Ecommerce Fraud Prevention
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When beginning a business, you certainly gave a lot of things some thought, but ecommerce fraud prevention wasn’t one of them. Because ecommerce fraud is a rising issue for companies, it’s critical now more than ever for business owners to safeguard their finances.

Global ecommerce sales are expected to increase to $7.4 trillion by 2025 from its $4.9 trillion US dollar level in 2021. These figures are excellent news for company owners, but rising sales also mean rising fraud. Ecommerce fraud is expected to cost the US $20 billion in 2021, a 14% rise from 2020 figures.

The terrible truth is that fraudsters and cybercriminals may target you and your business if you run or assist in running an online store. And this may have a bad effect on your brand’s reputation and possible consumer experiences in addition to hurting your earnings and taking up your time.

However, you may put features and procedures in place to safeguard your business.

You can protect your income and business by being as knowledgeable and prepared as possible, along with the appropriate ecommerce fraud prevention tools and techniques. Look through this article to learn more about ecommerce fraud, the many forms of fraud that retailers may encounter, and strategies for preventing it, including the use of Shopify’s free and integrated products like Shopify Protect and Fraud Analysis.

What is ecommerce fraud?

what is ecommerce fraud

Ecommerce fraud refers to any intentional misrepresentation made during an online transaction with the intent to benefit cybercriminals or fraudsters financially or personally, even if it hurts the merchant.

Ecommerce fraud comes in a variety of forms, and the word “ecommerce fraud” is more of an all-encompassing term that refers to any fraud that takes place on an ecommerce platform. Ecommerce fraud may also be referred to as payment fraud. Although different scammers employ various techniques, all online fraud has the same objective: robbing the merchant of money or products while going undiscovered.

To commit ecommerce fraud, a cybercriminal requires access to both personal and credit card information. However, unlike committing fraud at a real location, they don’t require an actual card, and scammers may even purchase this data on the black market—which was also probably stolen.

Each year, the cost of ecommerce fraud rises, and there are several causes for this. First off, it’s simple to commit—all you need is credit card information that has been stolen—and simple to get away with. Even though ecommerce fraud costs billions of dollars annually, that money originates from the thousands of different merchants who are each victimized to differing degrees. It is difficult to get the police or other authorities to look into this. Ecommerce fraud appears to be highly alluring to cybercriminals, especially when they consider the relative anonymity that online fraudsters may maintain while executing their schemes.

What are the types of ecommerce fraud?

types of ecommerce fraud

We briefly mentioned before that the word “ecommerce fraud” serves more as an all-encompassing term for all sorts of fraud that may be performed on an online commerce platform. Understanding the many forms of fraud you and your store could encounter is useful for protecting against and preventing fraud against your business. The following are seven forms of online fraud you need to be aware of:

  1. Credit card fraud
  2. Friendly fraud
  3. Account takeover fraud
  4. Interception fraud
  5. Triangulation fraud
  6. Affiliate fraud
  7. Refund fraud

1. Credit card fraud

Any fraud committed with a credit card or debit card is considered credit card fraud. Because a client does not have to physically give their credit card to a retailer as they would in a physical store, this type of fraud is also known as card-not-present fraud in an e-commerce scenario.

Typically, this kind of fraud occurs when a fraudster gains illegal access to credit card information, frequently through the black market. They then purchase a product or service using the card information. In the beginning, the thieves steal the credit card holder’s money by using their information improperly. They later cheat the business, forcing it to reimburse the illegal sale.

Refunds often happen after the product has arrived or after the services have been used. The cardholder’s bank charges a chargeback fee to the merchant in addition to the cost of the product or service remaining unpaid. Even while each case of credit card fraud may not be very expensive, it can pile up to be rather expensive. Additionally, thieves may engage in card testing fraud, in which they use their stolen card information to first make minor transactions to make sure the card hasn’t been canceled and then larger ones.

2. Friendly fraud

When credit card payments used in a transaction are returned to the buyer, it is known in banking as a chargeback or reversal. In this case, the bank or credit card company issues a refund to the cardholder and asks the merchant to pay back the money.

If someone makes a payment without their knowledge or consent, card owners may legitimately request chargebacks. For instance, if a burglar obtained their credit card information and used it to make a transaction. However, they can also be done to commit chargeback fraud, commonly known as so-called friendly fraud. A person will make a purchase in this scenario, but after getting the items, they will dispute the transaction and ask their bank to issue a credit card chargeback, claiming they were not aware of the purchase. A fraudster’s objective when engaging in friendly fraud is to receive a free product.

For online retailers, chargebacks may be particularly troublesome since, if your business receives too many, payment processors may suspend your ability to accept payments from particular credit card issuers. Additionally, chargeback costs, which cost $15 each chargeback, can be fatal to small businesses.

3. Account takeover fraud

Identity theft in the form of account takeover fraud happens when hackers get access to users’ login information.

These are typically obtained through phishing, a dishonest method. Phishing is when con artists send emails or messages purporting to be from a business to get clients to divulge their personal and account login details. 7.6% of phishing attempts in 2021 targeted retail and ecommerce sites.

These thieves enter their accounts using the login details, update their data, including passwords and addresses, and conduct unlawful purchases. The dark web may potentially be used to sell personal information.

Fraudulent account takeover may have a devastating impact on internet enterprises. Chargebacks and other fines are the outcomes, and if customers complain publicly, the image of the retailer may also suffer.

4. Interception fraud

When thieves make online purchases using another person’s credit card information, they are committing intercept fraud.

Normal ordering and payment procedures are followed, and the online retailer is given the go-ahead to send the goods to the registered shipping address. However, when the order has been placed and verified, the fraudster intercepts the delivery and has it sent to a different address. This may be done by getting the shipment address altered through the store’s customer care department or by getting in touch with the shipping company directly to have the package sent somewhere else.

If the offender lives close to the victim, they may be able to simply wait for the delivery of the products before either stealing them from their places of drop-off or signing for them when the victim isn’t home.

5. Triangulation fraud

The goal of ecommerce fraud known as “triangulation” is to profit from the sale of products obtained via the use of stolen personal data. The fraudster, the internet company, and the customer must all work together to complete the three parts of the scheme.

First, scammers set up a phony online storefront, usually offering well-known items at steep discounts to draw in customers. Following that, unwary website visitors who decide to make a purchase fill out the checkout form with information such as their names, addresses, and credit card numbers. The last stage involves the fraudsters using the victim’s order’s products to be purchased and shipped to them using stolen credit card information and buyer data they obtained from their fictitious shop. When personal information is exchanged for a purchase, triangulation fraud victims mistakenly assume they have received a deal.

The majority of the time, triangulation fraud continues. These scammers will keep making transactions using stolen personal information. Triangulation fraud can go undetected for a long time since victims get their purchases, especially if the false online storefront seems reliable and trustworthy.

6. Affiliate fraud

Through affiliate fraud, crooks hope to profit financially through commissions. The strategy is derived from affiliate marketing, in which an internet business compensates a third party with a commission for customer introductions and/or purchases.

For instance, a smartphone internet retailer may pay a tech blogger a commission for each visit (and/or subsequent sale) made through their blog. Trackable, tagged links that inform the shop where its internet traffic originates are used to keep track of this.

Criminals who commit affiliate fraud use the system to boost the illicit revenue they collect. Through techniques like IP spoofing, cookie stuffing, malware, and typosquatting, which all produce fictitious human activity to carry out the associated action, they can do this.

7. Refund Fraud

When internet criminals seek to claim a refund for a purchase they made online, they are committing refund fraud.

Here are some common examples of refund fraud:

  • claiming that the order never came and then making an effort to receive a refund via a different route.
  • stating that the package was delivered empty or that the item(s) came damaged.
  • Fraudsters may attach the return shipping label to junk mail, send it off, and then assert that they have sent the items back in the case that they must be returned to be eligible for a refund.

In certain cases, thieves would use a stolen credit card to make a purchase and then ask for a refund using a different payment method while claiming that the original credit card they used was canceled.

5 ecommerce fraud prevention methods

ecommerce fraud prevention methods

It’s challenging to completely protect oneself from fraud given how pervasive and persistent ecommerce fraudsters are. However, you may take precautions to protect yourself from fraudulent activity that could hurt your online business as much as feasible.

  • Leverage Shopify’s fraud detection and analysis tools
  • Use a service to cover fraud-based chargebacks
  • Set up workflows to handle fraud seamlessly
  • Ensure PCI-compliance
  • Double down on security during peak shopping seasons

To that aim, a variety of fraud protection and prevention technologies are accessible to secure your company.

1. Leverage Shopify’s fraud detection and analysis tools

You’ll be happy to hear that Shopify provides fraud analysis tools that assist ecommerce businesses in spotting red flags whether you are a merchant on Shopify or considering using them to start an online store.

Shopify’s fraud analysis tool is available to its customers. It uses machine learning algorithms to evaluate data from across its entire network to assess the degree of fraud risk so that company owners may decide whether to complete it.

shopify fraud analysis tool

Some of these indicators include:

  • Whether the shipping and billing addresses match.
  • Whether a buyer has placed multiple orders in a short period.
  • Whether an order volume is higher than the average order volume of your store.

This technology highlights medium or high-risk orders, allowing merchants to take further preventive actions such as:

  • If need be, cancel the order
  • Adding the account to a block list
  • Verifying the customer’s identity by sending them an email
  • examining the delivery address on a map to make sure it is not a phony address or doesn’t resemble a home

2. Use a service to cover fraud-based chargebacks

cover fraud-based chargebacks

An engaging ecommerce that defends you against bogus chargebacks is another prevention for ecommerce fraud prevention. They make sure your business is covered if it experiences a chargeback for fraud on a transaction that has previously been authorized.

The excellent and free Shopify Protect service guards US companies against fraud on qualified Shop Pay transactions. So that you may keep your hard-earned money the next time a merchant encounters fraud, Shopify immediately pays the purchase amount and chargeback cost. Plus, Shopify handles the entire dispute procedure; your business doesn’t need to submit any documents.

3. Set up workflows to handle fraud seamlessly

ecommerce fraud prevention - shopify flow

To find illegal conduct and safeguard your organization, using ecommerce fraud prevention solutions is an excellent place to start. However, managing them more quickly and easily is possible when you integrate such solutions into a process.

An ecommerce automation solution called Shopify Flow assists you in managing fraud in your business setup, especially how to handle purchases that have been marked as “high risk.”

You may set up your operations to streamline how you manage fraud using Shopify Flow (available to businesses on an advanced Shopify plan and plans), such as automatically postponing payment on purchases that have been recognized as “high risk,” and even canceling the order. “Prevention is better than cure,” the proverb goes. It saves you the hassle of having to reimburse the consumer since you haven’t received any money from them.

If you’d rather have a person examine a transaction, Flow also lets you set it up such that suspicious-looking purchases are emailed to your support staff. Additionally, by adding them to a block list, you may stop repeat fraudsters from placing additional orders.

If you don’t already have an advanced or Plus plan, you can download the Fraud Filter app.

4. Ensure PCI-compliance

ecommerce fraud prevention pci

Any online retailer who accepts credit cards must abide by Payment Card Industry (PCI) regulations.

To guarantee that online transactions are secure, PCI security guidelines have been established. Businesses handling and keeping track of credit card and cardholder data are required to follow their rules and adhere to their requirements. By doing this, you reduce your chances of committing fraud, and if you don’t, you risk sanctions or penalties.

Reputable ecommerce platforms like Shopify automatically comply with PCI regulations for their clients’ stores.

5. Double down on security during peak shopping seasons

ecommerce fraud prevention - peak shopping season

Many retailers look forward to the holiday shopping season, and with good reason. The rise in visitors and sales generated during this period frequently amounts to the bulk of a store’s annual revenue.

However, business owners must take extra precautions specifically because of this. Between Thanksgiving and Cyber Monday in 2021, there were 25% higher attempts at online shopping fraud than during other times of the year.

Businesses may purposefully spend less time checking fraud because of the huge purchase volumes keeping them occupied. Shopping-distracted customers who use their credit cards to make purchases may unintentionally let down their guard and fall prey to triangulation fraud. In other words, the holiday season provides the ideal environment for cybercriminals to conduct ecommerce fraud and test out new methods.

Keep your chargeback rates low

Your chargeback rates rise in direct proportion to the amount of ecommerce fraud you experience. For your internet business, this is bad.

For ecommerce businesses, lowering chargeback rates is essential. Fraudulent chargebacks can significantly reduce prospective sales, and managing disputes takes up a lot of a company’s valuable time and resources.

What’s more, payment processing networks like Visa and Mastercard have fee thresholds that, if surpassed, may be costly for businesses. Businesses with a lot of chargebacks are put into card brand monitoring programs, which can result in monthly penalties and other costs until the amount of chargebacks drops. If merchants are unable to reduce their chargeback rates, worst-case situations include having their accounts canceled.

Examining your chargeback statistics to see what’s driving high chargeback incidents is one strategy to keep your chargeback rates low. Once a root cause has been found, you may consider how to address it to stop similar chargebacks from happening again.

Ecommerce fraud is not insurmountable

Cybercriminals will find new ways to perpetrate ecommerce fraud as more and more people shop online.

Don’t let this deter you.

Ecommerce fraud is not insurmountable by any means. You can prevent online assaults from happening by being well-prepared, vigilant, and using the correct ecommerce fraud prevention solutions. This will ensure that your consumers and business are safely protected.

Learn more about ecommerce fraud

How much ecommerce fraud is there?

Global ecommerce fraud was predicted to be worth $20 billion in 2021, up 14% from 2020.

Small- and medium-sized enterprises have seen a 62% increase in ecommerce fraud attempts as a result of the COVID-19 pandemic’s ecommerce boom.

How much revenue is lost to ecommerce fraud?

Ecommerce fraud cost North American companies a total of 2.6% of their online sales in 2021. For merchants in the APAC area, this figure is 4%.

Retailers in Europe and Latin America will lose 3.2% of their sales in 2021 and 3.7% of their revenue

How is ecommerce fraud detected?

Ecommerce fraud may be found manually or with the use of ecommerce fraud prevention technologies like Shopify’s Shopify Protect and Shopify Flow, which analyze transactions for fraud.

Common indicators of ecommerce fraud include:

  • Multiple payment attempts
  • Different billing country from the country the order was placed
  • Multiple orders being placed over a short period by the same buyer

What is a fraudulent chargeback?

When a customer uses their credit card to make a transaction and then disputes it, the credit card company refers to this as a fraudulent chargeback. Since the bank would label both true credit card fraud and friendly fraud as fraudulent chargebacks, it can be challenging for retailers to distinguish between the two.

The bank reverses the money given to the merchant while it looks into the claim and assesses a fee. If the bank rules in the buyer’s favor, the money will be refunded to them, and the seller will be responsible for the chargeback cost. The order amount and chargeback fee will be reimbursed to the merchant in situations when the bank rules in the merchant’s favor.

With Shopify Protect, online retailers can safeguard themselves against fraudulent chargebacks. By paying merchants the chargeback amount and chargeback fee, it protects against unauthorized and fraudulent chargebacks on qualifying purchases. Additionally, it manages the litigation procedure.

Does Shopify Protect cover chargeback fees related to fraud?

Yes, Shopify Protect pays for all chargeback fees and amounts relating to fraud-related chargebacks. The order must include tangible objects that must be transported. Digital products and those that must be picked up in-store are therefore not covered.

Additionally, orders must be delivered by a reputable carrier, Shopify Shipping, within seven days.

Is Shopify Protect a chargeback guarantee?

Yes, Shopify Protect promises to cover all chargeback expenses as well as the whole chargeback sum for legitimate fraudulent chargebacks.

To be eligible for a chargeback guarantee, orders and merchants must fulfill specific requirements:

  • Orders must be for actual things that need to be sent.
  • Orders must be paid for using Shop Pay.
  • Merchants must be based in the United States and have a Shopify Payments account in the United States.
  • Orders must be completed within seven days of receipt.
  • Shipments from recognized carriers or Shopify Shipping must include a verified tracking number.

What is 3D Secure?

To avoid ecommerce fraud, 3D Secure adds an extra layer of protection to online credit and debit card purchases. Users are sent to the card issuer’s domain to validate their card before they can complete their payment using 3D secure.

3D Secure is advantageous and highly recommended for online businesses since, following authentication, the merchant’s liability for fraudulent chargebacks or disputes is transferred to the card issuer.

Criminals commit affiliate fraud to profit financially from commissions. The strategy is based on affiliate marketing, in which an online business pays a third-party compensation for referrals and/or purchases.

For example, an online store selling smartphones may provide a commission to a tech blogger for each visit (and/or eventual sale) generated by their blog. This is tracked via trackable, tagged links that inform the store about the source of its internet traffic.

Criminals that engage in affiliate fraud manipulate the system to raise the amount of revenue they get illegally. They can accomplish this by techniques like IP spoofing, cookie stuffing, malware, and typosquatting, which all produce phony human activity to carry out the associated task.

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