Research suggests that a significant number of businesses each year are victims of payment fraud, which can be difficult to detect.
There are several ways to commit payment fraud, so it’s important you’re aware not only how you receive payments, but also how you pay your creditors.
How payment fraud occurs
Payment fraud can impact businesses of all sizes, creating financial losses and trust issues for customers. Here are some common fraud methods to watch out for:
- Customers returning products they didn’t buy from you, or picking up products in store before asking for a cash refund without a receipt.
- Stolen credit cards.
- Counterfeit money, especially if your business accepts cash. It’s worth learning how to spot counterfeit notes, especially $100 bills. Tell your cash-handling staff to be on the lookout, and train them how to spot counterfeit notes. Searching online for common images of counterfeit bills is a good way to start.
- Bad cheques, if they’re stolen or a customer’s account is empty. Avoid accepting cheques if you can. Instead, ask for a credit card with identification or for funds to be banked online. Always ask for photo identification.
Gaining a good understanding of these common fraud methods and training your team to recognize them will help you protect your business and reduce the risk of financial loss.
It’s not just retail Although payment fraud tends to happen most commonly in retail businesses, they’re not the only vulnerable organizations by any means. Fraud can happen when people order products online and then don’t pay for them, or when they use your services and then find a reason not to pay.
Online businesses often experience payment fraud when customers have paid by credit card online. The funds appear in your account, and you send them the goods, which should be safe, right? Unfortunately, this is not always the case. A common trick is that the customer will cancel the payment after three days and the bank reverses the funds.
Another common fraud technique sees a customer places and pays for a very small order for equipment/stock. They then place a very large order (without paying), which you send. This transaction is the fraud attempt you don’t suspect.
How to prevent payment fraud
As in most cases, prevention is always better than a cure. Taking appropriate steps to address people who may have misled or taken advantage of you can be time-consuming, stressful, and not always successful. It’s far better to have measures in place to prevent payment fraud from occurring in the first place. Some of the best ways to avoid payment fraud are:
- Training your front-line staff. It’s important to give them the tools and training to spot fraud at source by regularly reviewing examples of fraud, and your business policy on how to respond.
- Daily finance reviews to keep tabs on your accounts, monitor what goes in and out daily, and reconcile to your records to spot inconsistencies early – before they become a problem.
- Procedures for release/transfer of funds. Identify the main types of payment fraud that could impact your business. Then, clearly outline how to prevent them from happening. Make sure your employees understand these rules and agree to comply with them as part of their employment.
- Staying informed and talking to other business owners, online research, and in general keeping up to date for news of any recent frauds that might be operating.
- Background checks of customers if you’re even slightly suspicious, as there’s nothing wrong with checking up on a customer. Search for them online or in social media, call the company, or conduct a credit check.
Offering debit or credit card options, taking payments electronically using mobile payment methods, not accepting cheques – and if you are in retail – using a surveillance system are all good ways to prevent fraud.
Cheque fraud
This is still a problem, even though the use of cheques has significantly declined. While digital and card-based payments have become the preferred methods for many, cheques are still widely used for certain transactions – especially among businesses, government agencies, and older demographics.
The continued use of cheques keeps them a target for fraudsters, who can exploit them through schemes like cheque washing (altering cheque details), counterfeiting, and creating fake cheques. Additionally, electronic cheque processing (where cheque images are used instead of physical cheques) has made some transactions quicker, but also presents new vulnerabilities.
Cheques cost businesses millions of dollars each year because they’re easy for fraudsters to steal. Also, there’s a delay between depositing the cheque and having the funds cleared into your account.
Cheques are paper based, so they’re easy to copy or forge, and mailed, so they can be intercepted. This is where you, as a business owner, can be liable for payment fraud yourself if you’re using cheques to pay suppliers.
The rule-of-thumb here is to avoid cheques, both for making and receiving payments. One option is to prioritize online and electronic payments and discourage cheques from customers.
Next steps
- Protect your business from payment fraud using mobile payment options and moving away from paper-based systems.
- Adopt the latest payment technology as it will utilize the latest security and fraudsters will find it harder to manipulate.
- Regularly apply security patches and updates to all software and hardware involved in payment processing.
- If you’re unsure, get professional IT help.
A proactive approach will strengthen your defences against payment fraud and help keep your business secure.
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This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
