Fraudulent transactions in banking and commerce are becoming even more widespread as seconds, minutes, and days go by.  Transaction fraud has become an important threat in banking. In 2022, transaction fraud resulted in losses amounting to 1.59 billion US dollars across bank payments in the United States. By 2027, $40.62 billion would have been lost globally to transaction fraud. 

Of course, transaction fraud is usually financially motivated and may or may not be committed by expert financial fraud criminals. However, online transaction fraud or online payment fraud is a major threat for banks, Neo banks, and individuals. Fraudulent transactions pose severe security risks to banks, as well as negative damages to their public reputation; for individuals, it exposes them to severe financial losses and other spiralling effects. 

It is important to detect online payment fraud. Methods for Online transaction fraud are evolving daily, especially with the boom of online payments and shopping. It is important to be able to detect the different types of online transaction frauds, even before they happen, in order to prevent it and bring the intended perpetrators to book.

This article details several ways on how to detect online transaction fraud.

What is Online Transaction Fraud?

Online transaction fraud refers to deceptive activities aimed at obtaining financial or personal information from persons or organizations via digital transactions. It is also known as online payment fraud.

This type of fraud involves different tactics or methods, including identity theft, phishing scams, account takeover, and payment fraud. The primary objective is to illegally acquire money, goods, or sensitive data, often by exploiting vulnerabilities in online payment systems or using social engineering techniques to trick victims into giving away their information.

Although fraudulent online transaction is an emerging modern crime, most legislations in different regions have recognized it as a duly legal crime and have provided legalized punishments for online transaction fraud.  

The USA might be regarded as a pioneer in these legislations; the Computer Fraud and Abuse Act (CFAA), enacted in 1986, criminalizes unauthorized access to computer systems and networks. It addresses a wide range of fraudulent activities, including hacking and data breaches. 

The United Kingdom's Fraud Act of 2006 defines various types of fraud offences, including fraud by false representation, failure to disclose information, and abuse of position. 

In Nigeria, the CyberCrime Act of 2015 addresses various forms of cybercrime, including online transaction fraud. It provides legal sanctions for identity theft, phishing, hacking, and other cyber offences.                                 

Types Of Online Transaction Frauds 

1. Triangulation Fraud

Triangulation fraud is a somewhat sophisticated kind of online transaction fraud; it involves three parties: an unsuspecting buyer, a genuine seller, and a fraudulent seller as a middleman. Fraudsters make fake online stores to collect payment information from customers. They then use this information to make purchases from legitimate websites using stolen credit card details, redirecting goods to their address.

2. Identity Theft

Identity Theft involves stealing someone's personal information, such as Social Security numbers, credit card details, or login credentials, to impersonate them or make unauthorized transactions.

3. Card Not Present (CNP) Fraud

This happens when a fraudster uses stolen card details to make purchases online or over the phone without physically presenting the card. This type of fraud is very common in e-commerce.

4. Fake Transaction 

Fake Transaction is an umbrella term for a wide range of fraudulent online transaction, which involves the creation of false or misleading transactions to deceive individuals or organizations. This type of fraud is commonly used to manipulate financial records, steal money, or exploit system vulnerabilities. Categories of fake transactions include; 

5. Man-in-the-Middle (MitM) Attacks

This involves intercepting and altering communication between two parties (e.g., a user and a bank) to steal sensitive information such as login credentials or payment details.

6. Fake Apps and Websites

Fraudsters create counterfeit mobile apps or websites that mimic legitimate businesses to trick users into entering personal or financial information. These fake platforms are designed to steal credentials or initiate fraudulent transactions.

7. Synthetic Fraud

Synthetic Fraud happens when fraudsters create a new identity by blending real and fictitious information. This might involve using a real Social Security Number (SSN) that doesn't have extensive credit history (typically belonging to children, the elderly, or deceased individuals) with a fake name, date of birth, and other personal details. 

The aim is to create a seemingly legitimate identity to open new bank accounts, obtain credit cards, and make fraudulent transactions.

More types of online transaction fraud can be found in our article on Transaction Fraud: Examples, Impact, Detection and Prevention.

How To Detect Transaction Fraud: 10 Ways of Detecting Online Transaction Fraud 

As transaction fraud continues to soar, globally, it is important for both entities and customers alike to understand and have command on how to effectively detect transaction fraud. Below are ten ways to effectively detect transaction fraud; 

1. Transaction Monitoring 

In order to detect online payment fraud, systems can be implemented to monitor transaction patterns and detect anomalies such as unusually large transactions, multiple transactions from different locations in a short while, or transactions that deviate from typical customer behavior. This can be performed through Youverify's powerful AI-backed Transaction Monitoring tool. 

2. Identity Verification

It is important to ensure the identity of the initiator of a transaction; robust measures like identity verification methods can be set up, like two-factor authentication (2FA) or biometric verification; liveness detection can also be an effective means to ascertain that the initiator of a transaction is truly legitimate.

3. Address Verification 

When the initiator of a transaction tries to complete a transaction, they are prompted to provide their address, and this is checked against the registered address. If it doesn't check out, it can help bar or detect a fraudulent transaction. 

4. Using 3D Secure Authentication 

3D secure authentication adds an extra security layer to online credit and debit card transactions. It involves redirecting customers to their card issuer's website or app to verify their identity through OTP, security questions, or biometric authentication. Once verified, the card issuer sends an authorization response to the merchant, allowing the transaction to proceed. This reduces the merchant's liability for fraud-related chargebacks.

5. Fraud Score Checks

This is typically done with a digital tool, such as Youverify's Fraud Check; it involves real-time monitoring and identifying fraud transaction patterns. Suspicious transactions are flagged, stopping fraud before they happen.

6. Email Verification 

Email Verification can be an efficient method of detecting fraud when users are required to verify their email addresses during account creation or transaction processes. This helps confirm the legitimacy of user identities and reduces the likelihood of fraudulent activities associated with fake or temporary email addresses.

7. Looking Out For Red Flags

Consumers or individuals can benefit from being alert and looking out for red flags that can indicate online fraud detection; common red flags to look out for include avoiding unusually low prices, unsolicited promotion spams, phishing, and divulging personal information without tact. 

8. Geolocation Verification:

Hosting sites or platforms can track the geographic location of a customer's device during transactions. Mismatches between the transaction location and the user's usual location can be indicators of fraudulent activity, and therefore, fraudulent transactions can be prevented.

9. Using Device Recognition Software 

Device recognition technologies can identify and flag devices associated with previous fraudulent activities. This helps prevent fraudsters from using the same device multiple times across different accounts or transactions.

10. Customer Verification Tasks 

Customer Verification tasks can be introduced during high-risk transactions, such as CAPTCHA tests, knowledge-based authentication questions, or one-time passcodes sent to registered email or phone numbers. These challenges add an extra layer of security against automated fraud attacks. Flaunting these tasks can serve as a detection alert.

Related: Top 5 Common Fintech Frauds in the UK and Preventive Measures

How can AI Prevent Online Payment Fraud?

Fraud prevention online payment is in several ways as they are several measures and tools powered by AI that can help prevent transaction fraud; these include;

1. Transaction Monitoring 

Transaction monitoring involves real-time monitoring; artificial intelligence can enable real-time monitoring of transactions, allowing for immediate detection and response to suspicious activities. Automated alerts can notify security teams or users about potentially fraudulent transactions, enabling quick action to prevent financial losses. 

2. Synthetic Identity Fraud Detection 

While synthetic fraud can be tricky to handle manually, AI systems can efficiently detect it through advanced techniques such as pattern recognition, data cross-referencing, etc.

3. Real-time Decision Making:

AI allows for real-time decision-making, allowing financial institutions to assess the risk of a transaction almost instantly. This capability is crucial for blocking fraudulent transactions before they are completed, thereby reducing financial losses.

4. Network Analysis

AI algorithms can perform network analysis to detect connections between seemingly unrelated transactions or accounts. By identifying clusters of fraudulent activities or links to known fraud networks, AI helps uncover complex or interconnected fraud schemes.

5. Continuous Learning and Adaptation:

AI systems continuously learn from emerging data and adapt their transaction fraud detection algorithms to evolving threats. Machine learning models improve with time as they analyze more transactions and incorporate feedback from detected fraud cases, increasing transaction fraud detection accuracy and reducing false positives.

Detect Online Payment Fraud with Youverify’s AI-Powered Solution

Online transaction fraud is a fast-emerging modern-day crime; it can be quite tricky to prevent and keep a clasp on it. However, AI-backed tools or software can be an efficient help. 

Youveriy's suite of AI-backed compliance software tools is being utilized daily by financial institutions across the globe. Join 100+ businesses to detect and prevent fraudulent online transactions with ease using Youverify's powerful Artificial Intelligence transaction monitoring tool with zero false positives. Book a FREE DEMO with our transaction monitoring experts today.