Payment Fraud in Malaysia: A Guide to Protect Your Business

Malaysia’s digital economy is expanding at an unprecedented rate. Bank Negara Malaysia (BNM) projects that e-payment transactions will surpass 17 billion in 2025, a significant jump from previous years. While this rapid digitalization offers immense opportunities for businesses, it also creates a fertile ground for sophisticated payment fraud.

The financial stakes are high. In recent years, the National Scam Response Centre (NSRC) has recorded over RM 1 billion in annual losses from online financial fraud. For a business, payment fraud is not a distant technical problem; it is a direct threat to revenue, customer trust, and regulatory standing. A single well-executed scam can result in substantial financial loss, irreversible brand damage, and severe penalties for non-compliance.

This guide provides a detailed analysis of the payment fraud landscape in Malaysia. We will examine the most common fraud types with business-centric examples, outline the critical risks, and provide actionable, step-by-step prevention strategies.

Key Takeaways

• Growing Threat: Payment fraud in Malaysia is escalating in lockstep with the growth of e-commerce, QR payments (like DuitNow), and cross-border transactions.
• High-Risk Fraud Types: Businesses must be vigilant against Card-Not-Present (CNP) fraud, phishing, chargeback abuse (friendly fraud), and increasingly sophisticated synthetic identity fraud.
• Most Vulnerable Sectors: E-commerce, online travel agencies (OTAs), retail, digital services, and SMEs new to online payments face the highest risk exposure.
• Business Consequences: The impact of fraud extends beyond direct financial loss to include operational disruption, damage to brand reputation, and potential penalties under BNM’s regulatory frameworks.
• Core Prevention Strategies: Essential defenses include implementing multi-factor authentication (MFA), leveraging real-time AI-based fraud monitoring, ensuring PCI DSS compliance, continuous staff and customer education, and integrating a secure payment gateway.

What is Payment Fraud?

Payment fraud is any act where a criminal uses a payment system to illegally obtain money, goods, services, or sensitive financial data. In a digital context, it involves manipulating online payment processes, making it harder to detect and trace than traditional theft.

In Malaysia, common fraud vectors include:

• Using stolen credit or debit card details for online purchases.
• Employing social engineering tactics (phishing, smishing) to steal banking credentials and One-Time Passwords (OTPs).
• Abusing the chargeback process to secure illegitimate refunds.
• Creating synthetic identities from compromised National Registration Identity Card (NRIC) data to open fraudulent accounts.

BNM’s Financial Stability Review has consistently highlighted that fraud incidents are growing in complexity, targeting instant payment rails and QR-based platforms like DuitNow, which are now central to Malaysia’s payment ecosystem.

Common Types of Payment Fraud in Malaysia

1. Card-Not-Present (CNP) Fraud

CNP fraud occurs when criminals use stolen payment card details to make purchases online, over the phone, or via mail order, where the physical card is not required. It is the most prevalent type of fraud affecting e-commerce businesses.

• Business Example: An online gadget store based in Penang ships several high-end smartphones. The purchases were made using credit card details stolen from international tourists. Weeks later, the legitimate cardholders dispute the transactions, and the business receives multiple chargebacks.
• Impact: The business loses the cost of the smartphones, the shipping fees, and is also liable for chargeback penalties imposed by the payment processor, directly eroding its profit margin.

2. Phishing, Smishing, and Vishing

These are social engineering attacks where fraudsters impersonate trusted entities like banks, government agencies (e.g., LHDN), or utility companies to deceive individuals into revealing sensitive information.

• Phishing: Fraudulent emails with links to fake login pages for services like Maybank2u or CIMB Clicks.
• Smishing: SMS messages containing urgent alerts (e.g., “Your account has been compromised, click here to verify”) or fake delivery notifications from services like Pos Laju or J&T Express.
• Vishing: Voice calls where scammers impersonate police officers or bank officials, a key component of the infamous “Macau Scam.”
• Business Example: A customer of a local subscription service receives an SMS stating their monthly payment failed. The link directs them to a fake portal that mirrors the business’s payment page, capturing their card details and OTP. The fraudster then uses these details for high-value purchases elsewhere.
• Impact: Although the business is not the primary target, its brand is used in the scam, leading to a loss of customer trust and potential liability issues.

3. Friendly Fraud (Chargeback Abuse)

Friendly fraud happens when a legitimate customer makes a purchase and then disputes the transaction with their bank, falsely claiming it was unauthorized, the product never arrived, or it was not as described.

• Business Example: A customer buys a dress from a fashion e-commerce site in Kuala Lumpur. After receiving the item, they file a chargeback with their bank, claiming the transaction was fraudulent. The bank, often siding with the cardholder by default, reverses the payment.
• Impact: The business loses the revenue from the sale, the product itself, and incurs a chargeback fee. A high chargeback ratio can lead to increased payment processing fees or even termination of the merchant account.

4. Synthetic Identity Fraud

Fraudsters create a new, fictitious identity by combining real, stolen information (like an NRIC number or address) with fabricated details. This “synthetic” identity is then used to open bank accounts, apply for credit, or set up fraudulent merchant accounts to launder money.

• Business Example: A fraudster uses a stolen NRIC number combined with a fake name and burner phone number to apply for a small business loan or open a merchant account on a marketplace platform. They process fraudulent transactions through this account before disappearing.
• Impact: Financial institutions and platforms face direct losses, and it complicates Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.

5. Account Takeover (ATO) Fraud

Criminals gain unauthorized access to a legitimate customer’s account on an e-commerce site, food delivery app, or digital service platform. They often use credentials stolen from other data breaches, exploiting users’ tendency to reuse passwords.

• Business Example: A fraudster uses a leaked password to log into a customer’s account on a popular food delivery platform. They add a new delivery address and use the stored payment details to order hundreds of ringgit worth of food.
• Impact: Leads to customer disputes, chargebacks, and significant damage to the business’s reputation for security.

Why Payment Fraud is a Critical Risk for Malaysian Businesses

1. Direct Financial Losses

Businesses are often the final bearer of fraud-related costs. This includes:

• Cost of Goods Sold: The value of the product or service lost.
• Chargeback Fees: Banks typically charge merchants between RM 60 and RM 100 per chargeback incident.
• Operational Costs: The time and resources spent by customer service, finance, and IT teams to investigate and manage fraud incidents.

2. Regulatory and Compliance Pressure

Bank Negara Malaysia holds businesses accountable for securing their payment systems. BNM’s Risk Management in Technology (RMiT) policy mandates that financial institutions and businesses handling payments must:

• Establish a robust risk management framework.
• Implement strong internal controls to detect and deter fraud.
• Conduct regular security assessments.
  Non-compliance can result in financial penalties, operational restrictions, or the suspension of payment processing privileges.

3. Damage to Customer Trust and Brand Reputation

Global surveys consistently find that over 60% of consumers would stop using a service after a negative security experience. For SMEs and startups in Malaysia, customer trust is a primary asset. A publicised fraud incident can lead to immediate customer churn and negative media coverage, which is difficult to recover from.

4. Operational Disruption

Dealing with the aftermath of fraud diverts critical resources from core business activities. Investigating disputes, managing chargebacks, and communicating with affected customers consumes significant time and effort, hindering growth and productivity.

How Businesses in Malaysia Can Prevent Payment Fraud

1. Strengthen Authentication

• Implement 3D Secure 2.0: This standard adds a layer of authentication for online card payments, shifting the liability for fraudulent chargebacks from the merchant to the card issuer. It uses risk-based analysis to provide a smoother checkout experience than its predecessor.
• Use Multi-Factor Authentication (MFA): Secure internal dashboards and customer accounts with MFA (e.g., password + OTP or biometric scan). This is crucial for preventing account takeovers.
• Deploy Biometric Authentication: For mobile apps, leverage fingerprint or facial recognition for payment authorization, providing a secure and convenient option for users.

2. Use Real-Time Fraud Monitoring

• Leverage AI-Driven Systems: Integrate fraud detection tools that use machine learning to analyze transaction patterns in real-time. These systems can identify and flag suspicious behaviour based on hundreds of data points.
• Set Custom Rules: Configure rules specific to your business model. For example:

• Flag transactions from IP addresses in high-risk countries.
• Temporarily block accounts after multiple failed payment attempts in a short period.
• Set velocity checks to limit the number of transactions from a single user or card within a day.

3. Protect Customer Data (PCI DSS Compliance)

• Adhere to PCI DSS: The Payment Card Industry Data Security Standard (PCI DSS) is a mandatory set of requirements for any business that stores, processes, or transmits cardholder data. Compliance involves measures like data encryption, network security, and access control.
• Use Tokenization: Instead of storing raw card numbers, use tokenization. A payment gateway replaces sensitive card details with a unique, non-sensitive identifier (a “token”), drastically reducing the risk if your systems are breached.

4. Educate Staff and Customers

• Internal Training: Regularly train employees to recognize phishing emails, report suspicious activity, and follow internal security protocols.
• Customer Awareness: Proactively educate your customers. Send periodic emails or post on your website about how to spot common scams, the importance of strong passwords, and a reminder that your business will never ask for their OTP or full password.

5. Implement Strong Operational Policies

• Clear Refund & Chargeback Policies: Display your return and refund policies clearly on your website. This can deter some forms of friendly fraud.
• Maintain Detailed Records: Keep comprehensive logs of all transactions, including customer communications, proof of delivery, and shipping details. This documentation is essential for challenging and winning illegitimate chargeback disputes.

6. Partner with a Trusted Payment Gateway

A secure and reliable payment gateway is your first line of defense. It offloads much of the security burden by providing built-in fraud prevention tools.

A comprehensive payment gateway offers:

• Automated Fraud Screening: Real-time analysis of transactions using velocity checks, device fingerprinting, and IP risk assessment.
• Chargeback Management Support: Tools and expert assistance to help you dispute and manage chargeback claims effectively.
• Full PCI DSS Compliance: Ensuring all transactions are processed in a secure, compliant environment.
• Advanced Features: Support for 3D Secure 2.0, tokenization, and custom risk rules.

Razorpay Curlec offers Malaysian businesses a multi-layered security infrastructure designed for the modern digital economy. With AI-based fraud monitoring, a dedicated chargeback protection program, and built-in tokenization, Razorpay Curlec helps businesses secure transactions, minimize risk, and operate with confidence in the region.

Conclusion

Payment fraud in Malaysia is a dynamic and persistent challenge that requires more than just a basic defense. As criminals refine their methods, businesses must adopt a strategic, multi-layered approach to security. While complete elimination of fraud is not feasible, a combination of strong authentication, real-time monitoring, strict compliance, and continuous education can reduce the risk to a manageable level.

By investing in robust fraud prevention systems and partnering with a secure payment gateway, Malaysian businesses can protect their revenue, build lasting customer trust, and secure their position in the nation’s vibrant digital future.

Frequently Asked Questions (FAQ) on Payment Fraud in Malaysia

1. What industries in Malaysia are most targeted by payment fraud?

E-commerce, online travel, digital services (e.g., streaming, software), retail, and food delivery platforms are most affected. These sectors rely heavily on card-not-present transactions, which carry a higher inherent risk of fraud.

2. How do BNM’s “kill switch” measures affect businesses?

The “kill switch” is a self-service security feature that allows consumers to immediately freeze their bank accounts if they suspect fraud. For businesses, this means a legitimate customer might accidentally freeze their account, causing payment declines. It underscores the importance of transparent communication with customers regarding transaction security.

3. What penalties can a Malaysian business face for not complying with security standards like PCI DSS?

Penalties can be severe and include monthly fines from payment card brands, increased transaction fees, suspension of the merchant account, and reputational damage. In cases of significant breaches, a business may face regulatory sanctions from BNM under its RMiT framework.

4. Can a small business afford advanced fraud prevention tools?

Yes. Modern payment gateways often bundle advanced fraud prevention features into their standard offerings. AI-powered risk scoring, velocity checks, and 3D Secure support are now accessible even for startups and SMEs, providing enterprise-grade security without a prohibitive cost.

5. How can startups in Malaysia balance strong fraud prevention with a smooth customer checkout experience?

The key is to use a risk-based approach. Implement “frictionless” security measures like tokenization and behind-the-scenes AI risk scoring for all transactions. Only introduce “friction” like an MFA challenge or OTP for transactions that are flagged as high-risk, ensuring most legitimate customers enjoy a seamless checkout.

6. What is the first thing a business should do after discovering a fraudulent transaction?

Immediately contact your payment gateway or bank to report the incident. If customer data was potentially compromised, take steps to secure the affected accounts. Preserve all transaction logs and communications related to the incident, as this information will be critical for investigations and chargeback disputes.