By 2040, it’s estimated that 95% of purchases will be done online. However, the convenience and accessibility of online shopping is being weaponized by fraudsters, leading to an increase in fraudulent activities targeting online businesses.
When businesses don’t stop e-commerce fraud, they’re putting revenue on the line and potentially hurting their brand reputation. It’s crucial for online stores to use strong fraud prevention methods to protect both themselves and their customers. To stay ahead in a competitive market, top companies need to provide reliable, scalable, digital-first shopping experiences while keeping fraud at bay.
In this blog, we discuss the types of e-commerce fraud businesses need to know about, red flags to watch out for, and tactics for preventing e-commerce fraud.
What is e-commerce fraud?
E-commerce fraud refers to illegal or unethical activities conducted in online shopping or digital transactions, often involving theft, deception, or manipulation to gain financial advantages.
What kind of businesses are affected by e-commerce fraud?
E-commerce fraud affects a wide range of businesses across various industries. Any company involved in online transactions is potentially at risk, but some sectors are more vulnerable than others. Here are the types of businesses commonly affected:
- Online retailers
- Marketplaces
- Financial services
- Travel and hospitality
- Subscription services
- Digital content providers
Any business that’s selling something online is a potential victim of e-commerce fraud. Businesses must know the common signs of e-commerce fraud and put safeguards in place to protect their business.
What are the types of e-commerce fraud?
There are many types of e-commerce fraud. It can either be committed directly by a legitimate customer or by a third-party using stolen credit card information and/or account credentials. Here are some of the most common examples of e-commerce fraud:
- Card not present (CNP) fraud: This type of fraud occurs when a fraudster uses stolen credit card information to make purchases online, where the physical card is not present.
- Chargebacks: Chargebacks occur when a customer disputes a fraudulent charge with their credit card company, leading to a chargeback for the merchant.
- First-party fraud: Also known as friendly fraud, this occurs when a legitimate customer disputes a legitimate charge to get their money back.
- Return fraud: This involves customers returning products they have used or damaged, claiming they are defective or unwanted, in order to obtain refunds or replacements.
- Account takeover (ATO): In an ATO attack, fraudsters gain unauthorized access to a customer’s account and obtain other sensitive information about the customer or make fraudulent transactions using their saved payment information.
- Phishing and spoofing: Fraudsters send deceptive emails or create fake websites that mimic legitimate businesses to trick customers into revealing their personal and financial information.
- Account creation fraud: Fraudsters create multiple fake accounts to exploit introductory offers, discounts, or referral programs, leading to financial losses for the merchant.
- Card testing: Fraudsters test cards by making small purchases with multiple stolen credit cards to test the validity of the cards.
- Card hopping: Fraudsters card hop by making larger purchases with stolen credit cards that have been validated through card testing.
How to detect e-commerce fraud
The first step toward preventing e-commerce fraud is detecting unusual behavior. Here are some of the red flags for e-commerce fraud:
- Higher order volumes: A sudden surge in order volumes, especially for high-value products, may be a sign of fraudulent activity.
- Low-value orders: Fraudsters may place multiple small orders to test stolen credit card information before making larger purchases.
- Different credit cards: If multiple orders are placed using different credit cards but under the same customer account, it could indicate fraudulent behavior.
- Repeated declined transactions: Frequent declined transactions from the same customer could suggest that stolen credit card details are being used.
- Unusual IP locations: Orders originating from IP addresses located in different countries or known high-risk regions may raise suspicions.
- Different billing and shipping addresses: Inconsistent billing and shipping addresses, particularly when combined with other red flags, may indicate fraudulent activity.
- PO box shipping addresses: Orders using PO box addresses as the shipping destination may be an attempt to avoid traceability and detection.
How to prevent e-commerce fraud: Expert tips and tactics
There are many strategies and tactics for preventing e-commerce fraud, including technical controls and best practices. Some of the most effective tactics for preventing e-commerce fraud include:
- Implement machine learning tools to automate fraud detection: Machine learning algorithms can analyze patterns and detect anomalies in customer behavior to identify potential fraud.
- Link fraud signals from a data network that’s larger than your own: Collaborate with fraud prevention networks or organizations that share information on fraudulent activities to leverage a broader range of data for fraud detection.
- Implement risk-based or step-up authentication: Utilize adaptive authentication techniques that prompt additional verification measures, such as two-factor authentication, for higher-risk transactions.
- Implement card security code requirements: Require customers to enter the CVV or CVC code on the back of their credit cards to verify their ownership during transactions.
- Invest in Address Verification Services (AVS): AVS compares the billing address provided by the customer with the address on file with the credit card issuer to identify potential discrepancies.
- Partner with a reliable third-party payment processor: Choose a reputable payment processor that offers robust fraud prevention measures and has a proven track record in security.
- Follow PCI standards: Ensure your business is compliant with Payment Card Industry Data Security Standard (PCI DSS) requirements to protect cardholder data and prevent security breaches.
- Train customer service representatives on fraud: Educate your customer service team on common fraud indicators and techniques to enhance their ability to identify and report suspicious activities.
- Keep fraud prevention software updated: Regularly update your fraud prevention tools and software to stay ahead of evolving fraud tactics and leverage the latest security measures.
- Avoid collecting too much sensitive customer data: Minimize the collection and storage of sensitive customer data, such as credit card information, to reduce the risk of data breaches.
E-commerce fraud is a significant challenge for online businesses, but by implementing effective fraud prevention measures, you can protect your business and provide a secure shopping experience for your customers.
Be vigilant for red flags indicating fraudulent activities, leverage advanced technologies like machine learning for fraud detection, and follow best practices such as secure communication protocols and compliant data handling. By staying proactive and informed, you can minimize the risk of e-commerce fraud and safeguard your business’s success.
How Sift helps e-commerce leaders transform trust into revenue
Trust between an e-commerce business and its customers translates directly into revenue and growth. Sift’s AI-powered risk decisioning platform proactively blocks fraud across every point in the user journey, building customer loyalty through deep, identity-level insights and better digital experiences.
By leveraging Sift, e-commerce companies can:
- Create better consumer experiences: Give trusted customers an ideal experience every time they engage with dynamic friction solutions like one-click checkout and faster logins that bypass multi-factor authentication (MFA). Sift’s deep insights automatically deliver the right levels of friction at every point in the user journey, from account creation to checkout.
- Protect transactions: Sift’s Global Data Network of 1T annual events protects $325B annually across 700+ leading brands. Our AI-powered platform blocks emerging threats before they impact revenue, and builds trusted, seamless experiences for customers that improve loyalty and lifetime value.
- Adapt to changes: E-commerce providers grow when they’re able to scale their business while maintaining trust. Ensure your fraud team can confidently handle periods of high traffic with ease, accepting trusted users and adjusting to risk in real time.
Learn more about how e-commerce leaders grow fearlessly with Sift.