How to Mitigate Payment Fraud

Guide to Mitigating Fraud Payouts

In the digital age, sending and receiving money is easier than ever. Mass connectivity, user-friendly apps, and powerful APIs like Dots allow businesses to send payouts to recipients worldwide. The old limitations of paper checks, outdated payout options, and the complexities of cross-border transactions no longer exist. As a result, corporations are finding new opportunities. Quick and easy payouts enable organizations to hire independent contractors in other countries, employ gig workers domestically, send mass payouts to affiliates, and more.

Despite the new opportunities for growth and global expansion, more efficient payout processes can also make businesses more vulnerable to a growing worldwide threat: Fraud. Payments fraud is becoming more prevalent. According to a report published by the Association for Fraud Prevention in 2024, roughly 80 percent of organizations were victims of payout fraud attacks and threats in 2023, marking a substantial increase from previous years. Collectively, payout fraud costs billions of dollars in losses for businesses and consumers.

Payout fraud mitigation is a complex beast, but businesses must take steps to address vulnerabilities and protect the bottom line. In this guide, we'll explore common fraud tactics and strategies organizations like yours can adopt to stay safe.

What is it?

Payout fraud is any criminal activity that exploits payment systems to steal funds or sensitive financial information. Fraud comes in many forms in the financial world, and criminals use countless methods to steal from consumers and businesses. We'll get into the specific types of fraud that threaten organizations worldwide shortly. But before that, let's dive into the potential impacts of initiating fraud payouts or becoming a victim of fraud attempts.

The most obvious ramification is financial loss. Monetary losses can be substantial for businesses. One survey by Veriff found that 90 percent of respondents lost as much as nine percent of their annual revenue due to fraud. That's not an insignificant figure, and many corporate leaders fear an increase in revenue loss as fraudsters become more sophisticated in their attempts. There's also a worry about increased operational costs from dealing with fraud and its aftermath, which could impact overall efficiency and productivity.

Of course, losses extend far beyond finances. Falling victim to fraud attempts can severely harm a company's reputation. These events erode trust from payout recipients, damaging an organization's otherwise good name. That could result in strained business relationships, ballooning retention issues, etc.

Frequent fraud payouts could even land businesses in legal trouble. Organizations that fail to comply with ever-changing anti-fraud regulations or don't do enough to protect recipients could face steep penalties. Continued problems can also result in increased regulatory scrutiny, potential lawsuits, etc.

Businesses must face payout fraud head-on to avoid these impacts and more. Taking steps to mitigate fraud, address vulnerabilities, and protect payout recipients is key to ensuring the integrity and security of all payments.

Understand the Different Types of Fraud

The biggest challenge companies face when fighting fraudulent payouts is developing strategies to tackle all forms of criminal activity. Fraudsters can use many different methods to steal funds and private information. A well-rounded fraud mitigation strategy addresses all vulnerabilities. Here's a breakdown of the most widely attempted forms of payout fraud.

Identity theft

Identity theft occurs whenever criminals steal private information to impersonate them. What's possible depends on the type of sensitive information obtained. Fraudsters can steal bank account information, social security numbers, credit card details, etc. That data enables fraudulent actors to wreak havoc on an individual's personal and private life. Identity thieves can make unauthorized purchases, open up new lines of credit to wrack up debt, clean out a lifetime of savings or retirement funding, etc.

The worst part of identity theft is that it often goes unnoticed until criminals bleed victims dry. In many cases, it can take years to resolve the impacts of identity theft. In the meantime, victims must deal with the ramifications.

Identity theft is more common than most realize. The latest reports say that approximately 22 percent of all Americans report being victims. That's one in five people!

Organizations that handle sensitive information to send payouts must take precautions to keep recipients safe. That includes implementing robust encryption, secure storage, restricted access controls, and more. Other strategies, like using multifactor authentication, monitoring payout activity, and performing all necessary Know Your Customer (KYC) and Know Your Business (KYB) compliance requirements, also make a difference.

Skimming

Skimming is a strategy that typically occurs near physical point-of-sale (POS) terminals or ATMs. Companies sending payouts are less vulnerable to this type of fraud, but it can still happen. Victims fall prey to skimming attempts when they use terminals equipped with small skimming devices. These devices capture information like card numbers, login credentials, and more, allowing criminals to make unauthorized transactions or open new accounts.

Skimming devices are discrete. Criminals often install them onto card readers on POS terminals and ATMs, allowing them to steal information without a victim's knowledge. Some devices also employ near-field communication (NFC), enabling fraudsters to collect information without even seeing a card.

Preventing skimming attempts requires operators to inspect terminals while adopting anti-tampering security measures. Ongoing employee training and upgrading to technology that is less susceptible to skimming attempts can also keep people safe.

Phishing

Phishing is a type of fraud that involves tricking individuals into providing sensitive information freely. While many believe they wouldn't fall prey to those attempts, it's more common than most realize. The latest statistics suggest that criminals send around 3.4 billion phishing emails daily, and millions fall for them yearly. More than half of all organizations reportedly face phishing scams every week.

So, how do fraudulent actors "fish" for information? Phishing attempts can come through phone calls, emails, text messages, and websites. Criminals often communicate with victims while impersonating legitimate organizations, pretending to be a bank or government entity. It's common for phishing scammers to scare victims into providing information before using it to steal their identities, empty their financial accounts, and perform other forms of fraud.

Phishing fraud is growing in prevalence, and it's difficult to combat. Companies must educate employees to identify phishing attempts. They should also implement filtering and scanning technologies to minimize exposure while adopting strategies to contain the impact of potentially successful attempts.

Triangulation

Triangulation is a sophisticated form of fraud expected to cause losses as high as $10 billion in the United States by the end of 2024. It predominantly affects the e-commerce industry. With triangulation, fraudulent actors create fake websites that look legitimate in the eyes of consumers. They publish product listings for highly desirable products, often at too-good-to-be-true prices. Whenever a victim purchases said item, they provide their financial information to pay for it. 

Criminals then use other stolen credentials to purchase the product from the actual retailer, sending it to the victim like normal. Because the victim receives the item, they don't realize they're part of triangulation fraud until they notice stolen funds and unauthorized transactions later.

Controlling triangulation fraud isn't easy, and online shoppers must be wary of sketchy websites, suspiciously low prices, etc. Companies should also protect customers by monitoring the Internet for fake websites and listings.

Refund

Refund fraud is another issue that plagues e-commerce businesses and other organizations offering products or services. The latest reports show that refund fraud is rising, and 10 to 15 percent of all e-commerce returns are fraudulent.

Bad actors commit refund fraud by exploiting a retailer's refund policy. Essentially, they request a refund for a product or service they never purchased or have no intention of returning. They may also claim they never received their product or falsely say it arrived damaged.

Whatever the case, scammers take advantage of generous refund policies to get free products. Companies can combat this type of fraud in many ways. The most common strategies are reanalyzing existing refund policies and closing potential loopholes fraudsters might use. Organizations can also invest in training, verify information during refund requests, and utilize fraud detection tools.

Business email compromise

Unfortunately, many organizations become victims of fraud due to business email compromise. Criminals can steal money and sensitive information from corporations by posing as vendors, partners, or executives. They often do this by spoofing email addresses or using social engineering strategies to fool victims into believing they are who they claim to be. Because companies usually have hundreds or thousands of workers, it's surprisingly easy to fool at least one person into providing the information criminals want.

Training employees to identify suspicious emails goes a long way. However, organizations should also employ other strategies to avoid business email compromise. Email security technology can authenticate the sender to prevent spoofing attempts. Companies can also limit those with access to financial and private information or set up multilevel approval processes.

Check

Check fraud is an old-school criminal activity that's still prevalent today. It happens whenever a criminal uses fake, stolen, or modified checks to obtain funds illegally. Thanks to the longer timeline involved with cashing checks, many victims don't realize there's an issue until the criminal is long gone with their money. Modern check-depositing methods also create new vulnerabilities that criminals can exploit. For instance, you no longer have to visit a bank to cash a check. Photo-based depositing methods through a smartphone app make this fraud more accessible to bad actors.

Strong internal controls with regular bank reconciliation can minimize the risk of check fraud. The same goes for using more secure checks with watermarks, holographic features, and more. Many companies are also moving toward Positive Pay procedures, allowing them to pre-authorize issued checks to prevent fraudulent checks from clearing.

Chargeback

Banks and credit card providers offer many protections for consumers. Unfortunately, criminals are using some of those protections to steal from businesses. Chargeback fraud occurs whenever someone issues a false chargeback request from their financial institution. For example, an online shopper may legitimately purchase products from a retailer. However, once they receive their product, they request a chargeback, claiming it was an unauthorized transaction.

Chargeback fraud is a multi-billion dollar problem. It's so widespread that many refer to it as "friendly fraud." However, reports show that for every $100 chargeback a company receives, they incur roughly $240 in financial losses. That's not counting potential penalties for frequent chargebacks, reputational damage, and possible loss of merchant accounts.

Companies are employing many strategies to minimize and prevent chargeback fraud. These include extra information verification, powerful fraud detection tools, detailed transaction reports, and more. Organizations must also regularly monitor chargeback fraud, adapting mitigation techniques over time.

Account Takeover

Account takeover (ATO) fraud is a form of identity theft that happens whenever an unauthorized person gains access to an online account. ATO can involve email accounts, financial accounts, and more. Whenever a criminal takes over an account, they may have free rein to commit fraud in countless ways. For example, bad actors can change multifactor authentication measures, passwords, and more to prevent legitimate owners from regaining access. Depending on the type of account they steal, they may also move funds, disguise themselves as the owner to communicate with others, and more.

Companies must implement additional security and access features to stop ATO fraud. Multifactor authentication, fraud detection, strong password requirements, and ongoing training are paramount.

Card-Not-Present (CNP)

Card-not-present (CNP) fraud can be difficult to detect because it happens whenever a criminal makes fraudulent transactions without using a physical card. Examples of CNP fraud include criminals stealing card information using skimmers before using that data to purchase online or through the phone.

Individuals can lower their risk of CNP fraud by using digital wallets with tokenization and encryption. Meanwhile, businesses can enforce multifactor authentication and apply additional checks like address verification service (AVS) and card verification value (CVV). Advanced fraud detection technology can also help companies flag suspicious activity.

Be Aware of Signs of Fraudulent Activity

No matter what unique forms of fraud a company is susceptible to, it's important to be aware of signs that point to fraudulent activity. Organizations like yours need to invest in training to empower employees to look for indications of payout fraud at every turn. These may include:

• Suspiciously large payments

• Unexpected payouts

• Missing documentation or records

• Duplicate invoices

• Unusual payment patterns

• Odd transaction activity

• Record discrepancies

• Strange communication patterns

Understand your company's risks and train teams to identify possible signs of fraud. Criminals will attempt to defraud your company whether you're prepared or not. Awareness of what's possible and learning how to identify issues are key to taking action and protecting your business.

Know Who is at Risk

Any business that sends or receives money is at risk for fraud. However, those regularly sending mass payouts to recipients may be a bigger target to criminals. Several factors can determine your risk.

• Transaction Volume: Companies that facilitate many payments regularly are at a higher risk. Whether you're sending mass payouts to royalty earners, affiliates, or international freelancers, the amount of money you send and the frequency with which you conduct these transactions creates more vulnerabilities. Your business could be a high-value target for criminals, and the high transaction volume means there's a greater chance that fraud slips through the cracks.

• Industry Vulnerabilities: Criminals target some industries more than others. Businesses providing payouts in retail, e-commerce, hospitality, and healthcare are at risk. The same goes for any financial institution or organization that handles significant sums of money.

• Weak Control Measures: Organizations that lack strong internal control measures to protect payout processes are likelier to deal with fraud attempts. When criminals realize there are no strategies to monitor and review payments, they know they have a better chance of committing fraud undetected.

• Poor Data Security: A lack of robust security protocols to protect financial and sensitive information is just asking for trouble. Weak data security allows cybercriminals to steal information and commit fraud.

• Complicated Payout Processes: Overly complex payout processes allow bad actors to exploit more potential vulnerabilities. Organizations have many ways to perform payouts. However, a more complicated approach involving several payment processors and structures results in more angles for criminals to defraud you. That's why it's important to simplify payout processes using an API like Dots. The more streamlined a company's approach, the fewer vulnerabilities exist.

Create a Plan to Help Prevent it From Happening

Every organization is unique, and your company's vulnerability to fraud payouts varies greatly. However, the risk of fraud is ever-present, and leaders must create a plan to address vulnerabilities and prevent it from happening.

The first step is to understand your risks. Conduct a thorough risk assessment of your existing payout processes and fraud mitigation strategies. Know what types of fraud criminals might attempt and how they could be successful. Understand your enemies and see where your company's vulnerabilities are. 

From there, you can prioritize the most significant threats. Consider the impact of becoming a victim of fraud and the overall likelihood of fraud happening. While you need an all-encompassing payout fraud mitigation strategy, understand which areas need attention first to protect your business.

Develop a clear strategy for preventing fraud and what your business needs to do in the worst-case scenario. Great strategies combine prevention, detection, and response. Companies must allocate resources to stop fraud at the source while also investing in the ability to spot it as it occurs. The best strategies take a multipronged approach, employing advanced technology to make positive changes.

After implementing your strategies, continue to adapt. Criminals get smarter and adopt new tactics to get what they want. Monitor and audit your fraud mitigation techniques regularly. Doing so allows you to identify areas needing improvement while ensuring you cover all your bases.

Get Started With Dots Today

Managing payouts while preventing fraud isn't easy, but the right technology can make all the difference. Dots is a payouts API that provides peace of mind with fraud and risk mitigation features built right in. With Dots, you can instantly send payouts worldwide while giving your recipients the freedom to choose how they receive their funds on their terms. The Dots API streamlines your entire approach.

Meanwhile, powerful features keep your business and your payout recipients safe. Comprehensive security protocols like bank-level encryption tokenized PII and advanced OFACC compliance measures keep data under lock and key. Dots also has comprehensive compliance features and algorithmic fraud detection, giving you all the tools to combat unauthorized criminal activity. 

Simplify how your company handles payouts while using revolutionary features to prevent fraud. Schedule your Dots demo today to learn more about how our payouts API can benefit your business.