Overpayment Fraud: A rising threat for e-commerce store owners

What should you do if a customer offers to pay more than the listed price of an order but then requests you to refund the excess payment to a third party?

It’s a fork in the road because rejecting it may anger the customer, but complying risks fraud.

Overpayment fraud is a growing menace that inflicts substantial financial losses on unsuspecting eCommerce store owners. But what exactly is overpayment fraud? How do you know you’re about to fall victim to such scams, and how should you fight them? You’ll get all the answers and more in this piece.

Understanding overpayment fraud techniques

First, what is an overpayment fraud? An overpayment fraud, also called the confidence scheme, is when scammers use victims’ trust to trick them into sending money. Fraudsters often use stolen credit card information to make a purchase and then offer to overpay the total amount due. They will then request a return of the overage to a different payment account or third-party source to convert the available credit balance or credit line into cash. 

The historical background of overpayment fraud has been well-documented in various sources on financial history, criminology, and fraud prevention as early as the 19th century. Generally speaking, exploiting overpayments in financial transactions takes multiple forms, but one early form of overpayment fraud involving counterfeit or forged cheques emerged in the 19th century. 

As technology and economic systems have advanced, the methods and complexities of overpayment fraud have evolved, making it a significant concern in the contemporary digital landscape. Below, we explore the most popular forms of overpayment fraud merchants are dealing with today.

1. Fake Cheque Scams

Fake cheque scams involve fraudsters sending counterfeit checks to individuals or businesses to trick them into depositing the cheques and then sending back a portion of the money or paying for some service. These scams often target eCommerce merchants and individuals seeking work-from-home opportunities or conducting business with individuals they don’t know personally.

Read also: Revolutionizing Chargeback Management: A Guide to Automating Manual Reviews

The scam typically unfolds like this:

• The scammer sends a counterfeit check to the victim, usually for an amount higher than the agreed-upon price for the item being sold or the service being provided.
• The scammer then convinces the victim to wire or send back the difference between the original amount and the overpaid amount, often using a legitimate-sounding reason such as a need for a refund or an accidental overpayment.
• After the victim sends the excess to the scammer, the bank discovers that the original check was fraudulent, leaving the victim responsible for the entire amount.

Fake check scams lead to significant financial losses for individuals and businesses. It’s always advisable to verify the authenticity of checks and payment methods before taking any action and to be cautious when dealing with individuals who request refunds or overpayments without a valid reason.

2. Fake Payment Methods: Phantom Credit Cards 

Phoney customer overpayment is where a fraudster uses a stolen credit card to purchase from a merchant using a stolen credit card. They intentionally overpay for the product or service and then request a refund for the excess amount, often through a different payment method or by asking for cash back. 

Here’s how the scam unfolds:

• The fraudster purchases from the merchant using a stolen credit card, intentionally overpaying for the product or service.
• The fraudster then contacts the merchant, claiming they made an error and requesting a refund for the excess amount they paid.
• The fraudster may provide alternative payment information, such as bank account details or a different credit card, to receive the refund.
• The merchant, unaware of the fraudulent nature of the initial payment, processes the refund, effectively transferring legitimate funds to the fraudster.

After a fraudulent transaction, the card owner will eventually find out and contact their issuing bank to request a chargeback to recover the lost funds. You’ll be liable for the missing funds, incur chargeback fees, and lose the goods sold equally. In other words, the scam results in a triple loss for you – you lose the purchased goods and the funds paid for them, and you’ll pay additional fees and penalties.

3. Manipulating Payment Systems: Money Laundering Tactics

Trade-based money laundering with overpayment is when criminals launder illicit funds by manipulating trade transactions. In this scheme, the perpetrator attempts to use your eCommerce platform as a front for money laundering, putting your business at risk of legal repercussions. By intentionally overpaying for goods or services to transfer value across borders, the fraudster disguises the illegal origins of the funds. The overpayment creates a discrepancy in the value of the traded goods, allowing the launderer to move money without raising suspicion. 

Read also: 3 reasons why fintech startups get hacked and how they can protect themselves

Preventing overpayment fraud

Now that we’ve gone through what overpayment frauds are and how one can fall victim to them, the next point of consideration is how to prevent them effectively. Here are some recommendations:

1. Use Robust Payment Verification Systems

Verifying the authenticity of payment methods and closely monitoring transactions for any irregularities helps you detect and prevent such fraudulent activities. Additionally, implementing secure payment processing systems and staying informed about the latest fraud trends and prevention strategies can further protect businesses from potential financial losses. These include:

• Two-Factor Authentication: Require customers to provide additional verification, such as a unique code sent to their registered phone number or email address, before completing a purchase. This adds an extra layer of security, reducing the likelihood of fraudulent transactions.
• Address Verification Service (AVS): Utilize AVS to match the customer’s billing address with the one associated with their payment method. If there is a mismatch, it could indicate a potential fraud attempt, allowing you to take appropriate action.

2. Leverage Advanced Fraud Detection Tools

Stay one step ahead of fraudsters with Chargeflow’s cutting-edge AI-based fraud detection tools. The system analyzes various data points and patterns to identify suspicious transactions. This includes:

• Real-Time Transaction Monitoring: With real-time transaction monitoring, Chargeflow’s chargeback alert can automatically flag any irregularities or red flags that may indicate potential cases. This proactive approach allows you to intervene promptly and mitigate potential losses.
• Suspicious Transaction Indicators: Triggers for specific transaction patterns commonly associated with overpayment fraud allow you to track unusually large orders, multiple purchases from different locations, or repetitive failed transactions that could indicate fraudulent behaviour.

3. Educate Staff and Customers

Empower your team and customers with the knowledge necessary to identify and report potential instances of overpayment fraud. Consider the following measures:

• Fraud Awareness Training: Conduct regular training sessions for your staff to educate them about the different types of overpayment fraud and the warning signs to watch out for. Equip them with the skills to handle suspicious transactions and escalate issues when necessary.
• Warning Signs and Reporting Systems: Create a clear and concise guide for your customers, highlighting the common signs of overpayment fraud. Encourage them to report suspicious activities or transactions immediately, providing them with a dedicated contact point for such incidents.

4. Implement Secure Payment Procedures

Using secure payment procedures is paramount to mitigating the risk of overpayment fraud. Consider the following security measures:

• PCI DSS Compliance: Adhere to the Payment Card Industry Data Security Standard (PCI DSS), which outlines security requirements for handling credit card information. Compliance with these standards helps protect sensitive data and prevents unauthorized access.
• Secure Socket Layer (SSL) Certificates: Encrypt all communication between your customers’ browsers and your website by implementing SSL certificates. This encryption helps safeguard sensitive information, such as credit card details, during online transactions.

Final thoughts on overpayment fraud

Overpayment fraud is a growing threat that eCommerce store owners must be aware of and defend against. We’ve explored the various techniques fraudsters use, such as fake payment methods and manipulation of payment systems. You can stay vigilant by understanding their tactics and recognizing behavioural red flags.

Remember to comply with legal frameworks, report incidents promptly, never forward funds, and collaborate with law enforcement and payment processors to track down perpetrators. You can protect your business, customers, and reputation by taking these proactive measures.

The eCommerce landscape is rapidly evolving. Stay informed and implement fraud preventive measures to safeguard your business and ensure a prosperous future.

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This article was written by Tom-Chris Emewulu, Chargeflow’s Digital Evangelist. You can find him on Social Media via @tomchrisemewulu.