce is now being done electronically. Keeping up with the current types of fraud affecting other companies across the world is in your best interest so that you can put in place the required security measures to safeguard your company from them.

Bottom Line

Scams can occur throughout any transaction, whether it’s a phony money order or a peer-to-peer transaction. Selling and buying things online makes it far too simple for scammers to appear legitimate and have a functioning website or account. As a result, it’s critical to be knowledgeable about payment fraud and take steps to protect yourself.

Most systems attempt to utilise some type of buyer protection because of the prevalence of payment scams. You should always use mechanisms that protect you, whether you’re accepting or transferring money.

Last but not least, only provide personal information when it is necessary. Scams not only cause financial loss but can also lead to long-term consequences if your identity is stolen.