Protecting your Business from Common Types of E-Commerce Fraud

It is no surprise that over the last few months, e-commerce use has skyrocketed. By mid-March, same-day shipping orders were up by 237 percent, and e-commerce orders in 2020 were up 110 percent over 2019.

But this trend is not new. The use of e-commerce has been steadily increasing since 2014, and by 2021 the e-commerce industry is expected to generate 4.5 trillion dollars annually and accounts for 16 percent of retail sales. 

E-commerce offers consumers ease, speed and accessibility, but it is not all positive. As consumers switched to online shopping, fraudsters followed. It was estimated that by the end of 2020, online sales would generate $630 billion, but $12 billion of that would be lost to e-commerce fraudsters.

E-commerce fraud is defined as any fraud that is committed through an e-commerce platform. Fraudsters have developed new ways to steal money from consumers and businesses virtually. The top five ways are listed below.

Common Types of Fraud

  1. Card Testing

Card testing fraud can easily go undetected and is not normally discovered until it is too late. Card testing occurs when the fraudster steals a credit card number but does not know what the card limit is or if it works. To test the card, the fraudsters make numerous small purchases —usually using a bot to test multiple cards at once. When they know the card works, they make a bigger purchase. The fraud is not normally noticed until the bigger purchase is made, and at this point, it is too late to stop them and the business is out the money.  

  1. Friendly Fraud

Friendly fraud, or chargeback fraud, occurs when a customer purchases an item online and requests a chargeback from the payment processor. The payment processor returns the money to the customer, but the retailer must pay the charge. Friendly fraud is one of the most common types of e-commerce fraud and by 2023 is expected to account for 130 billion USD in losses. Although most friendly fraud is a result of an honest claim, fraudsters take advantage of the system to get free items. For example, the fraudster can order an item and then claim it was never delivered, or that they canceled the order and ask for a refund. 

Despite friendly fraud being prevalent in e-commerce, it is not unavoidable. Leaders in the FinTech industry believe the increase of friendly fraud stems from companies rushing to meet customer demands, instead of taking time to make sure the claims are legitimate.

  1. Refund Fraud

Refund fraud is committed when the fraudster makes an online purchase with a stolen credit card and then asks for a refund but claims the card has been canceled asks for a refund to be sent to another card. In the end, both the business and the credit card owner are out money, and the fraudster takes the money.

  1. Account Takeover

Account takeover fraud is a form of identity theft. The fraudster accesses a customer’s account —often through stealing information from e-commerce accounts or buying it on the dark web—and purchases items or services. Account takeover seems like it would be able to detect fraud, but as e-commerce develops, so too do methods of fraud. Fraudsters avoid being caught by converting money to bitcoin, making checks out to cash, and sending items to a random address where they can pick it up. 

Account takeover is considered a serious form of identity theft and ends up harming both the consumer and the business. When a business is used as a pawn in an account takeover scheme, customers view them as a security risk and avoid purchasing their products online. However, the business and the consumer are rarely at fault. The fraudsters who commit these crimes are highly skilled and can hack into even the safest systems. 

  1. Transaction Laundering

Transaction laundering accounts for 200 billion dollars in losses a year and comes in many forms. Money laundering via an e-commerce business is like money laundering through a brick-and-motor store. The fraudsters use businesses to process illegitimate funds and convert it into ‘clean money.

There are three main methods used to launder money through e-commerce businesses: front companies, pass-through companies, and funnel accounts.

Four Ways to Fight Fraud

  1. Fraud Detection Solutions

Businesses concerned about fraud can hire a third-party service specializing in monitoring and flagging transactions. This type of service is good for any size business but is often most beneficial for smaller businesses that do not have enough resources or time to dedicate to monitoring for fraud.

  1. PCI Compliance

The Payment Card Industry Security Standard (PCI DDS) is a set of requirements for businesses to follow to ensure they are securely storing credit card information. All businesses are required to follow the requirements to prevent fraud and protect consumers and businesses. 

  1. AI Bots

AI bots are usually used to detect money laundering because they can quickly sort through transactions and flag any discrepancies. Normally, AI bots are used in tandem with people. The AI will go through and pull any suspicious activity and then people will go through the suspicious accounts. 

  1. Blacklists

To fight fraud, many businesses have created ‘blacklists’ to ban any customer from shopping on their website. Once the businesses have detected a customer “testing” credit cards on their site, they can add them to the list, and block them from shopping again.