The ecommerce industry has grown exponentially in recent years. According to recent reports, electronic commerce is expected to grow to a whopping $6.5 billion industry in 2023. However, along with this growth comes increasing cybersecurity risks and challenges.
Fraud is a persistent problem faced by online retailers. Data shows that online businesses deal with more than 200,000 cyber attacks each month. Ecommerce fraud is becoming more and more prevalent as technology and the internet continue to develop.
To give you a better idea, here’s a quick rundown of the most common types of ecommerce fraud and ways to protect your business.
Common Types of Ecommerce Fraud
Also referred to as credit card fraud, transaction fraud happens when a fraudster conducts an online purchase using the information from a stolen credit card. In the context of ecommerce, the criminal doesn’t need to steal a person’s credit card physically. Instead, they can gain access to this highly sensitive information through malicious acts like phishing.
The alarm for transaction fraud only goes off when the real cardholder notices a strange transaction in their purchase history. Typically, they would notify their bank and request a chargeback to get a refund.
While this process rids the legitimate cardholder of responsibility, it can be troublesome for the web merchant. When transaction fraud occurs, the business owner must refund the payment and thus accept that they have lost a sale. Aside from that, they also have to pay a fee to the card network, which is often quite expensive.
Friendly fraud is another common type of scam in the ecommerce industry. Friendly fraud refers to activity that does not involve stolen credit card information but still aims to cause harm to the web merchant through opportunistic chargebacks and malicious return and refund requests. This type of fraudulent transaction is further classified into three categories.
- Innocent requests are transactions where a cardholder asks for a chargeback for a purchase they do not recognize. This can happen when a friend or family member uses their credit card without the card owner’s knowledge.
- Malicious friendly fraud is a type of friendly fraud that occurs when a customer buys a product while they purposely know that they are going to ask for a refund for it. This type of transaction involves the buyer purchasing and receiving the item but asking for a refund because they never got the item.
- Opportunistic friendly fraud happens when customers are unsatisfied with an online shop’s policy or simply regret their purchase. The customer would initiate a dispute with the web merchant regarding their policy and ask for a full refund, taking advantage of ecommerce’s chargeback guarantee feature.
Return policies in ecommerce are primarily designed to allow customers to return their purchases under particular circumstances. However, fraudsters have taken advantage of this feature to commit fraud using a variety of methods.
- Receipt fraud refers to fraudulent transactions involving returning either reused or stolen items. Receipt fraud also accounts for the technique of returning digital goods, products, or services bought from a different store to profit from the price difference.
- Switch fraud refers to the act of purchasing a working item and returning a purposely damaged or defective item. Bricking is a type of switch fraud in which the purchased item is stripped of its valuable component before being returned to the merchant.
- Wardrobing is a common return fraud where a clothing item is purchased with the intention of being returned after wearing it for a short period of time.
Triangulation fraud is a rather sophisticated strategy that has been posing serious threats in the ecommerce industry. This fraudulent activity involves three parties – a legitimate customer, a legitimate ecommerce store, and a fake online store with access to stolen credit card information.
This type of fraudulent transaction starts with the legitimate customer purchasing a digital good or product from a fake online store that is operated by a fraudster. The customer pays for the item, and the fraudster buys the same product on a legitimate ecommerce platform using stolen credit card details, placing the customer’s shipping information in their purchase.
At this point, the fraudster has successfully completed a transaction fraud, and the original cardholder will most likely process a chargeback to get their money back. Here, the online business owner will have to process the refund while the fraudster keeps the original customer’s money, and the customer also receives their purchased item.
In a triangulation fraud, the web merchant doesn’t only lose money because of the credit card chargeback, but they also lose an item in their inventory.
5 Ecommerce Fraud Prevention Strategies
Now that you have a better idea of the different types of fraud that occur in the ecommerce industry, it is important that you also know some of the most effective strategies to protect your online business and your customers from these scams.
Include cybersecurity and fraud detection features in your website
While fraud is prevalent because of the development in technology, ecommerce businesses can also utilize it to provide necessary safety and security measures. Adding fraud detection software to your ecommerce website can be your automated first line of defense against malicious transactions.
Fraud detection solutions can monitor your online store’s transactions and sound the alarm if anything looks suspicious. This can be really helpful for online businesses to get ahead of the hackers before any transaction is made.
Ensure PCI compliance
Credit card is one of the most common modes of payment when it comes to online transactions. To make sure that your ecommerce website is safe and secure to process credit card payments, it is essential that you are able to achieve the Payment Card Security (PCI) standard.
This PCI helps ensure that credit card information is processed correctly and that sensitive data are secure from any threats or risks.
Include the CVV number requirement for credit card transactions
The CVV number or the card verification value is a three or four-combination code used as a safety feature found on the back of the physical bank card. Requiring customers to input their card’s CVV when processing a credit card transaction helps ensure that the buyer has their card on hand.
Consider setting purchase limits
Making high-volume purchases is a common practice for fraudsters and scammers. To prevent your online business from suffering too many sales and inventory losses because of fraud, consider adding a purchase limit for each customer transaction.
Maintaining a single-order purchase limit just above the average will allow you to accommodate most transactions and also take note of orders that exceed it. From there, you can either flag, decline, or communicate further with the customer if they want to continue with their large purchase.
Regularly conduct website security checks
Technology and the internet are fast changing. Considering this, it is possible for your ecommerce website to have security features that are no longer up to date with the latest tech advancements.
Checking your website for possible weaknesses and vulnerabilities will allow you to make the necessary changes and adjustments to maintain a safe and secure website.
Running an ecommerce store is not an easy feat. Aside from worrying about your marketing tactics and product developments, you also have to ensure that your ecommerce website is safe from malicious cyber-attacks and threats.
When starting a business online, it is important to consider the different strategies you will use to protect yourself and your customers from online fraud. Doing this will prevent financial or material losses and help you establish your brand as a reliable, safe, and trustworthy web merchant.
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