Fraud in e-commerce is not new for retailers, but it has significantly increased with the booming market. Fraudsters are targeting merchants, customers, and credit card issuers. Essentially, all enablers in the ecosystem are at risk.
The “2024 Global E-Commerce Payments & Fraud Report” by MRC offers a detailed analysis of e-commerce payments and fraud, based on a survey of over 1,100 merchants across more than 35 countries. The report offers insights into payment acceptance, tactics and metrics, payment partnerships, fraud opportunities, first-party misuse, and fraud management. In 2023 alone, an estimated $38 billion in e-commerce losses were reported in the US due to online payment fraud, with projections indicating this number will reach $91 billion by 2028.
This blog explores various facets of e-commerce fraud, the types of fraud, and strategies to address them.
What is E-commerce Fraud?
E-commerce fraud refers to any deceitful or illegal activities carried out to obtain money, goods, or services fraudulently through online shopping channels. It involves the unauthorized use of payment information, identity theft, and other malicious tactics to exploit e-commerce businesses and customers. This is a serious issue.
When global e-commerce sales are tipped to reach $6.3 trillion in 2024, instances of e-commerce fraud for scammers have increased significantly.
Types of E-commerce Frauds
1.Friendly Fraud
This happens when customers make legitimate purchases on an e-commerce website but then initiate a chargeback from their bank or credit card company, falsely claiming they did not receive the order. As a result, the customer gets a refund, while the merchant loses both the merchandise and the payment.
For example, a shopper orders a new laptop from an online electronics retailer. After receiving and using the laptop for a few weeks, they contact their bank, claiming it was never delivered, to get a refund and keep the device for free.
2.Card Testing Fraud
Card testing fraud involves using stolen or compromised credit card information to make small, inexpensive purchases to verify whether the card is still active and usable. Once confirmed as valid, the fraudsters proceed to make larger, more costly illegal purchases using the same card details across multiple merchants.
This is the third most common e-commerce fraud type, according to the 2023 Global Payments and Fraud Report. It risks merchants being saddled with fees, chargebacks, and blocked payment processing if detected.
3.Refund Abuse
Refund abuse happens when customers exploit lenient return policies by claiming legitimately delivered items never arrived, were damaged, or were misrepresented in order to get a refund while retaining possession of the merchandise. For example, a customer orders a new TV but claims it arrived shattered, despite intentionally breaking it themselves. They receive a refund or replacement unit but keep the original undamaged TV.
4.Online Payment Fraud
Online payment fraud uses stolen financial data like credit card numbers and banking credentials obtained from data breaches or phishing scams. This data is used to make fraudulent purchases on e-commerce sites.
5.Account Takeover Fraud
Account takeover (ATO) fraud happens when criminals gain unauthorized access to legitimate customer accounts, often through credential stuffing attacks using passwords leaked in data breaches. With control of the account, they can make fraudulent purchases using stored payment methods, siphon funds, and loyalty points to sell on the dark web. 83% of merchants reported increased ATO fraud attempts in 2023, as poor password hygiene leaves many accounts vulnerable.
Reasons for E-commerce Frauds
E-commerce fraud stems from many sources and motivations. Some top reasons it occurs are:
- Data breaches: Among the leading causes of e-commerce fraud are data breaches, where hackers obtain unauthorized access to a company’s digital network and steal customers’ information. This stolen information is often used to make fraudulent purchases.
- Weak or stolen credentials: Users’ credentials are often stolen through phishing attacks or weak passwords. Such credentials can allow fraudsters to make unauthorized purchases or embezzle seller funds.
- Lack of secure payment verification: E-commerce platforms lacking secure payment verification methods provide a fertile environment for fraud. For instance, without tools like two-factor authentication or CVV card verification, it becomes easier for fraudsters to use card details that they have stolen to complete their transactions.
- Poor website security: E-commerce websites with poor security measures, such as open vulnerabilities due to SQL injection attacks and cross-site scripting, poor access control, and weak passwords, are low-hanging fruits for fraudsters.
- Advanced persistent threats (APTs): In these attacks, an intruder gets access to a network and stays undetected for a long time. APTs can be used in e-commerce to gather customer data over time, leading to fraud.
How to Detect E-commerce Frauds?
E-commerce fraud is not just about losing sales. It reduces customers’ confidence. If a person has been ripped off once by your website, it is unlikely that they will return.
- Abnormal increase in order volumes: Fraudulent people often prefer buying goods of high value as they buy them from other people’s money.
- Low-worth orders: Be alert about small transactions, particularly for amounts just around $1. Fraudsters often buy low-value items to confirm if their card was stolen.
- Different credit cards: If a customer purchases several times and buys from a different card each time, this is a potential red flag. There is a high probability that these are compromised cards.
- Repeatedly declining transactions: If payment declines due to security code issues, this can indicate a potential scam.
- Unusual IP addresses. Watch out for multiple orders coming from the same IP address or other strange orders from an IP address located outside.
E-commerce Fraud Prevention Strategies
Here are nine fraud prevention strategies to reduce the instances of online shopping fraud:
1.Conduct Manual Review of Suspicious Orders:
There is no substitute for human oversight. Skilled security professionals, such as penetration testers and offensive security experts, can identify orders exhibiting red flags associated with potential fraud. They can easily understand anomalies like multiple billing addresses or suspicious IP locations, which can help mitigate risks before fulfillment.
2.Limit Order Quantities:
Limiting the number of purchases in a single transaction can curb fraudulent activities. The limit depends on the product type and customer history. However, it should be done while maintaining a positive shopping experience.
3.Collect Proof of Delivery:
Return-related frauds are very common. To minimize them, we can receive verifiable evidence of product deliveries. This can be done by requiring signatures, OTPs, photo confirmations, or any other indisputable documentation to protect against unwarranted refund requests or chargebacks.
4.Ensure PCI Compliance:
Adherence to Payment Card Industry Data Security Standards is essential for online transactions. This helps safeguard customers’ sensitive payment data while shielding merchants from penalties associated with security breaches or lax data protection protocols.
5.Implement Clear Website Policies:
Establish strong policies governing account creation, password strength, and return procedures. These act as robust deterrents against fraudulent activities. Make sure that guidelines are clear and unambiguous.
6.Increase Vigilance During Peak Seasons:
Increased consumer activity during holidays or sales events increases the probability of fraudulent activities. Enhanced monitoring systems and temporarily stricter verification processes can mitigate the risks accompanying seasonal traffic surges.
7.Utilize Verification Software:
Deploying tools like Card Verification Number (CVN) and Address Verification System (AVS) strengthens the security environment while processing payments. These automated checks corroborate customer-supplied data against bank records, and if they identify any discrepancy, they flag it as potential fraud before transactions are complete.
8.Build a Blocklist:
Maintaining a detailed blocklist allows merchants to immediately identify and prevent known fraudsters from repeating e-commerce frauds. This can be done by capturing data from previous fraudulent attempts.
9.Leverage IP Fraud Scoring Tools:
You can use IP fraud scoring solutions to evaluate network traffic metadata to identify IP addresses with high risks and previous records of malicious activities. This helps prevent such activities by blocking malicious incoming connections in real-time.
How Sensfrx Can Help
Sensfrx uses various strategies to prevent e-commerce fraud. Here are some ways the features of the Sensfrx fraud detection tool can help prevent such frauds:
- Strong Encryption: Sensfrx encryption is powerful enough to protect user data against unauthorized access by fraudsters who might use it for transaction fraud.
- Device Fingerprinting: Sensfrx quickly recognizes instances of similar devices being used in multiple registrations or account openings.
- Intelligent Algorithm: The intelligent AI model quickly analyses abnormal behavior by tracking user activities, login trends, and transaction history.
- Dynamic Risk Scoring: Sensfrx analyzes real-time user behavior, device information, and transaction history and then assigns a risk score to each transaction. Transactions with a high-risk score could indicate potential fraud.
- Validators for Fraud: Sensfrx quickly detects unauthorized account access or unauthorized purchases and sends alerts beforehand.
- Automated Fraud Mitigation: Sensfrx reduces the risk of financial losses or damage with automated tools and workflows.
- Real-time Unmasking: Sensfrx can make fraud detection decisions in less than 250 milliseconds, giving you enough time to react and establish a defense.
Conclusion
Online fraudsters are becoming more sophisticated as retailers become more cautious about online fraud. Additionally, retailers must enhance fraud prediction and prevention mechanisms if they seek to minimize customer friction and lost sales. Reduce fraud with Sensfrx’s real-time fraud prevention tool. Take the first step towards a fraud-free future. Contact us now!
