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 ecommerce 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 ecommerce fraud?
  
• Which types of businesses should be concerned about ecommerce fraud?
  
• Types of ecommerce fraud
  
• Ecommerce fraud trends and future predictions
  
• Ecommerce fraud prevention and detection
  

What is ecommerce fraud?

Ecommerce 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 unauthorized access to sensitive personal or financial information.

Ecommerce fraud can be very damaging to businesses and their customers, leading to unauthorized 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 ecommerce fraud?

While any business operating online can potentially be a target of ecommerce 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 unauthorized 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 unauthorized 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, ecommerce fraud will occur in more places.

Types of ecommerce fraud

Ecommerce 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 ecommerce fraud.

Here is a quick overview of several types of ecommerce 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 unauthorized purchases or open accounts.

• Credit card fraud
  Credit card fraud involves the unauthorized 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 they didn’t receive the product or service—or that it was unauthorized—in order to receive a refund from their bank.

• Account takeover fraud
  Account takeover fraud happens when an unauthorized party gains unauthorized access to a user’s account—by hacking, phishing, or using stolen credentials—and then makes unauthorized 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 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 program, where fraudulent actors generate fake traffic, clicks, or sales to receive illegitimate commissions.

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

• Drop-shipping fraud
  With drop-shipping fraud, a fraudulent actor poses as a legitimate supplier, but never actually ships the products they’ve sold—leaving the retailer to deal with angry customers and financial losses.

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

Ecommerce fraud trends and future predictions

A proactive approach to preventing and combating ecommerce fraud requires understanding the trends and systemic conditions that influence how ecommerce 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 ecommerce 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 analyze 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 unauthorized 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 ecommerce 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 behavioral analytics
  Biometric authentication, such as fingerprint or facial recognition, and behavioral 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 ecommerce fraud will continue to evolve as both businesses and fraudulent actors adapt to new technologies, customer behaviors, and market conditions. It’s important for businesses to stay informed about emerging trends and invest in robust fraud prevention and detection strategies to protect themselves and their customers.

Ecommerce fraud prevention and detection

Ecommerce fraud prevention and detection involve a combination of strategies and tactics to minimize 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 businesses should consider:

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

• Implement strong authentication
  Require customers to use strong, unique passwords and consider implementing multifactor 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 behavior
  Keep an eye on unusual transaction patterns, such as multiple orders from the same IP address or unusually high-value orders. Analyzing user behavior 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 ecommerce 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 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 authorized personnel only.

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

• Communicate with competitors and industry organizations
  While other businesses in your industry and key markets might be your competition, they are also your greatest resource for learning about ecommerce 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 antifraud initiatives and organizations to stay informed about emerging threats and prevention strategies.

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