Credit card fraud may sound like something that only huge corporations need to worry about, but the reality is that businesses of all sizes must be vigilant. In this post, we’ll cover what credit card fraud is, look at common types of fraud targeting businesses, go over how to prevent fraud as a merchant, and explain how fraud detection works.
What is credit card fraud?
Simply put, credit card fraud is the unauthorised (or in some cases deceitfully authorised) use of a credit card, or its associated account or details, to obtain goods, services, or funds. It can be perpetrated by someone physically obtaining the card or by stealing card information (for example, via data breaches, phishing, or interception). (Wikipedia)
For a business, this means you may be accepting payments (online or in-person) where the cardholder is not legitimate, or you may be liable for a chargeback, refund, or other loss. In short, strong fraud prevention and risk management are critical.
Common Types of Credit Card Fraud Targeting Businesses
Here are some of the fraud types you’ll want to watch for:
Card-Not-Present (CNP) fraud
This happens when the cardholder is not physically present — for example, online or by phone. Stolen card numbers or credentials are used to make purchases. According to Merchant Cost Consulting, CNP fraud represents approximately 65% of all credit card fraud losses.
Friendly Fraud
In this scenario, a customer makes a legitimate purchase but later disputes the transaction (perhaps claiming non-delivery, saying the goods were faulty, or that they didn’t recognise it). The result is a chargeback and cost to the merchant, even though the purchase was valid.
Counterfeit Cards
Physical cards are copied, cloned, or produced fraudulently, then used in card-present transactions. Although EMV chip technology has reduced this in many places, it remains a threat, especially in less secure environments.
Account Takeover
Here, a fraudster gains access to a legitimate cardholder’s account (often via social engineering, phishing, or credential stuffing), then uses the account or card to make purchases. This can lead to major losses.
Refund Fraud
A fraudster makes purchases (often with stolen credentials or cards) and then requests refunds, sometimes to a different account or method, causing the merchant to lose both goods/services and payment.
Merchant Fraud
Less often talked about, this is where a “merchant” or seller is the fraudulent party; the business accepts payment via cards, but fails to deliver goods or services, or misuses the payment system so that legitimate cardholders are adversely affected. In essence, the fraud travels the other way.
By familiarising yourself with these types, you’ll be better positioned to design policies and controls.
How to Prevent Credit Card Fraud as a Merchant
Now that you know the types, here are actionable steps your business can take to reduce risk and protect both you and your customers.
Use Advanced Payment Gateways
Choose payment gateways that come with built-in fraud screening, risk scoring, device fingerprinting, geo-location checks, velocity rules (how many transactions in a short time), and other controls. These help ensure you’re not simply relying on the default processing path.
Implement 3D Secure Protocols
The protocol known as 3-D Secure (e.g., “Verified by Visa”, “Mastercard SecureCode”) adds an authentication layer for online transactions. It helps shift liability away from merchants in many jurisdictions and provides additional verification for a card-not-present environment.
Monitor Transactions
Run regular reports and dashboards to flag unusual patterns, high-value transactions, frequent refunds, multiple cards from the same IP, shipping to strange addresses, and mismatches between billing and shipping addresses. Monitoring is a key part of fraud prevention and risk management.
Train Employees
Employees handling payments or refunds should be trained to recognise red flags (such as odd shipping instructions, last-minute large refunds, mismatch between email/phone and shipping address). Internal awareness reduces the “human” gap in fraud defences.
Ensure PCI Compliance and Security
If you accept, process, or store credit card information, you must meet the standards of the Payment Card Industry Data Security Standard (PCI DSS). This involves network security, encryption, access controls, secure storage/transmission of cardholder data, and regular testing. Meeting PCI compliance and security isn’t just best practice; it reduces your vulnerability and potential liability.
Define Strict Refund Policies
A clearly communicated refund and return policy, along with documented procedures (who approves refunds, what checks are required, and when shipping must be verified), helps protect against refund fraud. If refunds are too loose/unverified, fraudsters may exploit that.
Regularly Update Security Systems
Fraudsters evolve constantly. Software behind payment systems, fraud screening, and employee devices should be kept up to date. Patches, updated fraud rules, and evolving controls (such as machine-learning detection) are increasingly important. According to Visa Acceptance Solution, “80% of merchants struggle with using data and technology to improve the accuracy of AI/ML tools to manage fraud.”
By layering these steps, you build a multi-tier defence, not just relying on one measure, but combining technology + process + people.
How does Credit Card Fraud Detection Work?
Detection of fraud is an active process, not just passive protection. Here’s how modern systems work:
Fraud Detection Tools
These are software solutions built into or external to payment gateways, which use rules, heuristics, machine learning, and behavioural data to flag risky transactions. For example, a sudden large purchase from a new device, or a mismatch in shipping/billing address, may trigger an alert. As some articles state, “By 2025 … fraud detection is largely the product of machine learning and automation today.”
Chargeback Management Software
When a cardholder disputes a transaction (chargeback), merchants can use specialised software to manage the lifecycle: track disputes, gather evidence, respond to card-issuer enquiries, and analyse patterns of chargebacks (e.g., friendly fraud). A good chargeback system supports your fraud prevention and risk management efforts by showing where you are losing money.
PCI DSS Compliance Solutions
As part of your security posture, compliance solutions (e.g., network scans, vulnerability testing, access logs, secure key management) support detection and prevention. If your systems are audited and compliant, you have fewer gaps for attackers to exploit. That is why PCI compliance and security are mentioned everywhere in modern fraud strategy.
Data Encryption Services
Encryption ensures that cardholder data, whether stored at rest or transmitted, is unreadable to unauthorised parties. If a fraudster cannot read intercepted data, the risk of card-number theft decreases. Combined with tokenisation (replacing actual card numbers with tokens), this significantly reduces exposure.
Together, these detection/prevention layers help you spot fraud early, respond appropriately, and mitigate losses.
Conclusion
If you’re running a business that accepts credit cards, whether in-store, online, or by phone, you have to think of fraud as a constant risk. By implementing sound policies, choosing strong payment gateways, training your team, ensuring compliance (especially PCI DSS), and investing in good detection tools, you’re doing far more than just ticking a box. You’re safeguarding your revenue, your reputation, and your customers.
Remember: fraud prevention is not a one-time project. It’s a continuous cycle of assessment → prevention → monitoring → updating. In today’s landscape, fraud prevention and risk management aren’t optional extras; they’re essential.
