The COVID-19 pandemic has contributed to an increase in online sales. At the same time, this growth in online sales and other transactions has led to an uptick in e-commerce fraud.

Last year, eCommerce losses stemming from online payment fraud hit a record high of approximately $20 billion globally, increasing more than 14% from the $17.5 billion recorded the year before. As a result, eCommerce fraud has emerged as a growing challenge that eCommerce merchants face on an ongoing basis.  

Unlike fraud that occurs in a brick-and-mortar location, online fraud can be committed using personal and credit card information without the need of physically having the credit card at the time of the transaction.

See related: 8 Simple Tips to Lower Retail Credit Card Processing Fees

In some cases, hackers steal personal and financial information and sell it on the black market.  Although this type of criminal fraud is more serious, there are other types of customer fraud, such as friendly fraud, where the customer purposefully files a chargeback to get a free product and avoid payment.

While there is no one-size-fits-all approach to fraud prevention, eCommerce merchants have access to proactive measures to detect and prevent eCommerce fraud. Investing in the right eCommerce fraud prevention solutions can significantly improve customer safety and the bottom line. In this article, you’ll learn the most common types of eCommerce fraud and, ultimately, some pointers on how to prevent eCommerce fraud to help keep your business protected and thriving. 

1. What Is eCommerce Fraud?

eCommerce fraud is any type of crime on an eCommerce platform. Fraudulent use of a stolen or falsified credit card, fake identity, and deceptive affiliate advertising are all forms of eCommerce fraud. 

The purpose of eCommerce fraud is to obtain cash or financial information either from the merchant itself or from the merchant’s customers. When someone commits fraud at your online store, you, as the retailer, bear the cost, which negatively impacts your revenue.  

eCommerce fraud is also sometimes referred to as payment fraud. Part of the reason for the current spread of eCommerce fraud is that prosecutions are relatively rare due to time and resource limitations and cumbersome evidence collection. In other words, fraudsters are seldomly caught, meaning business owners need to take preventative steps on their own. 

Therefore, a high-quality fraud detection and prevention management system should be integrated to stop fraud on your platform and minimize its impact on your earnings. Fraudsters continue to be ingenious and evolve, using more sophisticated tactics each year. And while these rogue actors only need to be right once, you need to be right every time. That’s why it’s crucial to educate yourself on the risks and prepare your business for possible instances of fraud.

2. How To Prevent eCommerce Fraud

While there is no single perfect way to protect your eCommerce business from the growing threats, here are some quick actions you can take to address eCommerce fraud.

1. Leverage fraud detection solutions

Using fraud solutions is one of the most effective ways to counter all types of eCommerce fraud. A fraud detection solution is a third-party software solution specializing in detecting risky transactions and protecting online merchants from card testing fraud, friendly fraud, and chargeback fraud. A fraud detection solution can be helpful for eCommerce organizations of all sizes. 

However, it’s most beneficial for small and medium-sized online businesses that do not have the resources, time, or talent to implement their own fraud solutions. While you must do your due diligence to find the best vendor, a fraud detection solution can be an excellent tool for fighting fraudsters. Some popular eCommerce fraud prevention tools include Subuno, Riskified, Fraudlabs Pro, Dupzapper, and Kount.

2. Perform frequent site security audits

Another critical measure to prevent eCommerce fraud is to conduct ongoing site security audits. This measure helps online merchants to identify flaws in their security systems before criminals and fraudsters discover and target them. If these audits are conducted often enough, they will provide the following:

  • Checking the shopping cart software and plugins for updates
  • Track active and inactive plugins to engage actions against inactive plugins
  • Confirm the functioning of the SSL certificate
  • Check for malware scanning of the website regularly
  • Ensure that communications between the store and customers and suppliers are securely encrypted
  • Cross-check the backup frequency of the online store
  • Check if the passwords used for administration accounts, hosting dashboards, CMS, database, and FTP access are solid and secure enough
  • Verify that the online store is PCI-DSS compliant 

3. Maintain a PCI-compliant eCommerce business

The Payment Card Industry Data Security Standard (PCI DDS) is a widely respected set of guidelines that enable companies that store and process credit card and cardholder information, such as physical retail stores or eCommerce companies, to operate a fully secure environment. The PCI Security Standards Council introduced the PCI DSS payment security standards in 2006 as a response to the increase in data theft. 

The council is composed of Visa, the Japan Credit Bureau, Mastercard, American Express, and Discover. PCI compliance involves basic security precautions, including creating a firewall between your Internet connection and any system storing credit card numbers. 

Hence, an eCommerce online store that handles credit card payments must be PCI compliant, as PCI compliance aims to protect sensitive cardholder information from being leaked due to credit card fraud. PCI compliance is compulsory. Therefore, make sure you comply with the relevant PCI guidelines to avoid any penalties. Most processing companies will provide PCI compliance as part of their service.

4. Partner with a trusted third-party payment processor

Outsourcing fraud controls to a third-party payment processor is one of the most straightforward and secure ways to prevent fraud in eCommerce. Third-party payment processors often address customer chargebacks, security compliance, and data storage issues.

Providing security for customer data should be the number one priority, especially if customers enter their credit card details into their accounts. A third-party payment processor can provide security for customers’ private information, reducing the number of eCommerce fraud attempts against a store.

Note

Partnering with the third-party payment processor of your choice comes down to choosing a POS system that gives you the ability to integrate any type of third-party payment processor. Some POS providers only work with their merchant service, limiting your choice of the third-party payment processor you need to ensure better the security of your customer’s data and your business. Be picky in choosing the POS system you need for your business.

5. Use an address verification service (AVS)

Credit card processors and issuing banks typically provide an address verification service (AVS) to detect suspicious credit card transactions in real-time and prevent credit card fraud. This service consists of verifying that the billing address communicated by the card user matches the cardholder’s billing address record at the card-issuing bank.

This verification is done as part of the merchant’s request to authorize the credit card transaction to the payment processor to the payment processor. If the addresses do not match, the system rejects the transaction or flags it for further investigation. This method of fraud prevention is most often used in conjunction with a payment processing solution.

6. Require card verification numbers (CVV)

The Card Verification Value (CVV) is a three-digit security code on the back of credit and debit cards (i.e., VISA®, MasterCard®, and Discover®) and the four-digit security code on the back of American Express® credit and debit cards. By requiring all shoppers to provide the CVV code for each transaction, businesses can ensure that customers have the physical credit card in their hands.

In addition, PCI standards advise merchants not to store the CVV with all other information about a user’s credit card (e.g., card number and owner’s name), as it is deemed illegal for merchants to do so. So, in a way, criminals can’t get this code unless they physically have the card, which cuts down on the risk of fraud.

7. Use the secure hypertext transfer protocol (HTTPS)

Using the secure hypertext transfer protocol is also effective to prevent eCommerce fraud. HTTPS is a primary protocol that ensures data exchange between a client’s web browser (such as Google Chrome) and an online eCommerce store. It is a secure version of the HTTP protocol.

The HTTPS protocol enables data encryption to protect critical information, such as customer names, addresses, and credit card numbers, securing critical customer data from hackers. Using HTTPS prevents the online store from displaying its transactions in a way that is easily accessible to hackers, cybercriminals, and fraudsters. An eCommerce business can use HTTPS by purchasing an SSL certificate. HTTPS is considered an effective preventive measure against common online frauds, which are less subtle.

8. Come up with a blocklist

If you use a fraud detection solution, you might discover some customers who have tested credit cards in your eCommerce store. Once you have identified these customers, place them on an internal blocklist. This will prevent these people from making future purchases on your site.

Of course, a blocklist is not a 100% solution, as fraudsters may keep using new stolen customer identities. However, a blocklist can help you identify potentially fraudulent transactions before they occur, based on past behavior.

9. Avoid collecting too much sensitive data

An effective approach to protecting an online store from a data breach or hack is gathering and storing as little customer data as possible. This preventive action follows a basic logic: hackers can’t steal what you don’t possess. Thus, eCommerce stores are only required to collect the data they need to complete a transaction and ship the product.

Some unnecessary information that businesses can do without includes social security numbers, birth dates, and other unnecessary sensitive customer data so that their business and customer data remain secure, even in the event of a data leak.

10. Set limits on purchases to reduce merchant errors 

While this may seem counterintuitive since you don’t want to limit your customers’ purchases, it’s still important to set limits on the number of transactions and the total dollar value they will accept from an account in a single day. Such limits can be easily based on order types and sales trends. This helps minimize the merchant’s exposure to fraud.

According to Chargebacks911, 20-40% of chargebacks are due to merchant error. You can avoid chargebacks by refraining from using confusing billing descriptors or unclear return policies, leading to frustration for rightful customers.

3. Some Common Types of eCommerce Fraud

Although online hackers have many schemes at their disposal, it is essential to know some of their common methods to better protect yourself against these attacks to secure your eCommerce site. Knowing a few eCommerce fraud strategies will keep you on your toes. These strategies have been used successfully against eCommerce sites, large and small. Here are a few of them. 

Go more in-depth with this post, too: 10 Types of eCommerce Fraud

  • Card testing fraud

Card testing fraud, also known as card cracking, is a strategy of gaining access to credit card numbers by stealing or purchasing card data on the dark web. The person who has the cards does not know if the card numbers can be used to complete a transaction or the limit associated with that credit card.

With access to credit card numbers, fraudsters browse through eCommerce sites and make small test purchases, often using scripts or bots to test multiple credit card numbers quickly. The first few purchases are extremely limited; the goal is to determine if a credit card can be used to make transactions. Once they know that a credit card number is usable, they start making much more significant purchases.

  • Friendly fraud

Also known as chargeback fraud, friendly fraud occurs when a person purchases an item or service online and then requests a chargeback from the payment processor, claiming the transaction was invalid. The credit card companies or the bank refunds the customer the transaction amount, which the retailer must still clear. The fraudster makes claims that appear honest and credible, and in some instances, that person may be right (hence the term “friendly fraud”). 

For example, if you are an online shoe retailer, a consumer may purchase an item from your online store and claim that the item was never delivered. They may notify his card issuer that the shoe was returned, but the refund was never processed. They can also say that the order made on your site was canceled and they want to be refunded. There is chargeback management software to help you identify and prevent instances of this. 

  • Account takeover fraud

Account takeover fraud occurs when someone succeeds in gaining access to a user’s account on an eCommerce store or website. This can be realized through a series of methods, including purchasing stolen passwords, security codes, or personal information from the dark web or the successful execution of a phishing scheme against a particular customer.

Account takeover fraud is even more serious because it is a form of identity theft and a threat to victims and your reputation as a retailer. Customers who think their data may be compromised on your website or eCommerce store are less likely to proceed to checkout and will turn to competitors who offer more stringent security measures.

4. How Can KORONA POS Help You Prevent eCommerce Fraud?

KORONA POS is a sophisticated point of sale software designed for retail merchants of all kinds. Although KORONA POS does not offer chargeback management software services or any other specific type of online fraud prevention, it allows you to choose any type of payment processor to process your payments and transactions that take place on your website.

Since choosing a sound and trusted payment processor is crucial for better security of your data and those of your customers, you need a POS capable of integrating with any type of processor, an advantage you will benefit from by using KORONA POS. Plus, we now offer a robust, custom eCommerce solution for online retailers. The solution comes fully set up with fraud protection included in every subscription. For more information on how KORONA works, click the button below for a free demo with our product specialist.

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Frequently Asked Questions On How to Prevent eCommerce Fraud

  • What is eCommerce Fraud?

eCommerce fraud includes any type of malicious action aimed at exploiting online stores. The advent of the COVID-19 pandemic has undoubtedly increased the number of eCommerce frauds.

  • What are the common frauds in eCommerce?

There are several types of eCommerce fraud. The most commonly used by fraudsters include card testing fraud, friendly fraud, refund fraud, account takeover fraud, interception fraud, and triangulation fraud.

  • How does fraud affect eCommerce?

In addition to harming eCommerce businesses themselves, fraudulent attacks can also have a negative impact on consumers. They are the cause of a great loss of revenue for businesses.  In 2021, eCommerce fraud caused a loss of approximately $20 billion dollars worldwide. By visiting counterfeit sites and making purchases, unwitting customers can have their contact information stolen, which is then used to make other fraudulent purchases.