How to prevent e-commerce fraud with intelligent automation

E-commerce has revolutionized the way we shop, making it convenient and accessible to purchase products and services online. However, this convenience and accessibility have been weaponized by fraudsters, leading to an increase in fraudulent activities targeting online businesses.

When businesses fail to prevent e-commerce fraud, it can lead to significant financial losses and damage to a company’s reputation. Therefore, it’s essential for online merchants to implement effective fraud prevention measures to protect themselves and their customers. In this blog, we discuss the types of e-commerce fraud businesses need to know about, red flags to watch out for, and tactics for preventing e-commerce fraud.

What are the types of e-commerce fraud?

There are many types of e-commerce fraud. It can either be committed directly by a legitimate customer or by a third-party using stolen credit card information and/or account credentials. Here are some of the most common examples of e-commerce fraud:

• First-party fraud: This occurs when a legitimate customer intentionally commits fraud.
• Chargeback fraud: Also known as friendly fraud, chargeback fraud is when a customer disputes a legitimate charge with their credit card company, leading to a chargeback for the merchant.
• Return fraud: This involves customers returning products they have used or damaged, claiming they are defective or unwanted, in order to obtain refunds or replacements.
• Account takeover (ATO): In an ATO attack, fraudsters gain unauthorized access to a customer’s account and make fraudulent transactions using their saved payment information.
• Phishing and spoofing: Fraudsters send deceptive emails or create fake websites that mimic legitimate businesses to trick customers into revealing their personal and financial information.
• Account creation fraud: Fraudsters create multiple fake accounts to exploit introductory offers, discounts, or referral programs, leading to financial losses for the merchant.
• Card not present (CNP) fraud: This type of fraud occurs when a fraudster uses stolen credit card information to make purchases online, where the physical card is not present.
• Card testing: Fraudsters test cards by making small purchases with multiple stolen credit cards to test the validity of the cards.
• Card hopping: Fraudsters card hop by making larger purchases with stolen credit cards that have been validated through card testing.

Signals to surface to prevent e-commerce fraud

The first step toward preventing e-commerce fraud is detecting unusual behavior. Here are some of the red flags for e-commerce fraud:

• Higher order volumes: A sudden surge in order volumes, especially for high-value products, may be a sign of fraudulent activity.
• Low-value orders: Fraudsters may place multiple small orders to test stolen credit card information before making larger purchases.
• Different credit cards: If multiple orders are placed using different credit cards but under the same customer account, it could indicate fraudulent behavior.
• Repeated declined transactions: Frequent declined transactions from the same customer could suggest that stolen credit card details are being used.
• Unusual IP locations: Orders originating from IP addresses located in different countries or known high-risk regions may raise suspicions.
• Different billing and shipping addresses: Inconsistent billing and shipping addresses, particularly when combined with other red flags, may indicate fraudulent activity.
• PO box shipping addresses: Orders using PO box addresses as the shipping destination may be an attempt to avoid traceability and detection.

How to prevent e-commerce fraud: Expert tips and tactics

There are many strategies and tactics for preventing e-commerce fraud, including technical controls and best practices. Some of the most effective tactics for preventing e-commerce fraud include:

• Implement machine learning tools to automate fraud detection: Machine learning algorithms can analyze patterns and detect anomalies in customer behavior to identify potential fraud.
• Link fraud signals from a data network that’s larger than your own: Collaborate with fraud prevention networks or organizations that share information on fraudulent activities to leverage a broader range of data for fraud detection.
• Implement risk-based or step-up authentication: Utilize adaptive authentication techniques that prompt additional verification measures, such as two-factor authentication, for higher-risk transactions.
• Implement card security code requirements: Require customers to enter the CVV or CVC code on the back of their credit cards to verify their ownership during transactions.
• Invest in Address Verification Services (AVS): AVS compares the billing address provided by the customer with the address on file with the credit card issuer to identify potential discrepancies.
• Partner with a reliable third-party payment processor: Choose a reputable payment processor that offers robust fraud prevention measures and has a proven track record in security.
• Follow PCI standards: Ensure your business is compliant with Payment Card Industry Data Security Standard (PCI DSS) requirements to protect cardholder data and prevent security breaches.
• Train customer service representatives on fraud: Educate your customer service team on common fraud indicators and techniques to enhance their ability to identify and report suspicious activities.
• Keep fraud prevention software updated: Regularly update your fraud prevention tools and software to stay ahead of evolving fraud tactics and leverage the latest security measures.
• Use Hypertext Transfer Protocol Secure (HTTPS): Implement secure communication protocols, such as HTTPS, to encrypt data transmission between your website and customers, protecting sensitive information.
• Avoid collecting too much sensitive customer data: Minimize the collection and storage of sensitive customer data, such as credit card information, to reduce the risk of data breaches.

E-commerce fraud is a significant challenge for online businesses, but by implementing effective fraud prevention measures, you can protect your business and provide a secure shopping experience for your customers. 

Be vigilant for red flags indicating fraudulent activities, leverage advanced technologies like machine learning for fraud detection, and follow best practices such as secure communication protocols and compliant data handling. By staying proactive and informed, you can minimize the risk of e-commerce fraud and safeguard your business’s success.

Take Sift’s Digital Trust & Safety Assessment for custom recommendations on your fraud operations from our team of in-house experts.