With more and more people opting for online payments, payment gateways and mobile wallets are facing the risk of being misused by unscrupulous merchants, reports the Times of India. 

Citrus Pay and PayU, online payment service providers, claim that the 1% interest rates offered by payment gateways is being taken advantage of by several small traders who set up online stores and withdraw money citing fake transactions. 

Nitin Gupta, CEO of PayU India told the Times of India, "We have lost Rs 4.5 lakh on account of fraud out of which one ecommerce merchant sold a used 'car' worth Rs 1 lakh to himself by his credit card." 
 
Cash withdrawal at an ATM in India through a credit card is charged at about 2.7%-2.8% interest rate monthly, which on an compounded basis comes to about 40% annually. But most mobile wallets and payment gateways charge 1% interest rate for E-commerce transactions. 

Small time traders have discovered this loophole and have found it to be a cash rotating machine by opening fake online retail companies. 
 
With the Indian e-commerce industry projected to grow to over $12 billion by end of next year, companies such as Mumbai-based Citrus Pay have seen a rise in frauds. 
Jeetendra Gupta, Co-Founder of CitrusPay, a payment gateway, was quoted in the Times of India as saying,"In Timtara's case, the whole payments industry lost over Rs 1 crore as the merchant failed to deliver the goods." 
 
E-commerce portal Timtara shut down last year after arrests of management, as they failed to deliver products, when they ran out of cash accepted from buyers. 
Legally, swiping card for cash is not allowed in India as there have been rackets in the past that the police have busted. The other reason behind swiping credit cards for fake sales is to earn rewards.
 
Not only payment gateways but even the mobile wallets have become extremely cautious. It's easier to swipe money from a credit card into a bank account. 
Users are able to withdraw cash from their credit cards at almost 0% in mobile wallets compared to up to 2% they are charged on e-commerce portals. 
To curb fake online sale frauds, payment gateways such as PayU and CitrusPay have launched detection mechanisms. 

The very first step is to fingerprint the IP address of the device which is making an abnormal payment. If it's the same device a merchant used to register with payment gateway, he or she can be caught red-handed. The second is to record the location of the access of the product and its price.