As ecommerce becomes mainstream for shoppers of every generation, fraudsters are honing their skills and developing tactics to seize the moment. In fact, the problem is expected to worsen over time. Juniper Research anticipates that businesses will lose more than US$362 billion globally to ecommerce fraud between 2023 and 2028.
So, what can you do to avoid being caught in that net? For starters, your fraud prevention team needs to know what they’re dealing with – fraudsters use a combination of old and new techniques. That means, at a minimum, you should have a strategy to address the four most common types of ecommerce fraud:
Let’s look at each one.
CNP fraud happens when a criminal uses stolen credit card information to make purchases. Most often, fraudsters get this stolen information on the dark web and through phishing scams.
Today’s fraudsters are so sneaky and resourceful, they can convince innocent consumers to hand over their financial information without realizing it. Here’s how it happens:
Every day, more than 450,000 new malware programs are identified, which puts more consumers at risk. Using this data, fraudsters can perpetrate multiple schemes and scams.
ATO fraud happens when that data stolen through a phishing scam or bought on the dark web is used to take over a victim’s account. Usually, the fraudster assumes control over checking and savings accounts, brokerage, and even loyalty accounts.
ATO fraud is a huge problem, accounting for every fifth login attempt in the United States. Not only is this the stuff of nightmares for consumers, but ATO fraud can also lead to high chargeback rates for businesses. Among the most common business targets are subscription services and recurring payments. Once businesses set up the initial payments, they may pay less attention to changes over time. This is where fraudsters can easily attack.
Another tactic fraudsters use is one that makes customers unwitting accessories to crime.
Triangulation fraud happens when innocent customers make purchases on a third-party marketplace, but the merchandise they receive is actually bought on another website using stolen payment information.
How it works:
BOPIS fraud is somewhat of a hybrid between ATO and triangulation fraud.
Here’s how it works:
Because there’s no shipping address to confirm, this type of fraud isn’t easily detected until the business is alerted about a potential chargeback.
This type of fraud has increased up to 250% since the beginning of the pandemic, forcing businesses to distinguish between suspicious and legitimate orders.
As we move into the era of artificial intelligence, fraudsters are taking tactics to the next level.
Fraud has transformed into a profit model for criminals who use bots and brand impersonation for attacks. They can simply rent bot networks from fraud "service providers" to launch large-scale campaigns that phish victims and attack websites.
FaaS is inexpensive, too — each bot call can cost as little as 15 cents.
While chargebacks were initially developed by card issuers to protect consumers, the chargeback process has become so easy that fraudsters and consumers alike game the system and knowingly commit chargeback fraud.
In these cases, customers intentionally file fraudulent chargebacks with the goal of keeping the product or service they ordered while also receiving a refund of the full transaction amount.
Chargeback fraud can take place in a variety of ways, including when the customer:
It’s become such a pervasive problem that the FBI currently views it as the third-largest problem in ecommerce.
Chargeback fraud takes a big bite out of small- and medium-sized ecommerce businesses’ bottom line. Businesses lose around $125 billion annually in time, fees, physical goods and shipping costs. That doesn’t include the damage done to the company’s relationship with payment processors if their chargeback rate is too high. Once a chargeback rate is nearly at or over the 1% threshold, businesses are usually subject to management programs that impose high fees and the potential of becoming “high risk.”
Despite being labeled as fraud, customers who misuse the chargeback process aren’t always malicious. Instead, think of friendly fraud as “accidental fraud” that can occur when a customer doesn’t keep meticulous records of their credit card purchases or simply doesn’t recognize a purchase on their credit card statement that they did in fact make.
Friendly fraud may also result from misunderstandings like:
The important thing to remember with friendly fraud is that these customers aren’t trying to be deceitful. Still, the impact of friendly fraud is significant:
Friendly fraud chargebacks have increased by 15%-20% across almost all types of businesses. This is partly because card-issuing banks have made it very easy for cardholders to make their disputes and certain social media influencers have highlighted the advantages of chargebacks.
– Chris Ballenger, VP ChargebackOps
Policy abuse is a category of fraudulent activities that take advantage of a store’s policies for personal gain. Each year, U.S. retailers lose about $89 billion to policy abuse. It’s predominantly an issue for enterprise retailers that process thousands of transactions daily and may not track if customers are abusing company policies.
Unlike ecommerce fraud, where a fraudster steals from a company using an innocent customer’s payment information, policy abuse involves theft solely from the company. As customers become more savvy shoppers, some take advantage of companies and exploit them for free merchandise and more benefits. The incidence of policy abuse has increased 75% over the past several years, with four main types.
Return or refund abuse happens when criminals take advantage of a company’s return policy, costing U.S. retailers more than $12 billion each year. This type of scheme isn’t easy to perpetrate. Finding the loopholes in a business’s policies takes time and planning, and it’s often the sign of a crime ring or FaaS.
One of the most common types of return or refund abuse is wardrobing, where high-end fashion and luxury goods are purchased with the intent of returning them after a singular use.
Other types of return and refund fraud include:
Loyalty abuse typically happens in one of a few ways:
Nearly 49% of ecommerce businesses have seen an increase in coupon abuse, which happens when a criminal creates multiple accounts so they can take advantage of a promotion more than once. Most often, coupon abuse is the work of large-scale crime rings and mass-registered fake accounts.
Gift card fraud can happen in a few ways.
Regardless of the fraud type, your best bet is to avoid it altogether.
To prevent fraud, businesses need to take certain steps before and after a purchase has been made:
It’s also important to implement a comprehensive fraud prevention solution.
Even businesses that implement the aforementioned preventive measures may still find themselves the victim of fraud. Some businesses may then try to implement simple fraud rules and basic fraud filters in an effort to prevent these transactions, but they just aren’t effective. Instead, they must implement a comprehensive fraud prevention solution that can protect them against the rising threat of CNP and friendly fraud.
ClearSale’s hybrid solution starts with a highly effective automatic approval algorithm that “learns” as more transactions are processed. Globally experienced fraud analysts assess the small percentage of orders flagged for review with the goal of locating as many additional approvals as possible. Fraudulent transactions are identified and declined.
Highly trained human analysts along with advanced machine learning address the friendly fraud threat in real time. Not only can we help protect your business over the long term, but we also guarantee transactions 100% against fraudulent chargebacks.
By applying this global lens and a large database of orders across industries, we’re able to quickly recognize fraud trends and help clients eliminate fraud threats and prevent chargebacks — all while approving more orders, faster.
Through our partnership with enterprise chargeback management service provider ChargebackOps, ClearSale offers full-scale chargeback management:
Leveraging a combination of artificial intelligence and expertise, we help prevent cyberattacks and mitigate their effects, quickly removing threats from various sources.
To find out more about how you can prevent your company and your customers from being the victims of fraud, contact a ClearSale analyst today.