Ecommerce Fraud: Detection, Prevention, Red Flags, & Future Trends

Ecommerce fraud is a significant concern for businesses operating in the digital marketplace. Across regions, Europe, particularly countries like Germany and France, grapples with substantial fraud risks. Meanwhile, North America has the highest fraudulent transaction value globally, comprising over 42% of ecommerce fraud cases. In Latin America, the impact is significant, with a loss of 20% of revenue attributed to fraudulent activities, affecting approximately 3.7% of Ecommerce orders.

To address these escalating challenges, retailers need to be aware of the best practices to detect and proactively prevent Ecommerce fraud before it happens. This comprehensive guide provides you with ecommerce fraud prevention best practices, ecommerce fraud management and detection best practices, along with signs to watch out for.

What is Ecommerce Fraud?

Ecommerce fraud encompasses a variety of deceptive tactics employed by fraudsters to exploit vulnerabilities in online transactions, posing serious risks such as financial losses, damage to reputation, and compromised customer trust.

Fraudulent activities within Ecommerce range from payment fraud, where stolen credit card information is used to make unauthorized purchases, to sophisticated schemes like account takeover, where fraudsters gain unauthorized access to user accounts through various means.

11 Common Types Of Ecommerce Fraud

Understanding these common methods used by fraudsters is essential for businesses to implement effective fraud prevention measures and protect themselves and their customers from financial losses and reputational damage.

1. Payment Fraud

Fraudsters often use stolen credit card information to make purchases on Ecommerce websites. They may also use techniques like card testing to verify stolen card details before making larger fraudulent transactions.

Read more: Transaction Fraud Detection: Top 8 Tips and Best Practices

2. Account Takeover

In this method, fraudsters gain unauthorized access to user accounts by stealing login credentials through techniques like phishing or brute force attacks. Once inside, they can make purchases using saved payment methods or change account information to facilitate further fraud.

3. Identity Theft

Fraudsters may steal personal information, such as Social Security numbers or driver's license details, to create fake accounts or make purchases in someone else's name. This can lead to financial losses for both individuals and businesses.

Read more: Synthetic identity theft: What is it & how does it work?

4. Phishing and Spoofing

Fraudsters send fraudulent emails or messages pretending to be from legitimate businesses, such as banks or Ecommerce websites, to trick recipients into revealing sensitive information like login credentials or payment details.

5. Shipping Fraud

In this scheme, fraudsters use stolen credit card information to purchase goods online and have them shipped to a different address, often a location where they can easily retrieve the stolen goods without getting caught.

6. Chargeback Fraud

Fraudsters make legitimate purchases online and then dispute the charges with their credit card issuer, claiming they never received the goods or that the transaction was unauthorized. This results in chargebacks for the merchant, leading to financial losses and potential penalties.

7. Friendly Fraud

Sometimes referred to as "false claims," friendly fraud occurs when a legitimate customer makes a purchase online and later disputes the charge with their credit card issuer, claiming they never received the goods or that the transaction was fraudulent.

8. Unauthorized Transactions

This involves fraudulent transactions made without the account holder's consent or authorization, often through the exploitation of security vulnerabilities or stolen payment information.

9. E-gift Card Fraud

Fraudsters exploit loopholes in e-gift card systems to obtain and use gift card codes fraudulently, resulting in financial losses for retailers and inconvenience for legitimate customers.

Read more: Gift Card Fraud Prevention: Types, Examples & Detection

10. Refund Fraud

In return fraud, fraudsters exploit refund policies by making purchases with stolen payment information and then requesting refunds to receive the funds in cash or gift cards, often without returning the purchased items.

11. Triangulation Fraud

In this sophisticated scheme, fraudsters set up fake Ecommerce websites to act as intermediaries between legitimate sellers and buyers. They use stolen payment information to purchase goods from legitimate sellers and have them shipped to unsuspecting buyers while keeping the funds for themselves.

Read more: 'Mastering Fraud Prevention' Guide

10 Best Practices For Ecommerce Fraud Detection

Monitoring transactions and user behavior is a crucial aspect of ecommerce fraud detection strategies for Ecommerce businesses. Businesses need the right tools and techniques to effectively identify and mitigate potential fraudulent activities. 

1. Utilize the Right Tools

Employ tools such as risk-based authentication, card security codes (CVV), and address verification services (AVS) to authenticate transactions and verify customer information. It is important to note that implementing an effective ecommerce fraud solution or ecommerce fraud prevention tools is vital for protecting online businesses.

Read more: An In-depth Guide To Fraud Monitoring and Detection in Digital Transactions

2. Analyze Customer Data

Analyze customer data to identify suspicious patterns and behaviors, such as unusual purchase frequencies or deviations from typical buying habits.

Read more: Fraud Analytics: Identifying and Reducing Fraud Risks in 2024

3. Recognize High-Risk Orders

Identify high-risk orders based on specific characteristics, such as purchases of high-priced items, multiple orders of the same item, or unusually large orders.

4. Check IP Addresses

Monitor IP addresses for discrepancies in geographical location or multiple purchase attempts from the same address, as fraudulent actors may use proxies or VPNs to mask their identity.

5. Track Fraud by Country

Track fraud by country to identify high-risk regions and adjust fraud prevention strategies accordingly, such as implementing additional verification measures for orders originating from high-risk areas.

6. Implement 3D Secure 2.0

Implement 3D Secure 2.0 to verify shoppers' identities in real time during online transactions. 3D Secure 2.0 is an advanced authentication protocol designed to enhance the security of online transactions and reduce the risk of fraud and ecommerce scams.

It is an updated version of the original 3D Secure protocol, which was introduced to provide an additional layer of security for card-not-present transactions, such as those conducted in Ecommerce environments.

Read more: Card Not Present Fraud: Prevention & Detection Strategies

7. Conduct Merchandise Audits

Regularly audit merchandise to identify items targeted by fraud scams, such as high-value or easily resalable products, and implement additional security measures to protect these items.

8. Use CAPTCHA

Employ CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) for additional security measures during account creation, login, or checkout processes, preventing automated bots from engaging in fraudulent activities.

9. Implement Fraud Detection Tools: 

Utilize advanced fraud detection tools and algorithms to flag and investigate potentially fraudulent transactions automatically. Advanced algorithms enable seamless fraud detection in Ecommerce transactions. Also, effective fraud detection in Ecommerce is crucial for maintaining customer trust and safety. Therefore, utilizing an ecommerce fraud solution is important for online business owners.

10. Stay Updated on Fraud Trends: 

Stay informed about emerging fraud trends and techniques by actively monitoring industry news, participating in fraud prevention forums, and collaborating with other businesses to share insights and best practices.

12 Best Practices For Ecommerce Fraud Prevention

Ecommerce fraud prevention best practices are essential for protecting online businesses and their customers from fraudulent activities that can result in financial losses and reputational damage. Here's a breakdown of key strategies and tactics to strengthen your ecommerce fraud prevention efforts:

1. Secure Payment Gateways

Choose reliable and secure payment gateways that offer fraud detection and prevention tools, such as encryption and tokenization, to protect sensitive customer data during transactions.

2. Implement Strong Authentication

Require customers to use strong, unique passwords and consider implementing multifactor authentication (MFA) to enhance account security. This may involve sending a one-time password (OTP) via email or SMS, or using an authentication app.

3. Establish Fraud Detection Rules and Filters

Set up rules and filters to flag or block suspicious transactions, such as transactions from high-risk locations, orders with mismatched billing and shipping addresses, or transactions that exceed certain thresholds.

4. Utilize Address and Card Verification Systems

Implement address verification service (AVS) and card verification value (CVV) checks to verify that the billing address and card details provided by the customer match the information on file with the card issuer.

5. Maintain Software and Systems Vigilance

Regularly update your Ecommerce platform, plugins, and security software to protect against known vulnerabilities and stay ahead of emerging threats.

6. Employee Training and Awareness

Educate your team on common fraud tactics, the importance of data security, and the steps they should take to detect and prevent fraud.

7. Encrypt and Safeguard Customer Data

Use encryption and other security measures to protect sensitive customer information stored in your database, and limit access to this data to authorized personnel only.

8. Monitor Chargeback Activity

Track chargeback rates and analyze the reasons behind them to identify potential fraud patterns or areas where your business can improve.

9. Stay Updated on Fraud Trends

Keep abreast of emerging fraud trends and techniques by actively monitoring industry news and participating in ecommerce fraud management forums and discussions.

10. Establish Fraud Prevention Policies

Develop and implement clear fraud prevention policies tailored to your business's needs, outlining procedures for detecting, investigating, and responding to fraudulent activities.

11. Utilize Device Fingerprinting

Monitor how customers connect to your website using device fingerprinting techniques. This method not only detects suspicious logins through VPNs, proxies, or emulators but also identifies connections between accounts. Identifying recurring devices and IP addresses associated with fraudulent activities can enable the detection and dismantling of entire fraud networks simultaneously.

12. Utilize Data Enrichment

Utilize various data points such as email addresses or phone numbers to create comprehensive customer profiles. By validating email addresses and assessing factors like the domain service used or verification status, you can verify customer identities effectively, especially during manual reviews before product shipment.

12 Red Flags Businesses Should Watch Out for in Ecommerce Fraud

1. Unusually Large Orders

Be wary of orders that are significantly larger than average or orders for high-priced items, as they may indicate fraudulent activity, especially if the customer has no prior purchasing history.

2. Low-Value Transactions

Fraudsters may attempt to fly under the radar by focusing on low-value goods or services. 

3. Rushed Transactions

Fraudsters often attempt to expedite transactions without concern for product details or shipping options. Watch out for customers who seem more focused on completing the transaction quickly than on the specifics of the purchase.

4. Multiple Orders of the Same Item

Pay attention to customers who place multiple orders for identical items, especially if these orders are placed in quick succession. This behavior could indicate that the customer is testing stolen credit card information, potentially engaging in ecommerce credit card fraud.

5. Mismatched Billing and Shipping Information

Verify that the billing address provided by the customer matches the address associated with the payment method. Be cautious of orders with mismatched billing and shipping addresses, as this could be an attempt to use stolen credit card information for fraudulent ecommerce credit card fraud purchases.

6. Unusual IP Addresses

Monitor IP addresses associated with transactions and be cautious of orders placed from IP addresses located in high-risk regions or countries known for fraudulent activity. Additionally, watch out for multiple transactions originating from the same IP address within a short timeframe.

7. Suspicious Account Activity

Keep an eye on accounts with irregular or suspicious activity, such as multiple failed login attempts, frequent changes to account details, or unusual purchasing behavior. These could be signs of account takeover or fraudulent activity.

8. Uncharacteristic Customer Behavior

Take note of customers who exhibit behavior that deviates from typical patterns, such as sudden changes in purchasing habits, requests for expedited shipping without regard for cost, or attempts to bypass security measures.

9. Use of Anonymous Payment Methods

Be cautious of customers who attempt to use anonymous payment methods, such as virtual credit cards or cryptocurrencies, as these methods are often favored by fraudsters seeking to conceal their identities.

10. Refusal to Provide Additional Information

If a customer is hesitant to provide additional verification or information when requested, it could be a red flag indicating potential fraudulent activity. Legitimate customers are typically willing to provide the necessary information to complete a transaction.

11. Unresponsive Communication

Pay attention to customers who are unresponsive or evasive when contacted for verification purposes or to address concerns about their order. Fraudsters may avoid communication to prevent detection of their fraudulent activities.

12. New Customer Profiles

Keep a close watch on new accounts that immediately purchase the same items regularly. While they may appear to be loyal customers, this behavior could indicate fraudulent sellers infiltrating your platform.

Ecommerce Fraud Trends And Future Predictions

1. Misuse of AI Tools and Chatbots

With the exponential growth of AI-driven applications like ChatGPT, hackers are exploiting these tools for malicious purposes. 

Read more: Your Guide to Application Fraud Detection and Prevention

2. Triangulation Fraud

Triangulation fraud unfolds with three key participants: 

• A customer
• A fraudster
• A merchant. 

Here's how it operates: The fraudster establishes a counterfeit online marketplace offering products at discounted rates. A consumer, attracted by the enticing deals, places an order on the fraudulent platform. Subsequently, the fraudster harvests the personal and payment information of the consumer and charges their card. 

Meanwhile, the fraudster places an order on a legitimate marketplace using stolen payment credentials from another individual and arranges for the product to be delivered to the original customer. While initially appearing beneficial to all parties involved, the unsuspecting cardholder eventually discovers an unauthorized payment, leading to chargebacks for the merchant.

3. Spoofing Digital Fingerprints

Fraudsters manipulate digital fingerprints to deceive risk detection systems and remain anonymous during fraudulent activities. They alter browser details, IP addresses, device information, and other factors to bypass restrictions imposed by Ecommerce platforms. Tools like VPNs and proxies are used to hide locations, making it difficult to prevent fraud. 

By spoofing digital fingerprints, fraudsters can evade restrictions imposed by Ecommerce platforms, such as bans on specific geographic regions notorious for high-value or high-volume fraud attempts.

Conclusion

In conclusion, as Ecommerce continues to flourish, so does the threat of fraud. Looking ahead, it's essential for businesses to adapt and evolve their strategies in response to emerging trends and predictions in ecommerce fraud. Companies should invest in powerful ecommerce fraud prevention tools to protect their customers' data.

It is worth noting that a powerful identity verification solution such as FOCAL Fraud Prevention Solution prioritizes customer experience, optimizing their journey based on their fraud risk profile. FOCAL platform is one of the best fraud detection software, employing machine learning algorithms, AI technologies, risk-scoring capabilities, behavioral analysis, and comprehensive data networks to empower merchants to swiftly and accurately assess the risk associated with consumers during both onboarding and transactions.