How Payment Gateways Can Detect and Prevent Online Fraud

July, 2019

Enterprises suffering loss

While launching a product in the market, little do we consider about the possibility of online fraud. As business grows, daily transactions increase in number so does the payment options. Now, accepting a credit card payment increases the risk of online fraud. According to market research, big businesses suffer loss of approximately $6.4 billion dollars per year due to online fraud, through payment procedure. While small ventures too suffer loss to an estimate of $155,000 a year.

While using credit card, payment gateways provide basic security measures to reduce credit card fraud. However, there are payment gateways that do not secure transactions like PayPal. Considering the current scenario, the economy is becoming digitalized with which there is a rising demand to re-evaluate the workflow and tool deployments. Also, it is essential to implement techniques that can manage transactions flawlessly and without incurring loss due to fraud.

Online fraud can be of two types: hacking account and identity theft.

  • Hacking an account indicates misuse of personal information, financial data and purchase history of customers.

  • Identity of an individual can be stolen through username and password, credit card details and personal information.

The following are the effective ways to reduce the chance of experiencing online fraud.

The process of address verification

Address verification is one of the effective ways to detect and prevent online fraud. Address verification service (AVS) is an operative system that has the capability to match delivery address with the address where the card is issued by the bank. Now, if an individual is purchasing something, he/she needs to provide the complete billing address along with the zip code which can be utilized by AVS for verification purpose. In case verification fails in the AVS system, further investigation is initiated. For that matter, a detailed inquiry is conducted on CVV (Card Verification Value), email address, IP address etc. a failure of all of which results in declining a transaction.

Card verification value

Every credit card will have 3 or 4-digit code known as card verification value or CVV. CVV is the security measure that credit card companies ensure with each card. The CVV safeguards the card for the user only. Incase CVV doesn’t match, the payment gateway can decline the transaction. During card-not-present transactions, the required card information is inquired from the customer and verified before processing the product. CVV in a way can help sellers fight fraud and reduce chargebacks that can happen due to online fraud.

Identifying a device

One of the most effective ways to detect and prevent online fraud is, computerized device identification. It tries to gauge an online transaction and decide whether to approve, decline or raise an alert flagging it. Every device, be it phone, computer or tablet has their unique device fingerprint. It helps to identify fraud hence, reducing risk considerably. Since, fraudsters cannot impersonate a device’s unique identity, there are companies which even monitor the device id as a reference to detect suspicious or fraudulent activity.

Monitoring big transactions

In order to identify fraud, big transactions should be monitored because, before a card gets blocked a fraudster generally target large transactions. A company can limit such large transactions and failed transactions to pass through a payment gateway, to reduce the chance of online fraud.

3D security protocol

3D-SecurityPayer authentication, also called Verified by Visa (VEB) and MasterCard Secure Code, is a security protocol that secures online transaction. This method allows cardholders to generate a PIN for authentication purpose. Payer authentication is one of the popular authentication measures that ensures protection against fraud and chargebacks.

Preventing fraud while shipping overseas

According to online fraud guide, while shipping items overseas, one must exercise caution while processing orders from high-risk countries. Generally, customers from such countries need to verify their identities by calling the company before their orders are processed.

Lockout mechanisms

IP-addressLockout mechanism helps to prevent fraud by deterring fraudsters who depend on automatic card number generator program. Through such programs, fraudsters create valid card numbers which they use to charge the accounts to their limit. Lockout mechanisms can lock transactions from a particular IP address when a large number of credit cards get declined within a set time frame. This proves effective in detecting and preventing online fraud.

Risk scoring tools

Risk scoring tools can recognize fraud transactions based on certain rules. Hence, a transaction is first being analyzed whether its fraudulent in nature or not based on which, the order is verified.


According to market research, almost 50% of small businesses become victims of scamming and hacking. Therefore, the payment gateways should be secured enough to detect as well as prevent online fraud in future.

- Kathakali Basu
Content Writer
Infoholic Research