What is Credit Card Fraud?

Credit card fraud occurs when criminals make unauthorized use of natural or fake credit cards and related information. It is a form of identity theft perpetrated to obtain financial gains from credit cards, like purchases and cash advances. 

Here are examples of common credit card frauds:

  • Using existing credit card accounts
  • Stealing physical credit cards 
  • Obtaining account numbers and PINs 
  • Covertly opening new credit card accounts under the victim's name 

Once criminals obtain the above means, they start running up charges. The victim and their credit card company are left with the bill. In addition to this type of fraud, businesses may also encounter "friendly frauds," which occur when customers accidentally or intentionally attempt to identify actual transactions as fraudulent to get these funds back through chargebacks. 

Credit card fraud crimes are not new, and credit card companies constantly create and implement ways to deal with this issue. However, criminals, too, continue to find ways to bypass security and commit fraud. Investigations into credit card fraud may take months, and unaddressed credit card fraud can damage the victim's credit scores and reports. Online merchants can help mitigate many types of credit card fraud by using identity verification.

In this article:

Types of Credit Card Fraud

  1. Application Fraud

Application fraud occurs when a criminal uses fake or stolen documents to open an account under someone else's name. Here are the two main scenarios that criminals use for application fraud:

  • Using a real identity—criminals create fake documents or steal real ones like bank statements and utility bills to create an authentic-looking personal profile, open a real account, and obtain credit or withdraw cash in the victim's name. 
  • Using a synthetic identity—criminals gather personal information from various identities to create a fake identity and open a new account under that name, using it to spend as much as possible to maximize their credit card spending. They also use it to purchase items with a high resale value and turn it into cash.

You can protect against application fraud by keeping your information private and storing sensitive documents in secure locations. You should also personally dispose of identifiable information.

  1. Account Takeover

An account takeover occurs when criminals attempt to take control of a real account, like a credit card, bank, email, or SIM card. Once the criminal gains control at the account level, they can achieve high returns. Forrester recommends risk-based authentication (RBA) to mitigate this risk.

 

Criminals attempting to take over an account may use aspects of the victim's identity, like email addresses, to access financial accounts and intercept communication related to the account—preventing the victim from discovering these criminal activities. Despite that, victims are usually the first to identify account takeover by finding unauthorized charges or withdrawals on monthly statements. 

Here are several crimes fraudsters can perpetuate once they take over an account:

  • Make unauthorized purchases using an actual credit card.
  • Illegally withdraw money from someone else's bank accounts. 
  • Gain access to all information tied to the account, stealing credit card and social security numbers. 
  • Change the account's passwords to block the victim out of the account. 
  • Open additional accounts using stolen information and accounts, utilize benefits and rewards from these accounts, and sell the information to other criminals.

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  1. PoS Fraud

Point-of-Sale (PoS) fraud occurs when criminals attach small skimming devices to standard PoS devices for hacking data. PoS devices scan and store card information when customers complete a swipe transaction. Typically, a store employee or merchant shares this information with malicious actors. Additionally, criminals may attach skimming devices to ATM card slots for cloning card information, secretly placing a camera over the keypad to capture PINs.

  1. Phishing and Vishing

Phishing and vishing are social engineering techniques that trick victims into divulging information. Here is how these scenarios typically work:

 

  • Phishing—criminals impersonate official email communication from an actual bank to trick victims into clicking on false links leading to authentic-looking websites that are malicious. Once victims enter card details, fraudsters obtain unauthorized access to the information. 
  • Vishing—criminals impersonate bank officials via phone call communication, asking victims to share a one-time password (OTP). The criminal tricks victims by saying the OTP is needed to verify the card, use the reward points, or extend the validity of existing rewards.

Credit Card Fraud Protection and Prevention

Businesses can help protect their customers against credit card fraud in various ways, including:

Monitoring for Suspicious Transactions

Businesses handling credit card transactions need to monitor for suspicious transactions. Here are some best practices that can help check customer information to prevent fraudulent transactions:

 

  • Billing and shipping information must match. If this information does not match, it may warrant further investigation into the transaction. 
  • Transactions of high-value purchases with expedited shipping may indicate a fraudster is trying to quickly commit credit card fraud, using expedited shipping to avoid getting caught before obtaining the purchases.
  • Small transactions in quick succession often indicated card testing. 

 

The above activities may not always indicate an actual fraud but still require further investigation. Therefore, businesses should halt transaction processing in these cases and suspend shipping until they can ensure it is not criminal committing fraud. These preventive actions can save money, time, and reputational damages.

Preventing Payment Fraud Through Customer Service

Trained customer service teams can help prevent malicious and friendly credit card fraud by providing helpful and responsive service. Additionally, ensuring that payment descriptors match the business name also helps reduce or even eliminate friendly fraud, as it does not confuse the transaction's authenticity. Finally, businesses should maintain a list of repeat offenders and stop doing business with them altogether.

Card Security Features

Credit card companies offer various security measures to help prevent credit card fraud, including:

 

  • Address Verification Service (AVS) helps confirm the cardholder's identity by matching the inputted address with their registered address in the bank's records.
  • 3-D Secure (3DS)—this security layer prompts users to input a code to complete their purchase. Card companies offer this service under different names, such as Mastercard's SecureCode, Visa Secure, and American Express's SafeKey.
  • Card Verification Value (CVV)—this three-digit number is on each credit card. Payment processing systems may ask customers to input this number to verify that they have the card while making the purchase.

 

While helpful in increasing security coverage, these features also add a certain level of friction. According to Amazon, asking for a CVV during checkout slows down the process and negatively impacts the purchasing experience. This is why Amazon does not ask for CVV and instead implements different defenses.

Fraud Prevention with BlueCheck

BlueCheck achieves this balance by combining a sleek, field-tested user interface with a robust verification engine that connects to a network of authoritative databases and credit bureaus. In addition, we partner with companies in various industries and growth stages to provide affordable, reliable online age and ID verification. Learn more about how BlueCheck can help you solve your age verification challenges.

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