Welcome to Sift University: Ecommerce Fraud 101
By Sift /
7 May 2015
Chargebacks. Card testing. Reshipping. If you’re new to the world of ecommerce fraud, these terms may seem like abstract names for even more abstract processes. Dealing with online fraud can be a frustrating experience if you don’t quite grasp how it works or where it comes from. Fraud affects multinational corporations and mom-and-pop shops alike, so learning how to protect your business is key to preventing unnecessary problems. To help you out, here’s an overview of the basics of ecommerce fraud, how it impacts your business, and how to curb its effects.
Who are we dealing with here?
There are two broad categories of fraudsters: friendly and hostile.
Friendly fraud is carried out by a customer who engages with the merchant directly, making online transactions with personal account information. In a typical scenario, the customer receives his purchased merchandise, then disputes the charge through his bank. The bank investigates the claim but usually approves the customer’s request, resulting in a chargeback. The merchant not only has to return the customer’s money, but also pays additional processing fees and penalties. It’s a tricky situation because some customers might forget that they received their purchases, but many cases are deliberate attempts to obtain merchandise or services for free.
Hostile fraud involves a third party who illegally obtains and uses someone’s account information to purchase merchandise. One way to spot a fraudster is with card testing transactions, where fraudsters test numerous stolen credit card numbers by making small purchases online. If those transaction attempts are successful, the fraudster can use the card number to make larger fraudulent purchases. Even if the merchant doesn’t accept the payment method and issues a “payment authorization failure” message, the fraudster can tweak card verification data (e.g. expiration date, CVV code) until the transaction goes through successfully. Hostile fraud can be perpetrated by anyone, from organized crime rings to individual actors with access to black markets.
What should I look out for?
Online fraud can happen in a variety of ways, and all of them can cause considerable harm to your business. Here are some common types of fraud that affect merchants:
- Reshipping: International orders are usually more closely monitored than domestic ones, which is problematic for a fraudster who lives in a country other than the one associated with a stolen credit card. To bypass that basic rule of detection, the fraudster can recruit someone from within the cardholder’s country to receive and reship the merchandise to the final destination. Reshipping fraud can be responsible for hundreds of thousands of dollars of goods lost, and is often associated with organized crime rings.
- Auction fraud: Auction sites and digital marketplaces have low barriers to entry, so virtually anyone can sign up and start selling merchandise. An unknowing customer might purchase goods from a fraudulent seller, who then uses stolen credit card information to buy and deliver the merchandise from a legitimate retailer. Although the customer receives his purchase in the end, the fraudster collects the sale. Once the credit card transaction is flagged as fraud by the actual cardholder, the legitimate merchant is left with no payment and lost inventory.
- Refund abuse: Malicious customers, instead of requesting a refund from their bank, may reach out to merchants directly. These customers could include those who falsify receipts, return stolen merchandise, or make a purchase with the intent of returning it after short-term usage. A single customer might create multiple accounts to obtain fraudulent refunds, which can result in recurrent losses.
How much does fraud cost?
Losses from ecommerce fraud can be damaging not only to your bank account but also your online reputation. Billions of dollars are lost every year to fraud, hurting businesses big and small. Fraudulent chargebacks and associated fees, illegitimate refunds, and loss of inventory are just a few costs that can be avoided. Investing in the tools to detect and reduce fraud will allow you to spend more time on your business and less time dealing with fraudsters.
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