The Ultimate Guide to Ecommerce Fraud Protection: Safeguarding Your Business

The online world offers incredible opportunities for businesses to connect with a global customer base. But, with this expansion comes the risk of ecommerce fraud protection, a challenge that online stores must overcome to succeed.

Ecommerce fraud constantly evolves as fraudsters devise creative methods to exploit vulnerabilities. This means that ecommerce fraud protection isn’t a one-time fix but an ongoing affirmation to stay vigilant, adapt, and ahead of these threats.

Understanding the various types of threats and adopting robust ecommerce fraud protection strategies is critical. Failure to do so can lead to significant financial losses, damage your business’s reputation, and result in lost customer trust, which can hinder your business’s long-term health and growth.

The Growing Threat of Ecommerce Fraud

As more consumers embrace the convenience of online shopping, ecommerce fraud is becoming more common. Today, about 20% of all retail transactions happen online. The ecommerce industry is expected to grow to over \$8 trillion in the next few years. This increase in digital transactions provides more opportunities for fraudsters.

Just how big is the ecommerce fraud problem? Global ecommerce sales are predicted to hit $6.3 trillion in 2024. This creates ample opportunities for scammers to steal customer data and commit fraud. In 2023 alone, businesses in the US reported a shocking \$38 billion in ecommerce losses due to online payment fraud. This number is expected to hit a staggering $91 billion by 2028.

Types of Ecommerce Fraud

Many types of ecommerce fraud target online businesses. Recognizing these different types is the first step to combating them and strengthening your security posture. Here’s a breakdown of some of the most common threats:

1. Payment Fraud

Payment fraud occurs when someone makes unauthorized purchases using stolen credit card information. This type of fraud is common among online stores, but an MRC report shows it also impacts other businesses. Between 2022 and 2023, merchants will be charged 2.9% of their global revenue.

2. Chargeback Fraud

Also known as “friendly fraud,” chargeback fraud happens when a legitimate customer purchases and then fraudulently requests a chargeback from their bank. They might claim they didn’t receive the product or that the transaction was unauthorized. Even though they received the goods, this deceitful practice can be costly for businesses.

To prevent this, make sure you get a high-risk merchant account for secure online transactions processing.

Chargeback fraud is common among merchants, with some 62% reporting increased friendly fraud since last year. This staggering increase reveals the escalating boldness of fraudsters. About 9 in 10 fraudsters submit convincing evidence to resolve disputes in their favor, adding to the challenge.

3. Refund Fraud

Refund fraud is a close cousin to chargeback fraud. However, customers can contact the merchant directly instead of going through their bank. They may claim a refund for products they actually received or services they used.

4. Return Fraud 

Return fraud involves customers abusing a store’s return policies. They might return already used items, swap purchased goods with different or damaged ones, or claim an item wasn’t delivered. The National Retail Federation found that retailers lost $13.70 for every $100 in returned merchandise in 2023.

Shockingly, online merchants reported a 25% to 30% increase in refund abuse in 2023 alone. This makes it one of the fastest-growing online fraud methods.

5. Account Takeover (ATO) Fraud

With ATO fraud, fraudsters gain unauthorized access to a customer’s account using stolen login credentials. They use the compromised account to make unauthorized purchases. A staggering 83% of surveyed brands reported a surge in account takeover fraud just last year.

These scammers often target customer accounts that use weak passwords. Therefore, educating customers about choosing strong, unique passwords for their accounts is a vital part of ecommerce fraud protection.

6. Loyalty Fraud

In loyalty fraud, bad actors target reward programs. The goal is to accumulate points, miles, or discounts. They then use or sell them for profit. This form of fraud directly impacts a business’s bottom line and can disrupt customer loyalty initiatives.

Sadly, loyalty fraud affects 22% of global retailers. The multi-channel selling environment is especially vulnerable. This is a situation encountered by about 17% of businesses navigating that sphere.

7. Synthetic Identity Theft

In this highly sophisticated attack, criminals create new identities by combining real and fake customer information to open fraudulent accounts. Ecommerce fraud protection efforts must include verifying customer identity in real time to prevent this.

According to the Federal Trade Commission, this method accounted for a whopping 80% of all identity fraud. This alarming rate translates to about $6 billion in losses for US lenders annually. Incorporating AI-powered identity verification systems as part of an effective ecommerce fraud protection approach is necessary to combat this threat.

8. Promo Abuse Fraud

Promo abuse occurs when fraudsters exploit promotions and discounts. They do this by creating multiple fake accounts, using stolen credit card information, or employing bots. The goal is to take unfair advantage of special offers. This is an alarming development since 49% of ecommerce businesses have experienced an increase in promo abuse fraud since 2020.

The Cost of Ecommerce Fraud

Fraud, in all its forms, has serious financial repercussions for online businesses. In total, eCommerce companies lose $48 billion to fraud each year. Additionally, about 50% of US eCommerce merchants have identified payment fraud as their biggest fraud-related concern.

These figures represent more than just monetary losses; they also reflect a loss of potential revenue. Additionally, fraud can damage a brand’s reputation and erode customer trust. You can mitigate the financial threat of ecommerce fraud by investing in fraud protection tools.

Effective Ecommerce Fraud Protection Strategies for Online Businesses

Implementing effective ecommerce fraud protection strategies and choosing from our list of the best ecommerce business insurance isn’t optional; it’s crucial. Proactive measures protect your business and your customer’s hard-earned money. This helps nurture trust and promotes long-term success for everyone involved.

Here are some powerful ecommerce fraud protection measures your business can adopt:

1. Employ Robust Password Policies

This is a simple, but often overlooked strategy. Enforce strong and unique passwords for both you and your customers. Educate them about creating strong passwords. Also, encourage the use of password managers to improve their security.

2. Use Two-Factor Authentication

Add an extra layer of security with 2FA. This can involve requiring customers to enter a one-time code sent to their phone in addition to their passwords during login. This makes it much harder for fraudsters to access accounts, even if they have login details. 2FA is quickly becoming the gold standard in ecommerce fraud protection.

3. Verify Address Information with AVS

The AVS system verifies billing addresses given by customers. It compares it to the address on file at their issuing banks. Any discrepancies should raise red flags, allowing you to investigate further. You can also halt the transaction to prevent fraudulent transactions. AVS is a powerful tool in the ecommerce fraud protection arsenal.

4. Scrutinize Transaction Details

Pay close attention to any inconsistencies in transaction details. This could be mismatched billing and shipping addresses, orders exceeding a customer’s usual spending habits, or numerous transactions from the same device. Flagging unusual transactions provides another layer of protection. Note that not all discrepancies signify fraudulent activities.

Ben Hyman, CEO and co-founder of rug brand Revival, also recommends looking out for low-value orders, especially those clustered around the $1 mark. He states that fraudsters often make small purchases using stolen cards to test if the cards are active before attempting larger purchases.

5. Monitor Device Reputation

This method assigns risk scores to devices trying to access your site. It does this by tracking device attributes and online behavior. This is particularly helpful in an era where account takeovers are increasingly common. As such, this is another crucial ecommerce fraud protection layer.

6. Partner with Experienced Fraud Prevention Solution Providers

Implementing sophisticated fraud prevention systems requires technical expertise and time. Outsourcing these services to experienced providers can simplify the process.

The ecommerce fraud detection market is growing rapidly. It will be worth a whopping $84.83 billion by 2026. This emphasizes the importance of ecommerce fraud protection. Notably, American companies are proactive in this area. They dedicate about 10% of their annual ecommerce revenue towards combatting payment fraud.

7. Adopt Robust Shipping Practices

Delayed deliveries, unclear tracking details, or issues with third-party logistics providers can increase your vulnerability to fraud, especially return fraud. Secure shipping practices help to mitigate this. This involves working with established providers with transparent tracking systems and prompt delivery.

This minimizes customer frustration, builds trust, and deters opportunistic fraudsters.

Implementing efficient shipping strategies is crucial considering that online retailers face massive losses from return fraud, amounting to $101 billion. One factor largely responsible for these losses is inefficient shipping practices. Zarina Bahadur, founder of 123 Baby Box, points out how common merchant errors can lead to fraudulent activities. For instance, unclear billing descriptions or complex and confusing return policies frustrate legitimate customers, pushing them towards questionable activities.

8. Leverage Identity Verification Solutions

Identity verification involves verifying customer identities in real-time. This is particularly important for new accounts. This process utilizes technologies like database checks, document verification, and biometric authentication. These are crucial layers of ecommerce fraud protection against synthetic identity theft, making them increasingly important in online businesses.

About 50% of merchants already incorporate these identity verification techniques in different capacities. They include approaches such as document verification, leveraging biometric identification like fingerprints, or implementing two-factor authentication (2FA).

9. Utilize Blocklists Effectively

Maintain and use internal blocklists. These lists prevent known fraudsters from making future transactions through your website. You can also ban suspicious email addresses, phone numbers, or payment details associated with previous fraud attempts. This reinforces your ecommerce fraud protection system.

This straightforward ecommerce fraud protection measure is used by 32% of merchants. By implementing blocklists, businesses can prevent repeat offenders from exploiting their systems. In turn, they can minimize fraudulent activities.

10. Consider Chargeback Protection Services

Services like Shopify Protect provide an additional line of defense for your online store. This type of safeguard protects you against fraudulent chargebacks. This is especially true for friendly fraud, which is often tricky to navigate.

Notably, friendly fraud cases alone can cost retailers between $20 to $100 each. This underlines the financial prudence of seeking specialized solutions in ecommerce fraud protection.

Ecommerce Fraud Prevention in Action: Real-World Examples

The devastating effects of ecommerce fraud on your business cannot be overstated. Between 2022 and 2023, instances of existing account fraud, also called account takeover (ATO), increased by over 12%. This means cases increased from 39,407 to 44,855. These figures show that online security is more crucial than ever before. As such, proactive ecommerce fraud protection measures are non-negotiable.

Let’s examine real-world situations illustrating how effectively implementing ecommerce fraud protection strategies protects you and your customers:

1. Robust Identity Verification Curtails Account Takeovers

Imagine a customer named John tries to buy from your online store. During checkout, your fraud prevention system flags his transaction as high-risk. This could be because it identifies his IP address as one frequently associated with fraudulent activities. It may also detect that he is using a different device than usual.

Instead of declining his transaction outright, your system uses a layered verification process. It requests additional identification documents to verify John’s identity. The goal is to ensure he is the one making the purchase. Such stringent ecommerce fraud protection measures are critical.

It is estimated that ecommerce will lose about $48 billion to online payment scams. Reports project that account takeover fraud is the driving force behind projected losses of over $343 billion in the next five years. These are not just statistics, they show how important robust ecommerce fraud protection is.

2. Early Fraud Detection Protects Your Business and Boosts Customer Satisfaction

Now, consider Jane’s experience at your competitor’s online store. She’s a victim of identity theft. Fraudsters place several high-value orders at your competitor’s online store using Jane’s stolen card details. Unfortunately, the competitor hasn’t invested in adequate ecommerce fraud protection measures.

The store doesn’t have a robust system to flag suspicious transactions, so the fraudulent orders are processed. They unwittingly ship goods to fraudsters. Jane is understandably frustrated when she later finds unauthorized charges. This situation costs your competitor a customer and might even lead to legal issues. This highlights the importance of a proactive ecommerce fraud protection system.