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Your guide to transaction fraud detection and prevention

We are living in a digital world more than ever before. From the quick tap of a mobile payment app to the seamless checkout of ecommerce giants, our financial behavior has shifted dramatically to favor convenience. But with convenience comes a lurking danger, transaction fraud.

Written with GPT-4.
Reviewed, revised and approved by Signifyd humans.

Fraudsters and those looking to protect businesses from them are engaged in an escalating battle. On the one side, merchants, banks and fraud protection providers work to improve transaction fraud detection to catch fraud before or when it happens. For their part, fraudsters are employing a myriad of tactics to commit fraud against unsuspecting victims. Ensuring the safety of financial transactions through bank transaction fraud detection, which can include fraud transaction detection using machine learning, has become an essential part of online business.

Given the importance of fraud protection, we’ve written this guide to unravel the threat landscape, highlighting the latest in transaction monitoring and chargeback prevention to secure online purchasing activities. Dive in to understand how the world of fraud detection in online transactions is shaping the future of ecommerce and what it means for you.

What is transaction fraud from a merchant’s perspective?

Transaction fraud occurs when deceitful actors exploit vulnerabilities in the payment process. The end result is often a painful chargeback for businesses. And these aren’t confined to just stolen credit card details. Sophisticated fraudsters are adept at mimicking legitimate purchases, only for them to be disputed later. Each chargeback means more than lost revenue; it also potentially erodes the trust merchants have fostered with their customers.


Why you need transaction fraud detection

In the first half of 2022, mobile devices became the dominant transaction source, accounting for over three-quarters (76%) of all global transactions. With the convenience of online shopping at our fingertips, the volume of these transactions has skyrocketed. This increase, paired with the diversity in payment options like credit/debit cards, PayPal, ApplePay, Google Pay, BNPL, etc., has led to a surge in fraudulent activities. These realities underscore the importance of transaction fraud detection.

  • Protecting finances: Not only from fraud, but also from false declines
  • Maintaining trust: Once lost, it’s very hard to get back customer loyalty
  • Avoiding additional costs: Chargeback fees, time and resources spent managing fraud-related disputes, and potential penalties are all potential risks
  • Staying ahead of fraudsters: This week’s fraud is not next week’s fraud; be ready

Types of transaction fraud

CNP fraud

Often abbreviated as CNP fraud, card not present fraud occurs when fraudulent transactions are executed without the physical presence of the credit card. Cyber rogues, armed with vital details including names, credit card numbers, shipping address and CVV, make purchases online, leading to chargebacks. On average, a customer’s active card makes 7.5 card-not-present transactions per month, according to Shopify. So, to have a business online, merchants must deal with CNP transaction fraud.

Account takeover

In this modus operandi, malefactors gain unauthorized access to personal accounts. Then they modify crucial details, including the email address, shipping preferences and/or the phone number. Once in command, they go on a buying spree, leaving the original account owner perplexed and, oftentimes, financially beleaguered. It’s not just about the money, though. The ordeal of reclaiming one’s account is an emotional roller-coaster.

How transaction fraud detection is done with machine learning

People can detect transaction fraud, but machines are faster. And now machines can learn quickly as well. Peek behind the scenes, and you’ll discover an intricate web of mechanisms, technologies and algorithms tirelessly working to shield transactions. But how does this detection magic actually work?

Data analysis

Harnessing data points, such as email addresses, credit card transaction details, phone number, and shipping addresses, these systems scrutinize every transaction for discrepancies or anomalies.

Machine learning & algorithms

“Learning” from past transaction elements and outcomes, machine learning models are designed to pinpoint fraudulent activity with heightened precision. Fraud transaction detection using machine learning is an emerging field, marrying technology with analytics to offer a stout shield against deceitful transactions.

Real time monitoring Real-time monitoring

The essence of robust fraud prevention lies in its immediacy. By keeping a vigilant watch in real time, detection systems can flag and halt suspicious transactions the moment they occur, curbing potential damage.

Multi-factor authentication

Multi-factor authentication adds a layer of security. This method requires customers to provide two or more verification forms, ensuring that the person initiating the transaction is indeed genuine. What merchants gain in security with multi-factor authentication, they lose in adding friction to transactions.

Disallow and allow lists

Formerly known as blacklists and whitelists, these lists now do what they say. By maintaining lists of entities with histories of fraudulent activity or those with proven trustworthiness, businesses can automatically make informed decisions about transaction approvals.

Fraud management solutions

Dedicated enterprise fraud management solutions offer a comprehensive suite of tools and fraud detection methods tailored to the unique needs of businesses, ensuring transactions are both smooth and secure.

Fraud management solutions offer an intricate dance of technology, data and vigilance, all converging to create a bulwark against potential transaction malfeasance.

Technology used for transaction fraud detection

As cybercriminals employ increasingly sophisticated tactics, the technology dedicated to stopping them has to be equally, if not more, innovative. Let’s delve into the tech gears turning behind the scenes:

Machine learning and AI

At the forefront of future-focused fraud detection is the dynamic duo of machine learning and artificial intelligence. By analyzing historical data and transaction patterns, these systems are trained to recognize and halt anomalies, ensuring fraud detection in online transaction scenarios is both swift and accurate.

Neural networks

Neural networks are used to train the models used in machine learning. These are computational systems inspired by the human brain’s neural structures. They excel at recognizing patterns and are particularly adept at sifting through vast amounts of transactional data to detect potential fraud.

Behavioral analytics

By monitoring user behavior, like typing speed or mouse movements, behavioral analytics  can detect unusual patterns, helping pinpoint potentially fraudulent activity even before a transaction is completed.

Transaction location is useful information Geolocation tracking

Keeping tabs on where a transaction originates can be pivotal in detecting fraud. Discrepancies, like a US-based customer making a purchase from an IP address in another country, can be instant red flags to be considered in the context of other signals..

How to prevent transaction fraud

Detection is half the battle; prevention is the real endgame. While technology does a stellar job of catching fraudulent attempts, it’s also about fostering an environment where such deceitful undertakings are hard-pressed to find a foothold.

Secure payment gateways

Ensuring that your online platform uses encrypted and secure payment gateways can drastically reduce the chances of payment frauds and credit card transaction mishaps.

Regularly update software

Cybercriminals often exploit vulnerabilities in outdated software. Keeping systems updated ensures that any known loopholes are promptly patched.

Use strong authentication methods

Beyond just passwords, consider implementing multi-factor authentication, biometrics, or even smart tokens for added security. But also think past the security issue to balance user experience and the friction security may cause.

Monitor accounts actively

Encourage customers or clients to regularly check their accounts for any suspicious activities. The quicker an anomaly is spotted, the faster it can be addressed.

Limit data retention

The less data there is to steal, the less attractive a target you become.

Collaborate with other businesses in a commerce protection network Collaborate with other businesses

Sharing information about fraud trends, tactics, or even specific threats can help create a collective defense against fraudulent attempts.Don’t underestimate the power of a large commerce network to the fight against fraud.

By intertwining proactive measures with cutting-edge technology, it’s entirely possible to protect the business while ensuring customers have a great purchasing experience.


The threats posed by transaction fraud are very real. But they’re not insurmountable. With the right blend of technology and strategy, businesses can fortify their defenses, transforming potential vulnerabilities into strengths. It’s not merely about reacting to fraudulent activity but preempting it. As technology continues to evolve, so will the tools and strategies at our disposal for fraud prevention. By staying informed, vigilant and collaborative, we can ensure that the digital marketplace remains a space of trust, safety and seamless transactions. Here’s to a future where every online fraud attempt finds itself thwarted, and every genuine transaction sails through with ease.

Kevin Boyd

Kevin Boyd

Kevin Boyd is the web development manager at Signifyd. When not leading his team in crafting captivating digital experiences, he experiments with prompt engineering using ChatGPT and other generative AI systems, as well as writing and optimization.