Payments 101

Credit card fraud prevention for merchants: all you need to know

Credit card fraud drains billions from businesses every year. For merchants, it means more than lost revenue. Fraud drives up chargeback fees, damages reputation, and increases operational workload. Customers who experience fraud often lose trust and may not return.

This article explains what credit card fraud is, why merchants are exposed, and how to fight it with practical tools and strategies. It also shows how payment orchestration helps unify fraud prevention across providers and markets.

Understanding credit card fraud

Credit card fraud happens when someone uses stolen or unauthorized card information to make purchases. It ranges from simple theft of card numbers to complex identity fraud rings.

Card-not-present (CNP) fraud dominates ecommerce. Criminals use stolen details online where the card does not have to be physically shown. Account takeover occurs when fraudsters gain access to a customer’s account and use stored cards. Synthetic identity fraud combines real and fake data to create new profiles for fraud.

Card networks and banks play a role in prevention. When asked “How do credit card companies prevent fraud?”, the answer is layered controls:

  • Real-time transaction scoring
  • Address Verification System (AVS) and CVV checks
  • Velocity and spending pattern analysis
  • Strong Customer Authentication (SCA) in markets like Europe

But these protections do not stop all fraud. Merchants still face chargebacks when fraud bypasses issuer defenses.

For a deep look at evolving threats, see What is payment fraud: an updated guide for 2025.

Friendly fraud: when customers dispute real purchases

Not all fraud comes from criminals. Friendly fraud happens when a legitimate customer disputes a charge they actually made. This could be accidental — such as forgetting a subscription renewal — or intentional, when someone tries to get goods for free.

Friendly fraud is hard to fight because it starts with a real transaction and passes security checks. By the time the customer disputes the charge, the merchant has shipped the product or delivered the service.

Early warning signs include:

  • Customers who frequently claim non-delivery
  • Unusually high refund requests after delivery
  • Chargebacks soon after recurring billing

For details on prevention and dispute handling, see What is friendly fraud: a guide for merchants.

How merchants deal with credit card fraud

When merchants ask “How do merchants deal with credit card fraud?”, the answer is layered defense:

  1. Risk screening tools to score every transaction.
  2. 3-D Secure 2 and SCA to authenticate customers.
  3. Device fingerprinting and behavioral analytics to detect bots or account takeover.
  4. Manual review for suspicious high-value orders.
  5. Chargeback response systems to dispute fraudulent claims with evidence.

Merchants that sell across borders also need region-specific rules. For example, BIN attacks (automated testing of stolen card numbers) are common in the US and Latin America. In Europe, fraud often exploits SCA exemptions or recurring payment flows.

Merchant liability and compliance

Many businesses wonder “How are merchants liable for credit card fraud?” Liability depends on authentication and payment type:

  • If a merchant does not apply required Strong Customer Authentication under PSD2 and a fraud case occurs, they often bear the cost.
  • In card-not-present environments outside Europe, merchants usually carry the liability once the issuer authorizes the payment.
  • Chargebacks shift the financial loss to merchants when customers dispute fraudulent transactions.

Understanding liability helps merchants choose the right fraud controls and weigh risk against conversion.

Global regulatory examples

Fraud prevention is shaped by local laws. PSD2 in Europe made SCA mandatory to cut card-not-present fraud. The Philippines introduced RA 8484, also known as the Access Devices Regulation Act, to punish credit card fraud and protect cardholders. While RA 8484 targets criminals, it also forces businesses to handle card data securely and cooperate with investigations.

Similar regulations exist elsewhere: the US enforces PCI DSS, Brazil enforces LGPD on data, and many APAC markets are strengthening consumer fraud protections. Merchants with global reach must follow each region’s rules while keeping a consistent fraud strategy.

Key fraud prevention tools for merchants

Fraud prevention is most effective when merchants combine multiple tools into one defense system rather than relying on a single check.

Address Verification System (AVS) and CVV checks

AVS compares the billing address entered at checkout with the address on file with the card issuer. CVV (Card Verification Value) adds another security layer by verifying the three- or four-digit code on the card. Together they stop basic card theft but remain invisible to customers when entered correctly.

3-D Secure 2 and Strong Customer Authentication

3-D Secure 2 (3DS2) has become a core part of fraud prevention. It uses step-up authentication such as biometrics or SMS codes. In Europe, PSD2 requires Strong Customer Authentication (SCA), which often relies on 3DS2 to verify customers. When implemented well, it reduces unauthorized transactions and protects merchants from liability.

Device fingerprinting and behavioral analytics

Fraudsters often hide behind stolen credentials but still leave technical traces. Device fingerprinting collects browser and hardware data to detect risky sessions. Behavioral analytics tracks patterns like typing speed, mouse movement, and navigation flow. Unusual behavior can trigger extra checks or manual review.

Risk scoring and velocity checks

Transaction scoring engines combine multiple data points — location, spend history, card BIN, and IP address — to assign a fraud risk score. Velocity checks flag unusual spikes, such as many purchases from one account in a short time.

Manual review for edge cases

No automated system catches every threat. High-value or suspicious orders benefit from manual review by trained staff. This approach balances security with customer service by approving genuine but unusual transactions.

When businesses ask “How do merchants deal with credit card fraud?”, these layers form the answer: use technology for speed, but keep human oversight for complex cases.

Balancing fraud prevention with conversion

Stopping fraud is critical, but being too strict can hurt revenue. False declines — rejecting good customers — cost merchants as much as fraud itself.

Adjust rules for each market

Fraud patterns differ globally. Rules that work in the US may reject too many legitimate European shoppers, and vice versa. Merchants should segment by region, card type, and channel rather than applying a single global rule set.

Test and tune thresholds

Fraud tools often use scoring thresholds. Merchants should test and adjust these regularly to maintain an acceptable balance between blocking fraud and approving real buyers.

Use step-up authentication selectively

Trigger 3-D Secure 2 only when risk is high. For low-risk customers, keep checkout smooth to preserve conversion rates.

For more detail on tuning fraud defenses while keeping payments seamless, see Fraud prevention for ecommerce: best practices for merchants.

How payment orchestration helps

Fraud prevention becomes harder when merchants work with multiple PSPs. Each provider has its own risk tools and dashboards. Orchestration unifies these moving parts.

Centralized fraud rules

Orchestration platforms let merchants create one set of risk policies across all PSPs. Instead of managing separate rules per provider, merchants maintain a single control layer that applies consistently to every transaction.

Easy integration of fraud tools

Connecting third-party risk services to multiple PSPs individually is complex. Orchestration allows merchants to plug in tools like device fingerprinting or risk scoring once and apply them across the stack.

Routing to reduce fraud exposure

Dynamic routing can send high-risk transactions to PSPs with better fraud detection or liability coverage. Merchants can keep low-risk traffic on cost-effective routes while protecting themselves on riskier segments.

Unified reporting for chargebacks and disputes

Fraud data, dispute rates, and chargeback codes become visible in one dashboard. Merchants can spot attack patterns faster and respond with better evidence.

This consolidation helps merchants scale fraud prevention as they expand globally and use more PSPs.

Compliance and liability revisited

Fraud strategy cannot ignore liability rules. As discussed earlier in “How are merchants liable for credit card fraud?”, merchants bear the cost of most card-not-present fraud unless they meet authentication requirements.

  • Using 3-D Secure 2 and SCA shifts liability to issuers in many regions.
  • PCI DSS compliance is mandatory when storing or transmitting card data for fraud checks.
  • Regional privacy laws, including GDPR and Brazil’s LGPD, govern how merchants can collect and use customer data for fraud scoring.

Fraud prevention also intersects with local laws like the Philippines’ RA 8484, which punishes credit card fraud and sets expectations for businesses to cooperate with investigations and protect cardholder data. Global merchants must track these rules to avoid penalties while protecting revenue.

Building a fraud prevention roadmap for merchants

Fighting credit card fraud is not a one-time task. Merchants need an evolving plan that adapts as threats change and new payment methods appear.

1. Audit your current exposure

Start by reviewing fraud rates, chargeback ratios, and false decline levels. Segment by country, card type, and channel. Look for patterns, such as high fraud in a single market or spikes during holiday seasons.

2. Map your tools and gaps

List all fraud controls in place — AVS, CVV, 3-D Secure, device checks, manual review — and note where they fail. Some merchants discover their tools overlap while missing key steps like velocity checks or BIN attack monitoring.

3. Strengthen authentication

Adopt 3-D Secure 2 where supported. Apply PSD2 Strong Customer Authentication correctly to reduce liability and fraud. In non-EU markets, use adaptive authentication based on risk scoring.

4. Layer technology intelligently

Combine risk scoring, device fingerprinting, behavioral analytics, and manual review. Avoid relying on one provider or PSP for all fraud prevention.

5. Integrate orchestration

If you use multiple PSPs, centralize fraud controls through orchestration. This makes rules consistent, simplifies compliance, and provides a single view of disputes and chargebacks.

6. Train and review

Ensure customer support and payment teams know how to respond to fraud claims and manage chargebacks. Review rules and thresholds regularly to stay ahead of new attack patterns.

FAQs

Are 3-D Secure and SCA enough to stop fraud?

No. They reduce unauthorized use but do not prevent friendly fraud or all synthetic identity attacks. Merchants still need layered defenses and chargeback management.

Can fraud tools hurt conversion?

Yes, if rules are too strict. High false decline rates can frustrate customers. Test thresholds regularly and use risk-based authentication to avoid unnecessary friction.

Does orchestration reduce fraud management complexity?

Yes. It provides one place to apply rules, integrate third-party tools, and review chargeback data across all PSPs.

How often should fraud rules be reviewed?

At least quarterly. Review after major seasonal peaks or new fraud trends. Payment data changes quickly, so stale rules can block good customers or miss new attacks.

Credit card fraud is a cost every merchant faces, but it does not have to drain revenue or trust. Merchants that understand the types of fraud, apply layered tools, and balance security with conversion outperform those that rely on basic checks.

Payment orchestration makes fraud prevention scalable. It unifies risk rules, integrates third-party tools, centralizes reporting, and adapts across regions. For merchants running global operations or using multiple PSPs, orchestration is the fastest path to a consistent and effective anti-fraud strategy.

Contact Gr4vy to simplify fraud prevention, reduce chargebacks, and protect your business while keeping payments seamless for customers.

Gr4vy

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