What Is E-commerce Fraud?

This type of fraud can affect both consumers and businesses, causing financial loss, reputational damage, and customer distrust. With the growth of digital transactions, it has become essential for individuals and companies to understand the risks of e-commerce fraud and how to protect themselves from it.

Understanding E-commerce Fraud

E-commerce fraud involves a range of deceptive practices aimed at exploiting online retailers and customers. Fraudsters often take advantage of loopholes in payment systems, insufficient identity verification methods, and the anonymity that the internet provides. The key characteristic of e-commerce fraud is that it occurs online and can involve various schemes, from stolen credit card details to creating fake online stores to deceive consumers.

One example of e-commerce fraud is card-not-present (CNP) fraud. In CNP transactions, the fraudster doesn’t physically possess the victim’s credit card but uses stolen information to make unauthorized purchases online. Unlike traditional in-store purchases, online transactions don’t require the presentation of a physical card, making it easier for fraudsters to carry out the scheme without detection.

Another example is chargeback fraud, where customers deliberately request refunds from their credit card issuer after receiving the goods or services, claiming they never authorized the transaction. This leaves the merchant not only without the item they sold but also without the money, as they have to refund it.

In both of these cases, the online nature of the transactions makes it difficult for businesses to verify whether the person making the purchase is who they say they are. On top of the difficulty of verifying clients’ identities, e-commerce fraudsters often rely on highly sophisticated techniques, such as phishing, account takeovers, and synthetic identities, to deceive merchants and customers.

Types of E-commerce Fraud

E-commerce fraud can take many different forms, each with its own set of tactics and risks. Let’s go over some of the most common types of e-commerce fraud to help you recognize and prevent these schemes before they cause harm:

Card-not-present (CNP) fraud

CNP fraud occurs when fraudsters use stolen credit card details to make online purchases without the cardholder’s knowledge. Since the card isn’t physically presented, it can be harder for merchants to verify the transaction’s authenticity. This type of fraud is one of the most common in e-commerce because of the reliance on digital payment methods.

Account takeover fraud

In this type of fraud, cybercriminals gain unauthorized access to a customer’s account, often through phishing schemes, weak passwords, or data breaches. Once inside, they may change the shipping address or make purchases using the victim’s stored payment information. Account takeovers not only lead to financial loss but can also cause lasting reputational harm for businesses, making recovery from such incidents even more challenging.

Chargeback fraud 

Chargeback fraud, also known as “friendly fraud,” happens when a customer makes a purchase and then disputes the charge with their credit card company after receiving the product. They claim they never made the purchase or didn’t receive the item, resulting in a refund from the merchant. While some chargeback claims are legitimate, fraudsters use this technique to exploit merchants and obtain goods without paying for them.

Phishing and spoofing

Phishing schemes involve sending fraudulent emails or creating fake websites that appear legitimate in order to trick users into providing sensitive information, such as login credentials or payment details. Spoofing involves creating fraudulent websites that mimic real e-commerce sites to deceive customers into thinking they are making purchases from a legitimate retailer.

Triangulation fraud

This is a multi-step scam that involves fraudsters setting up fake online storefronts. When customers make purchases, the fraudster uses stolen credit card information to buy the goods from a legitimate retailer and ships them to the unsuspecting customer. The fraudster keeps the profit, the retailer processes a fraudulent payment, and the original cardholder is left with an unauthorized transaction.

Fake online stores

Fraudsters sometimes create entirely fake e-commerce sites designed to look like legitimate online retailers. These sites entice users with attractive deals, low prices, and product images but never deliver the promised goods. After the payment is made, the scammer vanishes, and the consumer receives nothing in return.

Awareness of the different types of e-commerce fraud can help you identify suspicious activity and implement preventative measures within your organization, helping you protect both your operations and your customers from the financial and reputational damage caused by cybercriminals.

E-commerce Fraud Red Flags

Although fraudsters can be sneaky, certain warning signs of e-commerce fraud can help your business and consumers at large avoid falling victim to scams. Let’s explore some red flags that may help you identify fraudulent activity:

1. Unusually large orders. Orders that are significantly larger than average, particularly if the customer is a new or infrequent buyer, can be a sign of fraud. Fraudsters often make large purchases quickly to maximize their gains before their unauthorized transaction is discovered.
2. Multiple orders in quick succession. A sudden influx of orders from the same customer, especially in a short period of time, could suggest that a fraudster is using stolen payment information to place multiple transactions before the account is flagged.
3. Mismatched shipping and billing addresses. When the shipping and billing addresses differ, it can be a sign that the person placing the order is not the legitimate cardholder. Fraudsters often ship items to alternative addresses to avoid detection.
4. Suspicious email domains. Fraudulent customers often use disposable or suspicious email addresses. Unusual or generic email domains (e.g., one that ends in a series of random letters or numbers) may indicate an attempt to avoid detection.
5. High chargeback rates. If a business starts seeing an increase in chargebacks, particularly for the same products or services, it could signal a pattern of chargeback fraud. Reviewing and investigating the cause of chargebacks can help identify and prevent future fraudulent transactions.
6. International orders from high-risk countries. Fraudsters may operate from certain regions known for higher instances of e-commerce fraud. Orders from countries where fraud is prevalent can be a potential red flag, especially if combined with other suspicious factors.

Ideally, you would set up systems and procedures so your team can stay alert for these common red flags to detect potential fraud before it results in significant financial loss, allowing for quick action to prevent the transaction from being completed.

Best Practices to Avoid E-commerce Fraud

To protect your e-commerce business and customers from fraud, it’s crucial to implement proactive security measures. Here are some best practices to minimize the risk of e-commerce fraud:

1. Use strong authentication measures. Implement multi-factor authentication (MFA) for customer accounts and payment processing. MFA requires users to provide two or more forms of identification, such as a password and a one-time code sent to their phone, making it harder for fraudsters to access accounts.
2. Enable address verification systems (AVS). AVS helps match the billing address provided by the customer with the one on file with the credit card company. If the addresses don’t match, the system will flag the transaction for further review, helping reduce CNP fraud.
3. Implement secure payment gateways. Use reputable payment gateways that offer built-in fraud protection features, such as encryption and tokenization of payment data. These systems can detect and block suspicious transactions before they are processed.
4. Monitor orders for red flags. Set up alerts for unusual transactions, such as large orders, multiple orders in quick succession, or mismatched shipping and billing addresses. Conduct manual reviews of these flagged orders to verify their legitimacy.
5. Regularly update and patch software. Outdated software can be vulnerable to hacking and exploitation. Regularly updating your website, payment systems, and security protocols can prevent fraudsters from exploiting known vulnerabilities.
6. Educate your customers. Educate your customers about the signs of phishing and spoofing schemes, and encourage them to report any suspicious activity immediately. Offering tips on password security and safe online shopping habits can help prevent account takeovers and other forms of fraud.

These best practices can significantly reduce the risk of e-commerce fraud and ensure a safer and more secure online shopping experience for your customers.

Summary

• E-commerce fraud involves deceptive practices in online shopping, with common schemes such as card-not-present fraud, chargeback fraud, and account takeovers.
• Fraudsters exploit the anonymity and digital nature of e-commerce transactions, making it difficult for businesses and customers to detect fraud.
• Recognizing red flags like large orders, mismatched addresses, and high chargeback rates can help identify potential fraudulent activity.
• Businesses can reduce the risk of e-commerce fraud by implementing strong security measures such as multi-factor authentication, secure payment gateways, and address verification systems.
• Educating customers and regularly updating security software are key strategies for preventing e-commerce fraud.