Fraud is a massive issue for ecommerce businesses across the globe.
In 2022 alone, online brands lost an estimated $41 billion because of it. Even more alarming, that number is projected to grow to $48 billion in 2023.
Fraud hurts ecommerce by degrading buyer experiences and brand reputations.
As much as 66% of American consumers say they wouldn’t buy again from an online store where their account was compromised.
Another concern is how often it occurs. Paysafe found the following five countries have especially high incidences of fraud, and consumers there were most likely to be victims:
With this grim reality in mind, you must take measures to protect your business from ecommerce fraud.
In this post, we’ll help you tackle that problem. We’ll cover the most common types of fraud, share some ways to prevent it, and reveal tools to help you counter it.
Read on to learn about:
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“One thing is certain—you will always have a certain amount of fraud in your online store. The key is to understand what types of fraud you are most vulnerable to and then employ tactics to prevent them.”
— Matthew Ramirez, founder of Rephrasely
The first step in prevention is learning how to identify scams. In this section, we’ll go over some common types of ecommerce fraud and their early warning signs.
This broad term encompasses any fraudulent activity involving a credit or debit card. In ecommerce, it’s also called:
Criminals make online purchases using stolen credit card information, which doesn’t require a physical card. Sometimes, they test multiple cards to see which ones are active.
Common warning signs:
Phishing scams fool people into disclosing sensitive information such as their login credentials, bank account or payment details, billing address, etc.
They typically occur through emails, phone calls, or text messages where cyber criminals pose as trusted companies or brands.
The stolen information can then be used for account takeover (ATO) fraud, where scammers impersonate customers, access their ecommerce accounts, and make unauthorized transactions.
Once the account owners discover ATO, you can expect chargebacks and transaction disputes.
Common warning signs:
“One of the easiest tactics to prevent fraud in your online store is to know how chargebacks work and how to dispute fraudulent ones.
Making sure that you clearly understand and know how Visa/MC/Amex/etc chargebacks work will help you dispute wrongful chargebacks, prevent fraud, and make more money in the long term.”
— Gilad Zilberman, CEO of SeatPick
This type of fraud occurs when a buyer makes a purchase but asks their financial institution to reverse the charges after receiving their order.
Banks or credit card companies typically take the customer’s side, making chargebacks difficult to dispute.
In most cases, people contact financial institutions to reverse unrecognized charges. Sometimes though, there’s malicious intent to contest the transaction and keep the order.
Both situations eat into your profits.
Common warning signs:
Any business that ships items or accepts returns can experience this type of fraudulent or abusive consumer activity. Its various types include:
It involves abusing refund policies, wherein ecommerce customers return damaged, broken, or stolen items for profit or free goods.
Others even force customer service representatives (CSRs) into issuing refunds.
Common warning signs:
Refund fraud typically occurs without chargebacks or disputes, so it’s challenging to track. However, there are signs such as:
In these types of scams, swindlers take advantage of your marketing efforts via:
Common warning signs:
Triangulation entails cybercriminals creating a fake ecommerce website identical to yours.
Then, when a customer places an order, they charge them and then use their payment details to order on your website. They then keep the initial payment, and while customers receive the actual item, they are charged twice.
Without insight into what actually happened, a customer will think that your brand accidentally charged them twice while only sending one item—creating a poor buyer experience and inciting negative reviews.
Website theft is similar to triangulation, but it happens when hackers take over your site, steal customer information, and block you from your store.
Common warning signs:
This occurs when a fraudulent customer purchases from you using stolen credit card, shipping, and billing information.
Once the purchase is complete but before the item ships, the criminal contacts customer service to change the delivery address to their chosen pickup location.
They aim to intercept the order and take it for free or resell it.
Common warning signs:
“If you suspect something is amiss and can’t get a clear answer, it might be worth reaching out to the [wholesaler] to clarify or even going behind [their] back and reaching out to the supplier directly.
If you catch a seller in a lie, you can also always report them to the platform or, if you’re working directly with a supplier, discontinue your business relationship.”
— Matthew Ramirez, founder of Rephrasely
Since it can overlap with other criminal activities like collusion, financial fraud, and the misrepresentation of goods or services, supply chain fraud can be more complex than the others we’ve discussed.
It can even begin before a sale.
Misrepresentation, for instance, can result in you receiving counterfeit items instead of legitimate ones.
There are a few different types of supply chain fraud you need to know and protect against.
Some write it off as unavoidable, but cargo theft can significantly damage your business if left unchecked. This is typically planned and carried out while products are in transit.
Since thieves aim to resell, they target small and high-demand items.
This happens internally and differs on a case-to-case basis.
For instance, your 3PL can use your inventory to fulfill other client orders, or your goods may be stolen for resale.
Common warning signs:
Now that you know the common fraud types and how to identify them, let’s discuss how to prevent them.
With business scams, prevention is always better than a cure (which we’ll also review later in this article).
Do you have a customer portal that stores payment information, passwords, order history, addresses, and other sensitive information?
Then it’s crucial to create a secure website while ensuring a seamless shopper experience.
When con artists possess stolen customer login credentials, having an extra layer of protection like Two-Factor Authentication (2FA) can prevent them from accessing your store and your customers’ accounts.
Additionally, one-time passwords (OTPs) sent via SMS can notify an account owner if someone’s trying to log in to their account.
Your policies explain to customers how your business operates.
They also state what people can and can’t do, like prohibiting fraudulent or abusive activity. Clearly display them on your website and include regulations that cover:
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“We have placed limits on how many units of an item a customer can purchase in one order.
This has deterred scammers from ordering bulk items from our store using stolen credit card information. We also investigate accounts making multiple repeat purchases within a short time frame to determine whether they are legitimate.
Implementing order limits has helped bring down the rate of fraudulent activity to less than 6% per annum.”
— Nathan Sanders, CEO of Plumbing Navigator
Frequent, repeating small purchases and unrealistically large ones are red flags that indicate fraudulent activity. Impose order quantity limits to avoid clearing such transactions.
To minimize your chances of experiencing fraud, automatically block orders exceeding the established limitations.
Use your store data to gauge your average daily sales and set these restrictions accordingly.
One requirement for all ecommerce businesses is safe online payment processing, so they must comply with the Payment Card Industry (PCI) Data Security Standards.
These include best practices for scam and fraud prevention, such as:
Fortunately, most payment gateways can handle adherence to PCI standards.
“Using an Address Verification Service (AVS) remains one of our most effective fraud prevention strategies. It automatically compares the billing address provided at the point of sale with the address that the card issuer has on record.
Since adopting this fraud mitigation strategy, fraudulent payments in our store have declined by about 35%, protecting our company and our customers from fraudsters while also mitigating against reputational damage.”
— Michael McCarty, CEO of EDGE Fall Protection
Look for payment processors that also implement the following standard security measures (in addition to PCI compliance):
The code entry ensures correct billing addresses and adds an extra layer of security in cases where thieves only possess card numbers.
You can also install the above measures easily without the help of payment processors.
“As a business owner and an entrepreneur, some tactics I have employed to prevent invoice fraud include: requiring payment via an ACH transfer rather than credit card; requesting a copy of an invoice or other form of verification from the customer; requiring that international customers provide additional documentation; and using third-party risk management services that screen your incoming invoices for fraudulent activity.”
— Matthew Ramirez, founder of Rephrasely
If fraud is a big concern, you may want to limit your payment options.
Credit cards are inherently less secure than ACH payments, as they require less information that’s easier for scammers to come across.
This measure helps prevent identity theft as well as return and chargeback fraud.
Requiring physical signatures foils scammers who try to pose as someone else. It’s also proof the order was delivered.
Photos upon delivery can also serve as powerful evidence that those trying to (unjustly) claim refunds received their items.
Since most chargebacks are settled between the customer and the financial institution, signatures and photos may not be enough to dispute them.
When contesting chargebacks, include images of:
This due diligence will help you win disputes and prevent unnecessary losses.
Your CSRs can also protect your business, so equip them with the necessary knowledge and skills to counter fraud.
Show them how to screen orders properly and identify telltale signs such as:
Have your CSRs double-check contact information to spot fakes.
Also, train them on how to use fraud prevention tools. This helps them monitor fraud alerts and manually check risky orders.
This measure is for smaller ecommerce businesses that see fewer transactions and don’t need CSRs.
Sometimes the best defense comes in the form of manual reviews.
To find and fix security issues, manually review risky orders, watch out for the fraud indicators we’ve discussed, and lean on your security tools.
“We use a highly reputable fraud detection software that automatically flags suspicious user behavior on our ecommerce store. The software also flags orders that have a shipping address that differs from the billing address on the card used to make the payment.”
— Lisa Richards, CEO and creator of The Candida Diet
Powerful ecommerce fraud prevention tools can implement security measures like:
Others incorporate AI and machine learning so they can automatically take action when they detect suspicious activity.
The right one can confidently secure your store and improve the customer experience.
Despite the safety measures we’ve discussed, it’s still possible for an enemy to slip past your defenses.
What should you do if your store falls under attack? How can you deal with a horde of false orders?
Follow the steps below to counter any assault and shield your business.
This is imperative.
Take detailed notes of what’s happening—each fraudulent transaction, its date and time, and the accompanying account with its shipping, payment, and billing details.
Gather proof in case you need to press charges; clean records will help you take action later.
Afterward, pinpoint accounts that served as sources of fraudulent activity. Blacklist and block them to prevent further damage.
Don’t let con artists inconvenience your real buyers. Enforce security measures with tools that detect suspicious activity early and in real-time.
This can stop scammers from accessing customer accounts and personal information in the future.
Make sure the fraudulent transactions weren’t cleared.
For those that push through, cut them off before they’re fulfilled. Inventory losses can hurt, so take additional steps to secure the overall purchase process after the attack.
In case of account takeovers, notify victims immediately and ask them to reset their login credentials.
Also, advise them to double-check their payment methods and ensure they’re still secure.
Most importantly, apologize for the lapse in your store’s security and try to make it up to them to keep their business.
Fraud attacks from ecommerce swindlers are a nightmare, but you can prevent future assaults. Analyze what you’ve documented and conduct a website security audit.
For example:
Identify any gaps in your store’s security and address them to shore up your defenses.
“Platforms such as Shopify have some level of built-in fraud prevention to help reduce the likelihood of chargebacks, but if you’re doing significant sales volumes, then it’s advisable to use additional tools built specifically to prevent ecommerce fraud.
Ideally, you want to look for a tool that uses a combination of both AI and actual human review when necessary to detect fraudulent transactions.”
— Ryan Turner, founder of Ecommerce Intelligence
Finally, to assist your implementation of the strategies we’ve discussed, here are some powerful tools designed to detect, manage, and prevent fraud.
Many of these tools employ automated checks to speed up verification and recognize patterns to catch fraudulent activity.
Signifyd is an ecommerce fraud prevention platform that harnesses transactional and behavioral data from merchants across the world.
Key features:
Pricing: $1,500/month; 14-day free trial
Simility’s Adaptive Decisioning platform applies various technologies to help ecommerce businesses stay on top of fraud and abuse.
Key features:
Pricing: Unavailable
Subuno is a platform that automates ecommerce fraud detection and speeds up manual reviews to protect ecommerce businesses and increase their sales.
Key features:
Pricing:
Through its suite of products, Riskified assists with fraud management, helps reduce operating costs, and increases revenue.
Key features:
Pricing: Percentage of the value of each approved transaction
SEON relies on alternative data and flexible, modular APIs for precise and accurate fraud detection. It contains three core modules:
These modules also share the following key features:
Pricing: Free or $299/month; 14-day free trial
ClearSale provides fraud protection for small to enterprise-level businesses. Its services are tailored to your size, and it also offers consulting services.
Key features:
For small to medium businesses:
For enterprise brands:
Pricing: Based on a KPI or fixed percentage per approved transaction
NoFraud provides solutions for ecommerce fraud protection to yield seamless customer experiences and optimize your business operations.
Key features:
Pricing: Pay for approved orders only
Kount’s Identity Trust platform provides multiple products that leverage AI and consumer insights to fight digital fraud.
Key features:
Pricing: Contact sales to request a quote
Bolt’s CheckoutOS platform is a robust solution offering fraud protection and seamless checkout, authentication, and payment.
Key features:
Pricing: Starts at $19.99/month and scales based on yearly sales for BigCommerce; pricing for other platforms unavailable
Ecommerce fraud is a major headache for both businesses and consumers. But, with enough know-how and tools, preventing it can be simple.
As you take steps to guard your store, remember to identify the types of fraud you’re fighting, implement the aforementioned best practices for early detection and prevention, and supplement your efforts with tools that improve security and customer experiences.
Employ the necessary measures so you and your customers can operate without worry.
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