eCommerce Fraud Prevention

eCommerce fraud is a serious threat that compromises the security of online stores. Fraudulent transactions, account takeovers, and return fraud are just a few examples of malicious actions that can occur. From revenue losses and added fees to strains on resources, the compound effects add up. eCommerce losses from online payment fraud are estimated to reach $48 billion this year, a 174% increase since 2020. The growing fraud problem has made fraud prevention a necessity for eCommerce businesses.

eCommerce fraud prevention consists of the strategies, measures, and practices online businesses implement to detect, mitigate, and prevent fraudulent activities and transactions through digital platforms. It involves using various tools, technologies, and security measures to safeguard against fraudulent activities, such as unauthorized transactions, identity theft, stolen credit card information, and other forms of online fraud.

The primary goal of eCommerce fraud prevention is to protect the business and its customers from financial losses, reputational damage, and the negative impact of fraudulent transactions. By implementing effective fraud prevention measures, online businesses can maintain trust and confidence in their eCommerce operations, ensure secure transactions, and create a safe environment for customers to shop and conduct online transactions.

eCommerce fraud prevention encompasses a range of strategies, including but not limited to transaction monitoring, user authentication, data analysis, fraud detection algorithms, secure payment gateways, address verification, device fingerprinting, manual review, and collaboration with payment service providers. These measures work together to identify suspicious activities, detect fraud patterns, and prevent fraudulent transactions from occurring.

Overall, eCommerce fraud prevention aims to strike a balance between providing a seamless user experience for legitimate customers so as not to block good orders, while implementing robust security measures to identify and prevent fraudulent transactions in the online environment.

Growth of eCommerce Fraud

eCommerce fraud has been a growing concern in recent years due to the increasing popularity of online shopping and digital transactions. According to a report by Juniper Research, global online payment fraud losses are projected to exceed $206 billion by 2025, up from $138 billion in 2020.

Different Types of Fraud Defined

• Phishing is when a cyberattacker poses as a trustworthy entity or organization to deceive individuals — which can include the merchant’s employees as well as their shoppers — into providing sensitive information such as passwords, credit card details, or personal data. It typically occurs through emails, instant messages, or malicious websites that mimic legitimate sources.
• Friendly fraud/chargeback fraud refers to a situation where a customer makes a legitimate purchase online using their credit card or other payment methods but later disputes the charge and requests a chargeback from their card issuer, claiming that the transaction was unauthorized or fraudulent. However, in reality, the customer intentionally initiated the transaction and received the goods or services.
• Card testing is when cybercriminals attempt to verify the validity of stolen credit or debit card information by making small, unauthorized transactions or test purchases. The purpose of card testing is to determine if the stolen card details are still active and usable for future fraudulent activities.
• Identity theft is the acquisition and use of someone else’s personal information, such as their name, Social Security number, credit card details, or other identifying data, without their consent. The purpose of identity theft is often to commit financial fraud, gain unauthorized access to resources, or engage in other criminal activities while impersonating the victim
• Refund abuse is the misuse or exploitation of refund policies or processes for personal gain, often at the expense of businesses or sellers. It involves intentionally and dishonestly seeking refunds or returns for items that do not meet the criteria for a legitimate refund or return, or for items that were not purchased in the first place.
• Account takeover is a cyberattack where unauthorized individuals gain control of someone else’s online account, such as email, social media, banking, or eCommerce shopping accounts, without the account owner’s consent. Once an account is taken over, the attacker can access and manipulate the account, potentially leading to various malicious activities.
• Loyalty fraud is when fraudsters target loyalty programs offered by eCommerce businesses. These programs are designed to reward and retain customers by providing benefits, discounts, points, or other incentives based on their loyalty or frequent patronage. Loyalty fraud occurs when individuals or organized groups exploit vulnerabilities in these programs to gain unauthorized or fraudulent benefits.
• Affiliate fraud occurs withinaffiliate marketing, which is a performance-based marketing model where affiliates promote products or services of businesses and earn commissions for driving sales, leads, or other desired actions. Affiliate fraud happens when fraudsters falsely inflate their performance to fraudulently earn commissions or exploit businesses participating in the affiliate program.
• Reshipping is a practice where individuals act as intermediaries to receive and forward packages to other locations. While reshipping itself is not inherently illegal, it is often associated with fraudulent activities, particularly in cases of reshipping scams. In reshipping scams, individuals are recruited or lured into participating in what appears to be a legitimate business opportunity. They are usually promised benefits or compensation for their involvement. However, their role is to receive packages sent by fraudsters who have obtained goods using stolen credit cards or through other fraudulent means. The reshippers are then instructed to forward the packages to addresses provided by the fraudsters.
• Botnets are a network of compromised computers or devices that are under the control of a malicious actor, known as the botmaster or bot herder. These compromised computers, often referred to as bots or zombies, are typically infected with malware that allows the botmaster to remotely control and coordinate their fraudulent activities.

Impact on Businesses

eCommerce fraud can result in financial losses for businesses due to chargebacks, lost merchandise, and additional operational costs associated with fraud prevention measures. A study by LexisNexis found that for every dollar lost to fraud, businesses incur an additional $3.75 in costs, including chargeback fees, investigation expenses, and merchandise replacement. This does not include opportunity costs to businesses of having employees focused on fraud, rather than increasing sales or innovation.

Customer Trust and Experience

eCommerce fraud can undermine customer trust and negatively impact the online shopping experience. According to a survey by PYMNTS, 59% of eCommerce shoppers lose trust after unsatisfactory experiences. Adobe further reports that 74% of consumers say they will stop shopping from brands that break their trust.

Fraud Prevention Measures

The use of advanced fraud prevention technologies and tools, such as machine learning algorithms, artificial intelligence, and behavioral analytics, is increasing to combat evolving fraud tactics. According to Ravelin, 75% of merchants plan to increase investment in fraud prevention technology this year.

How to Prevent eCommerce Fraud

eCommerce fraud prevention is crucial for online businesses to protect themselves from financial losses and maintain the trust of their customers. Here is a comprehensive list of key strategies and best practices to help you mitigate fraud risks in your online transactions.

1) Use Secure eCommerce and Subscription Platforms

• Choose reputable and secure eCommerce and subscription platforms that implement robust security measures — and make sure they are compatible with your fraud prevention solution.
• Ensure the platform has built-in fraud prevention features, such as address verification, card verification value (CVV) checks, and IP geolocation.
• Be aware of new subscription fraud trends, designed to exploit system gaps between platforms.

2) Implement Strong User Authentication

• Require customers to create strong passwords and encourage the use of multi-factor authentication (MFA) for account access.
• Implement CAPTCHA or reCAPTCHA systems to protect against automated attacks.

3) Employ Address Verification System (AVS)

• Utilize AVS to compare the billing address provided by the customer with the address on file with the credit card issuer.
• Flag transactions with address mismatches or suspicious patterns for manual review. Offload representment to seasoned chargeback specialists who can effectively manage a high volume of disputes while your staff focuses on higher-value tasks.

4) Utilize Card Verification Value (CVV) Checks

• Request the CVV code from the back of the customer’s credit card to verify that they have physical possession of the card.
• Decline transactions with invalid or missing CVV codes.

5) Monitor for Suspicious Activity

• Employ real-time transaction monitoring tools to identify suspicious patterns or behaviors. 
• Leverage pre-gateway fraud screening in conjunction with dynamic checkout fields to create seamless checkout experiences for customers while preventing fraud in real-time.
• Set up alerts for transactions that exceed predefined thresholds or show unusual characteristics.

6) Implement Geolocation Verification

• Verify the geographic location of the customer’s IP address against the billing and shipping addresses provided.
• Flag transactions originating from high-risk countries or with significant geographic discrepancies.

7) Employ Device Fingerprinting

• Use device fingerprinting technology to identify and track devices used for transactions. Enable device recognition to autofill address and payment information so trusted customers can checkout swiftly.
• Analyze device data, such as IP address, browser version, and operating system, to detect suspicious or fraudulent activity.

8) Adopt Machine Learning and AI

• Leverage machine learning and artificial intelligence algorithms to analyze large volumes of data and detect fraud patterns.
• Train the system to identify anomalies and adapt to evolving fraud techniques.

9) Implement 3D Secure

• Implement 3D Secure protocols, such as Verified by Visa or Mastercard SecureCode, to add an extra layer of authentication for online transactions.
• Require customers to authenticate themselves with a password or one-time passcode during the checkout process.

10) Stay Updated on Fraud Trends

• Stay informed about the latest fraud techniques, trends, and vulnerabilities.
• Monitor industry news, attend conferences, and participate in relevant forums or communities to learn from others’ experiences.

11) Maintain a Clear Refund and Return Policy

• Clearly communicate your refund and return policies to customers, reducing the likelihood of fraudulent refund and chargeback requests.
• Implement checks and balances to verify the legitimacy of refund and return requests before processing them.
• Partner with a fraud prevention provider to completely eliminate the burden of chargebacks. (See: NoFraud Chargeback Protection Policy for our chargeback guarantee)

12) Educate Customers

• Provide educational materials on your website or during the checkout process to raise awareness about fraud risks and how customers can protect themselves.
• Encourage customers to monitor their accounts regularly, report any suspicious activity, and keep their personal information secure.

13) Collaborate with Payment Service Providers (PSPs)

• Work with reputable PSPs that offer additional fraud prevention tools and services.
• PSPs often have advanced fraud detection systems in place and can provide valuable insights and expertise.

14) Regularly Analyze and Review Data

• Regularly analyze transaction data, patterns, and customer behavior to identify potential fraud trends.
• Conduct periodic reviews of fraud prevention strategies and adjust them as needed based on the analysis.

15) Continuously Improve and Evolve

• Fraudsters are constantly evolving their tactics, so it’s essential to continually assess and improve your fraud prevention measures.
• Stay proactive and adapt your strategies to new threats and technologies.
• Talk to other online merchants to share experiences, trends, and tips.

If you’re keen on learning everything there is to know about eCommerce fraud prevention, here are some recommended next steps and related resources.

Step 1: Identify gaps

• Make sure all your technology is secure and updated with the latest version.
• Make sure the platforms in your tech stack integrate with your fraud prevention solution.
• Review checkout experiences and find ways to minimize cart abandonment.

Resources to help:

• eCommerce Fraud Protection Best Practices
• 4 Ways to Stop Cart Abandonment
• 5 Ways to Prevent Chargebacks
• Top 3 Subscription Fraud Trends
• 3 Ways to Create Customer Loyalty with Effective Fraud Prevention
• How Fraud Prevention Boosts Revenue

Step 2: Chat with a fraud expert

• Contact a fraud expert to help build out and refine the gaps identified in Step 1.
• Try NoFraud for free! Sign up for a free 14-day trial (no credit card required) to see what an effective fraud prevention solution can do for your business.

Resources to help:

• Join an Ask a Fraud Analyst webinar or view past sessions.
• Contact NoFraud directly and ask us your questions!

Step 3: Collaborate with your team

• Develop processes for how your team should respond to fraudulent transactions.
• Build procedures for transaction monitoring and analyses to stay ahead of fraud trends.

Resources to help:

• Top Fraud Trends in 2023 (webinar)
• The Best eCommerce Fraud Tools: Fraud Prevention Toolkit
• Is Full-Service Fraud Prevention Right for My Business?

eCommerce fraud prevention is vital for safeguarding online businesses, maintaining customer trust, and minimizing financial losses. Investing in robust fraud prevention measures is a proactive step towards securing your eCommerce business and fostering long-term success. A layered and comprehensive approach is crucial for effective fraud prevention in the eCommerce space. 

By implementing secure payment gateways, utilizing fraud detection tools, and employing MFA, you can significantly reduce the risk of fraudulent activities. Stay vigilant, monitor customer behavior, and educate your customers about security measures to create a secure and trustworthy online shopping experience. By prioritizing eCommerce fraud prevention strategies, you can protect your business, your customers, and your reputation in the digital marketplace.