Payment Fraud in eCommerce: The Role of Payment Gateways & Processors


Payment fraud is a pain in the neck for businesses, especially eCommerce companies. A major reason for this is their reliance on electronic transactions. In 2021 alone, 79% of businesses were victims of payment-related fraud attempts and attacks. That’s too large a number to ignore, which is why organizations are tackling the issue from all angles. 

One of the channels of fraud is payment gateways and processors. These platforms open the door for online fraudsters. Conversely, these platforms also play a role in preventing payment-related fraud.

In this article, you will learn how gateways and processors contribute both positively and negatively to payment fraud in eCommerce. 

What is a payment gateway

A payment gateway is a middleman technology deployed by retailers to receive debit or credit card purchases from buyers. It is a system that receives and verifies a shopper’s card information before sending it to the payment processor. The gateway checks the legitimacy of the card used for purchase. In eCommerce stores, they’re the checkout portals where customers enter their credit card information. 

person using laptop computer holding card

What is a payment processor

A payment processor is the middleman working behind the scenes to ensure a card transaction is successful. When an eCommerce store accepts card payments, the processor transfers the funds from the shopper’s account to the seller’s. Here is how it works: When the buyer inputs their card info in a payment gateway, the gateway passes it to the processor, the processor handles the request and the money gets moved from the buyer’s bank account to the merchant’s account.

What is payment fraud

Payment-related fraud happens when a person’s information is stolen and used to make unauthorized transactions. The victim can also be tricked into revealing their financial information. It covers all forms of transaction scams carried out by cybercriminals. When this type of fraud occurs, the victim loses money, property or vital information. This fraud is one vice that stops businesses from achieving eCommerce growth

Types of payment gateway and processor fraud

Payment gateway and processor frauds are carried out in different ways. Find the three common types below. 

  • Friendly fraud

If there is any payment fraud you should learn more about, it is friendly fraud. This fraud is also known as First-party Fraud. It occurs when a buyer purchases an item on an eCommerce site and requests a chargeback after receiving it, claiming dissatisfaction or other reasons. 

If the chargeback claim is successful ( often the case), the company returns the money to the shopper and the shopper keeps the item. This scam is tagged friendly due to the seemingly innocent and honest way it is committed. 

  • Account takeover fraud

This fraud involves cybercriminals getting unauthorized access to a shopper’s online account and changing the details in a bid to commit fraud. When a hacker gains access to a victim’s account, they change vital information and make it their own. Then, they make purchases with the account, defrauding the innocent owner. 

  • Gift card fraud

Gift card fraud is any kind of fraudulent activity involving gift cards. This is usually how gift card fraud happens: a cybercriminal goes to a merchant’s online portal and monitors the activities on a gift card. The fraudster waits for the card to be paid for and activated at the checkout register, and then attacks. The products stolen are resold online to eliminate traces. 

How to prevent payment gateways and processors fraud 

All the frauds listed above have to pass through the digital payment gateways and processors. This shows the role of these channels in payment fraud. On the positive side, these platforms also help prevent transaction fraud. The following are ways payment gateways and processors prevent fraud. 

Address Verification Service (AVS)

This is one of the effective ways gateways help prevent fraud. When shoppers buy products, they fill in their ZIP code and billing address. The AVS will verify the address provided and see if they match what is on the card. 

Here is how it works: The payment gateway sends a request for verification to the issuing bank. The issuing bank responds. If the address matches, the transaction process continues. If it does not match, more investigation will be carried out.  If the investigation shows foul play, the transaction will be declined.

Payer authentication 

This is a cardholder authentication procedure that helps shoppers secure internet transactions. Here is how it works: The customer creates a PIN and then uses it during checkout. Without the PIN, no one can buy anything with their card. Any transaction initiated without the PIN is flagged as fraudulent. 

Card Verification Value (CVV)

All credit and debit cards have a Card Verification Value (CVV). It is a 3 or 4-digit code. This code acts as a security layer that allows only the owner of the card to use it. To use the card for a purchase, you must provide this number. Without it, no transaction will be approved. If the CVV provided does not match the one on the card, the transaction will be suspected to be fraudulent.

Device recognitionwoman sitting on floor and leaning on couch using laptop

Like human beings, every device, whether phone, tablet, desktop or tablet, has a distinct identity. So, even if fraudsters steal card details, the transaction won’t go through if it is coming from a strange or unidentified device. You might have noticed this when using some apps; if you’re logging in with a different device, it will raise an alarm. Device recognition, when activated in payment gateways and processors, assists in curbing scams. 

Limited transaction amount

Another way to prevent card fraud is by putting a peg on the number of transactions that can be carried out on a card. Usually, when cybercriminals steal a card, they spend as much money as they can on it before they’re discovered. When a shopper authorizes their bank to flag large transactions, it is a way to stop cybercriminals. 

Unknown to the fraudster, there is a limit to what can be purchased at a time or for a period on the card. The payment processor gets a signal from the bank that the transaction is illegitimate and the processor stops it. 

Prevent eCommerce payment fraud with proven strategies

Payment-related fraud is a huge headache for eCommerce stores and most of these scams are perpetrated through payment gateways and processors. However, this scourge can be prevented to a large extent if the right strategies are implemented. 

To protect your business from this menace, put in place measures like address Verification Service (AVS), payer authentication, Card Verification Value (CVV), device recognition and limited transaction amount. These measures will ensure you don’t lose money to friendly frauds, account takeover fraud, gift card fraud and a host of others. 

Frequently Asked Questions (FAQs)

1. What are the 8 elements of eCommerce?

  • Value proposition: this is how the store’s products fulfill the needs of the customers 
  • Revenue model: this is how the store will generate profit and get a high return on investment
  • Market opportunity: this is the store’s intended marketspace
  • Competitive environment: this refers to other stores selling the same products and operating in the same marketspace
  • Competitive advantage: this is the edge the store has over others in the marketspace
  • Market strategy: this refers to the plan the store has to enter a new market and attract new customers 
  • Organizational development: this describes how the store will organize the work that needs to be done
  • Management team: these are the people responsible for making the business work

2. How does eCommerce fraud work?

eCommerce fraud is any illegitimate, illegal or false transaction carried out online. It occurs when a cybercriminal impersonates a buyer and makes a purchase without authorization. This fraud is committed in different ways, but it basically involves the fraudster stealing a customer’s data and using it to buy items from a store. 

3. What are the top 3 security issues in e-commerce?

  • Financial frauds: these include friendly frauds, account takeover fraud and gift card fraud
  • DDoS attacks: Distributed Denial of Service (DDoS) attacks are targeted at disrupting eCommerce sites in order to affect sales
  • Brute force attacks: these attacks are targeted at your store’s admin panel in order to crack your password 

4. What are the 6 e-commerce security strategies?

  • Integrity: the customer must be assured that their information is safe on the eCommerce website and the merchant must be assured that the customer data is valid
  • Non-repudiation: both buyer and seller must keep their end of the bargain
  • Authenticity: for secure eCommerce transactions, both shopper and merchant must provide proof of legitimate identity 
  • Confidentiality: the customer must be assured that the information provided is accessed strictly by the right parties
  • Privacy: the customer must be assured that the usage of their information is controlled
  • Availability: the eCommerce site must be accessible at any time from anywhere


Author Bio: Moyofade Ipadeola is a Content Strategist, UX Writer and Editor. Witty, she loves personal development and helping people grow. Mo, as she’s fondly called, is fascinated by all things tech.