11 eCommerce fraud prevention best practices and strategies to help you protect your e-commerce business from fraud and keep your customers’ sensitive information secure.
Protecting e-commerce websites and online transactions from cybercriminals have become increasingly important in recent years. As the popularity of e-commerce has risen, the threat of fraud has also increased, with cybercriminals constantly developing new tactics to target e-commerce platforms.
With the increase in internet purchases, the number of fraud attempts in e-commerce also grew, totaling 23.6% in the first half of 2022 compared to the same period of 2021, according to ClearSale.
Understanding E-commerce Fraud: Types and Impact
E-commerce, with its convenience and accessibility, has revolutionized the way we shop and conduct business. However, the digital landscape also brings with it new challenges, one of the most significant being e-commerce fraud. In this section, we will delve into the various types of e-commerce fraud and explore their impact on businesses and consumers.
Types of E-commerce Fraud
E-commerce fraud encompasses a range of deceptive activities carried out in the online shopping sphere. These fraudulent practices exploit vulnerabilities in the online transaction process, aiming to gain financial advantage at the expense of legitimate businesses and consumers. Here are some common types of e-commerce fraud:
Credit Card Fraud
Credit card fraud involves the unauthorized use of credit card information to make fraudulent purchases. Cybercriminals may obtain credit card details through data breaches, phishing attacks, or card skimming devices.
Account Takeovers
Account takeovers occur when fraudsters gain unauthorized access to a customer’s online account, often through the compromise of login credentials. Once inside, they can make unauthorized transactions and change account settings.
Identity Theft
Identity theft involves stealing personal information, such as Social Security numbers, names, addresses, and financial details, to impersonate individuals and commit fraudulent activities.
Chargeback Fraud
Chargeback fraud, also known as “friendly fraud,” occurs when a customer makes a legitimate purchase but later disputes the charge with their credit card company, claiming the transaction was unauthorized.
Phishing Scams
Phishing scams involve sending deceptive emails or messages that appear to be from legitimate sources, such as banks or e-commerce platforms. These messages trick recipients into revealing sensitive information or clicking on malicious links.
Synthetic Identity Fraud
Synthetic identity fraud involves creating fictional identities using a combination of real and fake information. This newly created identity is then used to open accounts and make fraudulent transactions.
Impact of E-commerce Fraud
The consequences of e-commerce fraud can be far-reaching, affecting both businesses and consumers alike:
Financial Losses
E-commerce fraud can lead to significant financial losses for businesses. Fraudulent transactions result in chargebacks, where the business not only loses the value of the sale but also incurs additional chargeback fees.
Damage to Reputation
Repeated incidents of fraud can damage a business’s reputation. Customers may lose trust in the company’s ability to protect their sensitive information, leading to attrition and decreased customer loyalty.
Increased Costs
Implementing fraud prevention measures and dealing with fraud-related chargebacks can increase operational costs for businesses. These costs include investing in advanced security technologies, hiring fraud prevention experts, and managing legal issues.
Consumer Disruption
Consumers who fall victim to e-commerce fraud can experience disruptions in their daily lives. They may need to resolve fraudulent charges, cancel compromised accounts, and take steps to protect their identity.
Regulatory Compliance Issues
Failure to adequately address fraud can result in non-compliance with data protection regulations, leading to legal consequences and fines.
Stifled Business Growth
E-commerce businesses affected by frequent fraud incidents may find it challenging to attract new customers and investors due to a tarnished reputation and financial instability.
Fighting E-commerce Fraud: Red Flags to Look Out For
Although new types of fraud emerge daily, most fraudulent activities share common features that can serve as red flags. By identifying these signals, merchants can prevent fraud attempts before they occur. Here are some of the most common red flags to look out for:
New Email Addresses:
Fraudsters often create new or temporary email addresses to make purchases. This practice is commonly referred to as ‘burner’ email addresses. If a customer uses a new email address, it could be a sign that they are planning to commit fraud and disappear.
High-Ticket Value and Velocity:
Fraudsters are interested in maximizing the value of their efforts. To achieve this, they often buy high-value goods or use systems to push through large volumes of transactions or attempted transactions in bulk. For instance, if an individual places an order for 10 units of a product that typically sells in singles, it could be an attempt to resell the goods for profit.
Overnight shipping:
Fraudsters often request expedited shipping to receive the goods before the merchant has a chance to detect the fraud. However, an even more suspicious sign is when they request overnight shipping, which can indicate that they plan to resell the goods quickly.
Multiple orders to the same address:
If an individual places multiple orders with different payment methods but all shipping to the same address, it could be a sign of fraudulent activity. The orders may be placed using stolen credit card information or other fraudulent payment methods.
Unusual time zone:
If a big order is placed during unusual hours, it could be a sign of fraud. For instance, if an order is placed from a different time zone than usual or during off-hours, it could be a sign of a fraudulent order placed by someone who is located in a different country.
Shipping to a freight forwarding address:
Fraudsters often use freight forwarding companies to receive the goods they purchase online. Shipping to these addresses can be a sign of fraudulent activity, particularly if the shipping address and billing address are in different countries.
Rushed or pressured purchases:
Fraudsters may attempt to pressure you into processing their order quickly, using tactics such as threatening to cancel the order or claiming that the purchase is urgent.
Unusual payment methods:
Fraudsters may use payment methods that are unusual for your business or industry. For example, they may use virtual currencies or gift cards to make purchases.
Address Mismatch:
If a fraudster uses a shipping address that does not match the billing address kept on file with the bank, it could be a significant warning sign of fraud.
Repeat IP Addresses:
Although IP addresses can be hidden or spoofed, amateur fraudsters might use the same IP address for multiple transactions.
Chargebacks:
While most chargebacks originate from genuine cardholders seeking refunds or the resolution of complaints, it is essential to recognize that some could be fraudulent. Merchants must treat chargebacks as post-transaction fraud and tackle them with the same energy as other fraud prevention strategies.
Grooming Your Blacklist:
Fraudsters often escape typical blacklist strategies by using similar but not identical customer details. To spot this issue, merchants should check their blacklist against their chargeback records. Maintaining a layered approach is the best method to uncover gaps in rules or processes.
Real-time Feedback:
Without real-time data feedback, including refund results, any dispute prevention actions, and all chargeback data, the decision engine is operating without the most relevant information. Merchants must ensure they have access to all data and can standardize relevant feedback to keep their rules running as expected, taking action to block bad actors but not accidentally declining those who are good.
Preventing eCommerce Fraud
While it is essential to identify red flags, businesses must take proactive measures to prevent fraud attempts. Here are some measures merchants can take to prevent e-commerce fraud:
AI-Enabled Solutions:
AI-enabled solutions can be an effective tool in preventing e-commerce fraud. These solutions use machine learning algorithms to analyze data and identify patterns that indicate fraudulent activities. Merchants can leverage these solutions to detect fraud in real-time and prevent fraud attempts.
Multi-factor Authentication:
Merchants can implement multi-factor authentication to prevent account takeover. This process requires customers to provide more than one form of identification, such as a password and a code sent to their phone, before accessing their account.
Verification Systems:
Merchants can implement verification systems to confirm the authenticity of customer details. These systems can include address verification, phone number verification, and identity verification. By confirming the authenticity of customer details, merchants can prevent fraud attempts.
Transaction Monitoring:
Merchants can monitor transactions to detect unusual patterns and prevent fraudulent activities. Transaction monitoring solutions can analyze data in real time and flag suspicious activities, allowing merchants to take action before fraudsters can complete their transactions.
Best practices to fight e-commerce fraud
According to projections, worldwide online sales are set to reach $6.4 trillion by 2024. With this in mind, it is essential that e-commerce companies adopt effective cybersecurity strategies to safeguard their platforms.
To help companies prepare for the challenge of defending against various types of e-commerce fraud, we’ve outlined 11 effective best practices on “e-commerce fraud protection” below:
Regularly Audit Platform Security
The first and most crucial step to protect against online fraud is to audit platform security regularly. Fraudsters and cybercriminals often identify system vulnerabilities that go unnoticed by companies. However, by identifying your platform’s vulnerabilities before attackers do, you’re one step ahead. Conducting a cybersecurity audit can be an in-depth process, but there are several key elements that companies should evaluate regularly to ensure their eCommerce platforms are secure. These include:
- Updating all software as soon as updates become available, especially if it’s a security fix.
- Checking the SSL certificate (HTTPS) of your website.
- Ensuring all data transmissions and communications between your company and customers are end-to-end encrypted.
- Making sure your e-commerce store remains PCI-DSS compliant.
- Regularly backing up your data.
- Scanning your site regularly for malware with appropriate antivirus/antimalware solutions.
- Monitoring the activities of malicious bots and immediately blocking them to prevent account takeover attempts and other bot-related threats.
Implement a Fraud Detection Solution
To prevent online fraud from occurring, it is essential to implement a robust fraud detection solution that can identify red flags and block suspicious user activity. Robust software can quickly identify visitor behavior on a website, application or API that shows signs of online fraud. It can then automatically block the source before attacks occur, effectively preventing fraud from happening without negatively impacting the customer experience.
The solution should also employ a two-tier bot detection engine that uses artificial intelligence (AI) and machine learning (ML). This allows the solution’s algorithm to analyze billions of daily events and continuously update its protection, so it can effectively detect and prevent new online fraud tactics.
Set Limits on Purchases and Collect Only Essential Data
It is essential to measure your store’s average revenue and set a limit on the number of purchases (both items and value) an account can make in a single day. This way, if a fraudster succeeds despite all preventive measures, you can mitigate the impact and avoid significant financial damage to your business.
Additionally, collecting confidential data from customers becomes your responsibility to protect. Therefore, it is advisable to avoid collecting too much sensitive data. By doing so, you can minimize your exposure in the unfortunate event of a data breach or successful account takeover attack. As a general rule, you should collect only the data that is essential to ship the product and validate the transaction.
Use Seals of Trust and Security Certificates
A security certificate, also known as an SSL certificate, guarantees that the information transmitted between the server and the browser is maintained with integrity. It verifies that the website is authentic and that the data exchanged between the website and the customer is encrypted and secure. This means that sensitive information such as customer names and credit card numbers remain secure. Failure to use HTTPS may also result in Google marking your site as not secure for users who use Google Chrome, which can reduce traffic to your e-commerce store.
Furthermore, online businesses should consider using extended validation (EV) SSL certificates. EV SSL certificates are the most advanced level of security certificates and provide the highest level of authentication, validation, and encryption. These certificates provide a green address bar on the browser, indicating that the site has undergone rigorous verification processes and is highly secure.
Implement a multi-layered fraud prevention approach
A multi-layered approach to fraud prevention involves using multiple tactics to detect and prevent fraud. Merchants can use a combination of AI, manual review, chargeback analysis, and other fraud prevention tools to ensure that their business is protected against all forms of fraud. This approach ensures that even if one tactic fails, there are others in place to detect and prevent fraud.
Train employees to identify potential fraud
eCommerce companies should train their employees on how to identify potential fraud. Employees should be aware of the common signs of fraud and know what to do if they suspect a fraudulent transaction. They should also be trained on how to handle chargebacks and refunds.
Verify customer information
Merchants should verify customer information before processing transactions. This can include verifying the billing and shipping addresses, phone numbers, and email addresses. Merchants can use third-party verification services to validate customer information and ensure that it matches the information on file with the issuing bank.
Monitor high-risk transactions
Merchants should monitor high-risk transactions, including those with high ticket values or those that are shipped to high-risk locations. Merchants can use AI-enabled fraud prevention solutions to identify these transactions and flag them for manual review.
Maintain a blacklist
Maintaining a blacklist of known fraudsters and suspicious email addresses, IP addresses or credit card numbers that have been associated with fraudulent activity in the past. Merchants can use this list to block transactions from these customers, preventing them from making fraudulent purchases on your website. It’s essential to keep this list up-to-date and regularly review it to ensure that you’re blocking the right customers.
Merchants can use AI-powered fraud prevention tools to monitor transactions against their blacklist and flag any that match.
Monitor Transactions for Chargebacks
Chargebacks occur when a customer disputes a charge with their credit card company. Chargebacks can be a sign of fraudulent activity, but they can also be a legitimate response to a problem with the purchase. Merchants should monitor their transactions for chargebacks and investigate them to determine whether they’re legitimate or fraudulent. This will help them identify any patterns of fraudulent activity and take steps to prevent them.
End note
Securing an e-commerce website is a challenging task, and cybercriminals are continuously adopting new tactics and technologies to exploit vulnerabilities. Whether your e-commerce business is a large corporation or a small store, investing in cybersecurity is critical to safeguarding your platform against fraud. By adopting the above best practices, companies can create a comprehensive eCommerce fraud prevention strategy and avoid getting into trouble.
FAQs
- What is e-commerce fraud? E-commerce fraud refers to deceptive activities aimed at exploiting vulnerabilities in online transactions, leading to financial loss and compromised data.
- Why is fraud prevention crucial for e-commerce businesses? Fraud prevention safeguards financial assets, maintains customer trust, and preserves a company’s reputation.
- What are common types of e-commerce fraud? Common types include credit card fraud, account takeovers, identity theft, and chargeback fraud.
- How can businesses protect payment information? Secure payment gateways, encryption, and tokenization are effective measures to protect sensitive payment data.
- What is two-factor authentication (2FA)? Two-factor authentication adds an extra layer of security by requiring users to provide two different authentication factors.
- Why is customer education important in fraud prevention? Educated customers are more likely to recognize and report fraud, contributing to a safer online environment.
- How can collaboration with industry partners help prevent fraud? Collaborating with peers and industry groups allows the sharing of insights and best practices to collectively combat fraud.
- What role does technology play in fraud prevention? Technology, such as AI and machine learning, can analyze patterns and detect anomalies, enhancing fraud detection.
