As businesses of all sizes increasingly rely on online sales to drive growth and reach new markets, they must also confront payment fraud. Fraudulent actors are becoming more sophisticated, requiring online retailers to adapt to protect not only their bottom line but also the trust of their customers.

This article explores why it’s important for businesses to understand and address e-commerce fraud, highlighting the latest trends, strategies, and best practices for ensuring a secure shopping experience for customers on every channel.

What's in this article?

• What is e-commerce fraud?
  
• Which types of businesses should be concerned about e-commerce fraud?
  
• Types of e-commerce fraud
  
• E-commerce fraud trends and future predictions
  
• E-commerce fraud prevention and detection
  

What is e-commerce fraud?

E-commerce fraud refers to various criminal activities that occur within the online shopping and transaction environment. It involves malicious actors exploiting vulnerabilities in digital commerce systems or manipulating businesses and customers to gain unauthorised access to sensitive personal or financial information.

E-commerce fraud can be very damaging to businesses and their customers, leading to unauthorised transactions, financial losses, and damage to the reputation of affected businesses. It’s a significant concern for any entity that operates online, as it can negatively impact customer trust, security, operating costs, and the overall viability of the business – in addition to damaging the customer experience.

Which types of businesses should be concerned about e-commerce fraud?

While any business operating online can potentially be a target of e-commerce fraud, certain types of businesses may be more susceptible to or need to be more vigilant about it. These include:

• Online retailers
  Businesses that sell products or services directly to customers through a website or online platform are at high risk due to the volume of transactions and the collection of sensitive customer data.

• Payment processors
  Companies that handle payment transactions between buyers and sellers, such as credit card processing services, need to be concerned about fraud since they are responsible for ensuring the security and accuracy of transactions.

• Digital content providers
  Businesses that offer digital products, like streaming services, e-books, and software, are also targets, since fraudulent actors may try to gain unauthorised access to content or distribute it illegally.

• Subscription-based services
  Businesses that operate on a subscription model, such as online courses, software-as-a-service (SaaS) companies, or membership sites, should be concerned about fraudulent sign-ups or unauthorised access to their services.

• Marketplaces and auction sites
  Online platforms that facilitate transactions between multiple sellers and buyers need to be concerned about fraud involving fake listings, counterfeit products, or fraudulent transactions.

• Travel and event booking sites
  Businesses that offer bookings for flights, hotels, or events have to be watchful of fraudulent actors making false bookings or using stolen credit card information.

This isn’t an exhaustive list of potentially vulnerable businesses. As more businesses across sectors start accepting payments online, e-commerce fraud will occur in more places.

Types of e-commerce fraud

E-commerce fraud isn’t a uniform threat that strikes businesses and customers the same way each time. Fraudulent actors use complex, ever-evolving tactics to conduct e-commerce fraud.

Here is a quick overview of several types of e-commerce fraud that businesses and customers need to be aware of:

• Identity theft
  Identity theft occurs when a fraudulent actor uses someone else’s personal information – such as their name, address, or credit card details – to make unauthorised purchases or open accounts.

• Credit card fraud
  Credit card fraud involves the unauthorised use of a credit or debit card, or the card’s information, to make fraudulent transactions. This can happen when card details are stolen through hacking, phishing, or skimming.

• Chargeback fraud
  Also called "friendly fraud", chargeback fraud occurs when a customer makes a purchase and then falsely claims that they didn’t receive the product or service – or that it was unauthorised – in order to receive a refund from their bank.

• Account takeover fraud
  Account takeover fraud happens when an unauthorised party gains unauthorised access to a user’s account – by hacking, phishing, or using stolen credentials – and then makes unauthorised purchases or changes.

• Phishing and social engineering
  Phishing and social engineering tactics involve the use of deceptive emails, messages, or websites to trick users into providing sensitive information or credentials, which can then be used to commit fraud.

• Refund fraud
  In the scenario of refund fraud, a fraudulent actor poses as a customer and requests a refund for a product or service that they never purchased, often by providing fake order details or using stolen account information.

• Affiliate fraud
  Affiliate fraud involves the abuse of an affiliate marketing programme, where fraudulent actors generate fake traffic, clicks, or sales to receive illegitimate commissions.

• Counterfeit or fake products
  Counterfeit products are imitation or unauthorised products that are falsely represented as authentic.

• Dropshipping fraud
  With dropshipping fraud, a fraudulent actor poses as a legitimate supplier, but never actually sends the products that they’ve sold. This leaves the retailer having to deal with angry customers and financial losses.

E-commerce fraud is perpetually changing to respond to technological shifts in e-commerce. There is always the risk of new types of e-commerce fraud emerging, so it’s necessary to implement fraud prevention tools and strategies that can respond to evolving fraud tactics.

E-commerce fraud trends and future predictions

A proactive approach to preventing and combatting e-commerce fraud requires an understanding of the trends and systemic conditions that influence how e-commerce fraud is perpetrated, and where current vulnerabilities can be found for most businesses. It’s necessary to stay informed on the latest developments.

Here are some of the current trends shaping how fraudulent actors are perpetrating e-commerce fraud and how businesses are addressing the threat:

• Growing sophistication of attacks
  Fraudulent actors are constantly developing new tactics and refining their methods, making it increasingly difficult for businesses and customers to detect and prevent fraudulent activities.

• Rise in mobile commerce fraud
  With the increasing popularity of mobile shopping, fraudulent actors are shifting their focus to mobile platforms. Businesses need to adapt their fraud prevention measures to address the unique challenges associated with mobile commerce.

• Increased use of artificial intelligence (AI) and machine learning
  Businesses are increasingly using AI and machine-learning tools to analyse vast amounts of data and identify fraud patterns more efficiently. But fraudulent actors are also using these technologies to create more precise attacks.

• Growth in account takeover fraud
  With more data breaches and personal information available on the dark web, account takeover fraud is expected to continue rising. Criminals use this information to access and compromise online accounts, leading to unauthorised transactions and other malicious activities.

• Increased focus on data security and privacy regulations
  As customer awareness of data privacy and security grows, businesses will need to comply with stricter regulations and invest in more robust security measures to protect customer data and prevent fraud.

• Collaboration and information sharing
  Businesses, financial institutions, and law enforcement agencies will increasingly collaborate and share information to combat e-commerce fraud more effectively. This may include establishing dedicated task forces or industry-wide initiatives to address the evolving threat landscape.

• Growing role of biometrics and behavioural analytics
  Biometric authentication, such as fingerprint or facial recognition, and behavioural analytics that assess user interactions with devices and platforms, will play a more significant role in fraud detection and prevention efforts.

These trends and projections indicate that e-commerce fraud will continue to evolve as both businesses and fraudulent actors adapt to new technologies, customer behaviours, and market conditions. It’s important for businesses to stay informed about emerging trends. They should also invest in robust fraud prevention and detection strategies to protect themselves and their customers.

E-commerce fraud prevention and detection

E-commerce fraud prevention and detection involve a combination of strategies and tactics to minimise the risk of fraudulent activities affecting online businesses and their customers.

In the meantime, here’s a quick overview of some key strategies and tactics that businesses should consider:

• Use secure payment gateways
  Choose reliable and secure payment gateways that offer fraud detection and prevention tools, such as encryption and tokenisation, to protect sensitive customer data during transactions.

• Implement strong authentication
  Require customers to use strong, unique passwords and consider implementing multi-factor authentication (MFA) to enhance account security. This may involve sending a one-time password (OTP) via email or SMS, or using an authentication app.

• Monitor transactions and user behaviour
  Keep an eye on unusual transaction patterns, such as multiple orders from the same IP address or unusually high-value orders. Analysing user behaviour can also help detect suspicious activities, like rapid account creation or multiple failed login attempts.

• Set up fraud detection rules and filters
  Establish rules and filters to flag or block suspicious transactions, such as transactions from high-risk locations, orders with mismatched billing and shipping addresses, or transactions that exceed certain thresholds.

• Use address and card verification systems
  Implement address verification service (AVS) and card verification value (CVV) checks to verify that the billing address and card details provided by the customer match the information on file with the card issuer.

• Keep software and systems up to date
  Regularly update your e-commerce platform, plugins, and security software to protect against known vulnerabilities and stay ahead of emerging threats.

• Train employees and raise awareness
  Educate your team on common fraud tactics, the importance of data security, and the steps that they should take to detect and prevent fraud.

• Encrypt and protect customer data
  Use encryption and other security measures to protect sensitive customer information stored in your database, and limit access to this data to authorised personnel only.

• Monitor chargebacks
  Track chargeback rates and analyse the reasons behind them to identify potential fraud patterns or areas where your business can improve.

• Communicate with competitors and industry organisations
  While other businesses in your industry and key markets might be your competition, they are also your greatest resource for learning about e-commerce fraud vulnerabilities. Create open channels of communication to share information about fraud trends and best practices with other businesses in your industry, and participate in anti-fraud initiatives and organisations to stay informed about emerging threats and prevention strategies.

To find out about how Stripe works with businesses to prevent e-commerce fraud and detect and respond to it when it occurs, learn more here.