We have detailed the evolution of ecommerce since the pandemic was first declared, an event that accelerated the adoption of online shopping by five years. Once the dust has settled and the figures are in, global ecommerce fraud loss is expected to reach $48B in 2023, with North American merchants bearing the brunt, expected to account for 42% of the total loss.
Article at a glance:
- Gain insights into the best practices to detect and prevent fraud in the e-commerce industry in 2024 and beyond.
- Learn about the most common types of fraud that ecommerce businesses need to be on the lookout for.
- Discover the best-in-class tools to use for fraud prevention.
Before we outline best practices for preventing costly ecommerce fraud, let’s quickly familiarize ourselves with the common types of ecommerce fraud experienced by businesses of all sizes.
Common types of ecommerce fraud
Payment fraud
In short, payment fraud happens when a fraudster uses stolen credit cards to purchase goods and resell them at profit. The most at-risk transactions in this instance are card-not-present (CNP) transactions. It is estimated that ecommerce losses to online payment fraud will hit $US48 billion this year.
Account takeover (ATO)
Account takeover happens when a fraudster uses stolen credentials to access customer accounts to get access to a platform/site. Once they’re in chaos ensures, with the bad actor having free reign to drain funds and/or loyalty points, along with stealing customer data.
ATO isn’t just a type of fraud that affects the ecommerce industry. Unfortunately, it happens across the board; a hacker illegally accesses a site using stolen credentials. It is estimated that, over the next five years, merchants will lose more than $343 billion to fraud, with account takeover attacks specifically driving the loss.
Friendly fraud/chargeback abuse
We’ve said it before and will keep saying it – there’s nothing friendly about friendly fraud, the most common type of ecommerce fraud. Also known as chargeback abuse, this type of ecommerce fraud occurs when a consumer disputes a legitimate transaction through the issuer or payment processor in an attempt to get a refund. Naturally, the goal is to get a refund and keep the item!
Synthetic identity theft
Synthetic identity theft is an insidious type of fraud in which a real person’s information, such as their date of birth or government identification, is stolen and combined with other falsified personal information to create a new identity.
As detailed in depth in our eBook, synthetic identity theft isn’t just a type of ecommerce fraud, it is the fastest-growing financial crime in the US, accounting for nearly 80% of all identity fraud and costing US lenders approximately $6 billion a year.
Promotion abuse (promo abuse)
Another topic discussed via eBook, promo abuse is a type of ecommerce fraud that involves a customer taking advantage of a merchant’s promotions. An ever-growing area of concern for merchants big and small, 49% of ecommerce businesses having experienced an increase since 2020.
E-gift card fraud
As a type of ecommerce fraud, e-gift card fraud is straightforward; a fraudster steals payment information and buys an e-gift card. They then resell the card, pocketing the money and the payment information of the consumer. And in the meantime? The frustrated consumer has to dispute the charge with their issuer, resulting in a chargeback for the merchant.
Affiliate fraud
Affiliate fraud occurs when a bad actor uses dishonest, malicious tactics to earn commission payments via affiliate marketing programs. Although there are often strict terms and conditions in place to prevent this gaming of the system, it still happens. The most common types of affiliate fraud involve cost-per-click campaigns, cost-per-lead campaigns, cost-per-install models and cost-per-sale models.
This type of ecommerce fraud can really be as simple as refreshing a webpage multiple times, sending spam emails or creating a false sense of high traffic with popups. And the amount of fraud within affiliate campaigns does vary depending on the action and payout amount to the affiliate itself. However, at the end of the day, the negative effects are the same – this ecommerce fraud eats into a merchant’s profits and depletes marketing budgets.
Triangulation fraud
Triangulation fraud happens when a fraudster builds a fake ecommerce store to sell items at cheaper prices with one clear goal in mind: to steal consumers’ credit card data. Once they have stolen the data, the fraudster forwards the transaction to the unsuspecting merchant who then charges the customer a second time. This all ends in a chargeback which, you guessed it, costs the merchant.
Before we get a start on the five industry best practices for ecommerce fraud detection let’s get one thing straight: no merchant should be doing this alone. In fact, a recent Ekata survey found 70% of ecommerce companies use three or more tools to help strike the right balance between fraud prevention efforts and a smooth consumer experience at each touchpoint. Therefore, multi-layering your fraud prevention strategy is your best bet to coming out ahead of the fraudsters in 2023.
Let’s begin.
5 industry best practices to preventing ecommerce fraud
Automate decisioning with artificial intelligence (AI) and machine learning (ML)
Without a doubt, AI has emerged as a powerful weapon against ecommerce fraud. AI technologies, such as ML algorithms, can analyze a significant amount of data and detect other anomalies that may indicate fraudulent activities. By automating decisioning with AI, merchants can make more confident risk decisions than fraud analysts on a much faster, grander scale.
When it comes to ecommerce fraud, AI-powered fraud management systems can detect and prevent payment fraud, identity theft and regular phishing attacks. Better still, they can adapt and learn over time new fraud patterns and the latest trends, further improving upon detection capabilities.
By integrating AI-based technology with identity verification solutions, merchants can build their own rules. This not only provides a more comprehensive approach to ecommerce fraud prevention, but it also reduces the need for manual reviews, enabling faster acceptance rates and building better business outcomes.
Partner with a robust data network
Fraudsters don’t work in siloes and neither should merchants. Ekata’s Identity Network uses data aggregated from more than 200 million monthly anonymized, real-world queries to predict fraudulent versus legitimate interactions. It does this by analyzing patterns of how identity elements are being used online.
Partnering with a robust data network like Ekata’s empowers merchants with the information they need to make faster, more confident risk decisions.
Partner with a trusted payment processor
To mitigate ecommerce fraud, merchants need to stick to what they are good at – selling and providing exceptional customer service in a crowded digital marketplace. Leave the payment processing to the experts!
By outsourcing ecommerce fraud checks to a third-party payment processor, merchants can better manage customer chargebacks (and friendly fraud attempts), as well as security compliance details and data storage. The latter is particularly vital as customers grow more and more wary of releasing payment details to just anyone in the age of sophisticated data breaches.
Implement step-up authentication according to the risk profile
Deciding upon when, how and where to introduce step-up authentication during a transaction is the ultimate decision. At Ekata, we believe in strategic friction. And the strategic differentiator when it comes to preventing ecommerce fraud without creating undue friction is identity verification. By leveraging model-derived signals such as Ekata’s Identity Risk Score, Network Score and IP Risk flag into their own risk models, merchants can better predict the riskiness of a customer and mitigate ecommerce fraud. High-risk score? Step up that step-up authentication! Low risk? Roll out that seamless CX red carpet!
Ensure your fraud prevention tools are best-in-class
Detecting and preventing ecommerce fraud, while providing a frictionless customer experience is an ongoing challenge for merchants around the globe. And, while consumers may wish for a seamless experience, they also expect security.
Merchants who take the appropriate steps to integrate security solutions that do not negatively impact their consumers come out on top. The first step, of course, is choosing the right fraud prevention tool. Luckily, there is no shortage of ecommerce fraud prevention tools, which is a good thing. This enables fraud prevention professionals to do an analysis of their fraud challenge and determine what solution would help them succeed.
With a data-driven approach, we have made it our business to understand what merchants need and how to stay in front of current and emerging ecommerce fraud trends. Our approach revolves around leveraging real-time identity data and advanced machine learning to effectively fight against promo abuse and reduce chargebacks by 40%. We supercharge the manual review process with workflow automation and risk decisions. By keeping your customer’s experience front of mind, we streamline onboarding and transactions for good users, improving conversion rates and encouraging customer loyalty. And we are with you every step of the way.
Contact us today to learn more about best practices about how you can protect your business against ecommerce fraud.
