Protecting Your eCommerce Business from Fraud: Types, Risks, and Best Practices
Jeffrey Edwards
|Cyber Risks & Threats | July 14, 2024
eCommerce has revolutionized the way we shop, with businesses and customers now interacting more easily and conveniently than ever before. At any time, anywhere, customers can purchase goods and services. Businesses gain access to a significantly larger audience, and customers gain access to products and brands that may not be available locally. Even better, online shopping can be personalized to a user based on their browsing, purchase history, and preferences.
However, there is a downside to this increased convenience. The ability to store both financial information and personal information on eCommerce platforms is appealing not only to businesses and consumers but also to cybercriminals, who target both customers and retailers alike with various forms of eCommerce fraud.
eCommerce fraud encompasses a variety of fraudulent activities, including credit card fraud, identity theft, and inventory manipulation. Sometimes, eCommerce fraud can be as simple as redirecting a package to a fraudster’s address; other times it can be customer account takeover through compromised credentials. In any case, persistent fraud can result in significant losses for retailers. Federal Trade Commission data shows that consumers reported losing more than $10 billion to fraud in 2023.
In this guide, we will explain and explore the risks of eCommerce fraud, provide practical tips on detecting and handling it, and explain how to use software to prevent major financial losses.
16% of eCommerce traffic is fake, download the State of Fake Traffic 2024 report to learn more.
Types of eCommerce Fraud: An Overview
eCommerce fraud has become increasingly sophisticated, with cybercriminals employing a variety of techniques to exploit online businesses. Understanding the different types of eCommerce fraud is crucial for businesses to effectively protect themselves and maintain a secure and trustworthy platform.
Below are some of the more common techniques that fraudsters use when committing eCommerce fraud. These attacks may be used as standalone techniques or in combination as part of a broader attack campaign.
Fake Account Creation Fraud
In fake account creation fraud, fraudsters generate numerous accounts on an eCommerce platform using fake emails or false information. These accounts are typically created using bots at scale, allowing fraudsters to mask their identity and avoid detection. The intent behind fake account creation varies—some may use these accounts to take advantage of introductory offers, while others may employ them in more malicious schemes like money laundering, phishing attacks, or abusing the Commerce platform with fake reviews or spam comments.
These fraudulent accounts can have significant negative impacts on a business. They distort customer data, leading to inaccurate insights and poor decision-making in marketing strategies. When used for fraudulent transactions or other illicit activities, these accounts contribute to direct financial losses. Additionally, the presence of large numbers of fake accounts can strain a system’s infrastructure, increasing operational costs and reducing efficiency over time.
Card Testing Fraud
In card testing attacks, fraudsters use credit cards to make multiple small purchases on an eCommerce website. These credit cards are either fraudulent credit cards or credit card information that is stolen via scams. Fraudsters use card testing fraud to see which stolen credit cards are active and which cards have the highest limit. On the backend of an eCommerce site, these purchases can go undetected, as they often are not flagged as fraudulent until several large purchases have already been made.
While the risk of not receiving a valid form of payment is an immediate concern, card testing fraud has additional consequences. Consider the cost that goes into each purchase on an eCommerce site: packaging, shipping, even the product itself –these can all, unfortunately, become a loss for your business through card testing fraud. And after a number of fraudulent purchases are made, this loss can become substantial. In addition, if a business is the victim of credit card fraud, reactionary costs may incur to investigate the fraudulent activity.
Chargeback Fraud
Chargeback fraud, sometimes known as “friendly fraud,” occurs when a customer disputes a legitimate charge on their credit card statement in order to receive a refund. Fraudulent chargebacks usually involve claims that the product was not as described or that it was never received. Chargeback fraud can also be used by organized groups of scammers, who use fake accounts and stolen credit cards to make purchases and later dispute them.
For businesses, chargeback fraud can be costly. Just like card testing fraud, the costs associated with a sale (shipping, packaging, actual product, etc.) become a loss when a chargeback succeeds. The credit card company may also charge businesses for each chargeback they receive, which can add up over time.
Account Takeover Fraud
Account takeover (ATO) fraud occurs when a fraudster gains unauthorized access to a legitimate customer’s eCommerce account through previous data breaches, phishing, social engineering, or by exploiting a weakness in the eCommerce website’s security. As with most eCommerce sites, personal information, financial information, and purchase history are commonly accessible on a customer’s account. Once an account is compromised, the fraudster is not only able to make unauthorized purchases on the account holder’s behalf, but they also may extract that account holder’s personal and financial information.
On a larger scale, account takeovers are carried out by bots. For example, “credential stuffing” uses combinations of email addresses and passwords on eCommerce sites, testing login credentials from previous data breaches or phishing attempts. This is just one of many bot attacks that scammers use to carry out account takeovers.
Inventory Hoarding Fraud
In inventory hoarding fraud, fraudsters manipulate eCommerce platforms by placing large quantities of items in their shopping carts without completing the purchase. This tactic is often automated through the use of bots, allowing fraudsters to tie up significant portions of a website’s inventory. The goal may be to create artificial scarcity, preventing legitimate customers from purchasing the hoarded items. This can lead to frustrated customers and lost sales opportunities for the business, and it may also be done for competitive gain by preventing a rival company from selling those products.
The effects of inventory hoarding can be particularly damaging during peak shopping periods, such as holidays or special sales events, where limited stock items are in high demand. For businesses, the immediate impact is a loss of potential revenue as genuine buyers are unable to complete their purchases.
eCommerce Fraud’s Impact on Business
A compromised eCommerce business has significant consequences. Online businesses are often discussed in terms of their financial losses, but other consequences can also be equally damaging.
The following are a few potential negative effects of an eCommerce fraud attack:
- Financial Loss: In most cases, businesses that suffer eCommerce fraud have to pay the costs associated with chargebacks, which occur when customers dispute a charge. Businesses may also have to pay for replacing stolen goods, as well as any additional shipping costs associated with the fraud. For an eCommerce business, this can lead to significant financial losses.
- Damage to reputation: When a customer’s personal information has been compromised through an eCommerce site, they are likely to lose confidence in that business. The success of a business depends on customer loyalty and trust; if those two things are broken, the business could suffer.
- Legal liabilities: In an eCommerce business, if the customer’s personal information is compromised, then that can lead to legal liabilities, and the business could be held responsible for financial damages and legal costs.
- Additional workload on customer service: In addition to consuming a business’s resources, fraud consumes a lot of its time as well. In the event of an attack, a company is forced to devote a significant amount of time and resources to responding to customer complaints, tracking packages, and dealing with chargebacks. This can take away valuable time from a customer service team, causing other customers to be underserved.
- Affecting the delivery and supply chain: Specific types of eCommerce fraud, inventory hoarding for example, can disrupt supply chain management, leading to inaccurate inventory levels, inefficient restocking, and, ultimately, increased operational costs.
- Compliance : Fraudulent eCommerce transactions may also lead to non-compliance with regulations, such as the Payment Card Industry Data Security Standard (PCI DSS) and the General Data Protection Regulation (GDPR), which may result in fines.
Best Practices for Protecting Your eCommerce Business from Fraud
Keeping your online business protected from fraud is crucial for success and longevity. By taking steps to prevent eCommerce fraud, you can help your business avoid financial loss and other risks that come along the way.
Below are a few strategies you can implement to ensure your company’s security and customer satisfaction:
- Keep your software up to date: Your website and payment gateway software should be updated regularly to ensure they are secure and have the latest features. This will prevent potential information leaks, privacy vulnerabilities, and compromised software.
- Implement a strong password policy with Multi-Factor Authentication (MFA): Mandate complex passwords and implement MFA for account logins as an additional layer of security, making it more difficult for fraudsters to gain unauthorized access to customer accounts, thus preventing brute force attacks and account takeover fraud.
- Always review suspicious behavior: Fraudulent activity can be detected early on by reviewing suspicious behavior before it results in significant financial losses. Keep an eye out for suspicious behavior, such as orders coming from high-risk countries or shipping addresses that aren’t the same as the billing addresses.
- Monitor for unusual purchase patterns: Implement monitoring systems to flag unusual purchasing behavior, such as a high volume of small transactions (indicative of card testing) or large quantities of items left in carts without purchase (suggestive of inventory hoarding). This allows you to take action before significant harm is done.
- Rate-limit high-volume transactions from the same user/IP: Rate limiting is a critical practice for protecting your eCommerce business from fraud. By capping the number of requests a user or IP address can make to your server within a specific time frame, you can prevent malicious actors from overwhelming your system with repeated actions, such as attempts to create multiple fake accounts or conduct rapid-fire card testing.
- Be PCI compliant: PCI (Payment Card Industry Data Security Standards) compliance establishes a set of security standards businesses must comply with to process, store, and transmit credit card information. Using these standards reduces the risk of fraud and protects sensitive customer information because it requires regular security assessments that help to identify and address vulnerabilities in a business’s security systems.
- Invest in a go-to-market security solution: The most comprehensive solution for eCommerce fraud prevention is a go-to-market security tool. A go-to-market security platform, like CHEQ, can provide a layer of visibility into all fraudulent activities, testing each visitor with cybersecurity challenges and helping with blocking of malicious activity.
Maintaining Customer Trust and Ensuring eCommerce Security with CHEQ
With CHEQ, businesses can proactively stop fraud at scale before it even begins. CHEQ’s unmatched accuracy in detecting bots and fake accounts used by fraudsters stems from monitoring 90,000 websites and processing 6 trillion signals daily. With over 2,000 cybersecurity challenges for suspicious traffic, CHEQ ensures that malicious activities are identified in real time. The platform provides granular data and actionable insights, enabling businesses to make faster, more informed decisions. With CHEQ, companies can focus on delivering a seamless user experience, fostering trust with customers and internal leadership, while significantly reducing business risk and maintaining robust eCommerce security.
Frequently Asked Questions
How can I tell if I am a victim of eCommerce fraud?
For a customer, unauthorized transactions on your bank statement and charges on your credit card that you don’t recognize could be signs of fraud.
For a business, eCommerce fraud could cause an unexpected high traffic volume but low conversion, unusual or large orders, orders from high-risk countries, shipping addresses that don’t match billing addresses, multiple failed login attempts from a customer, or unexpected chargebacks.
What are the most common types of eCommerce fraud, and how can I protect my business from them?
Some of the most common types of eCommerce fraud include: Fake Account Creation
-
- Fake Account Creation
- Card Testing Fraud
- Chargeback Fraud
- Account Takeover Fraud
- Inventory Hoarding
To protect your business, you should:
- Keep your software up to date
- Implement a strong password policy with Multi-Factor Authentication (MFA):
- Review suspicious behavior
- Monitor for unusual purchase patterns
- Rate-limit high-volume transactions from the same user/IP
- Be PCI compliant
- Invest in a go-to-market security solution, like CHEQ
How can I ensure that my customers’ payment information is secure on my eCommerce platform?
Secure payment gateways, PCI compliance, address verification, and CVV verification are all ways to protect your customers’ payment information.
How can I reduce the risk of chargeback fraud?
Chargeback fraud can be reduced by verifying customer information, monitoring for suspicious behavior, using fraud prevention tools, and developing a chargeback prevention plan.
What are some best practices for protecting my business from account takeover and social engineering fraud?
Account takeover and social engineering fraud can be prevented by using strong passwords, implementing two-factor authentication, monitoring suspicious login attempts, and educating employees about social engineering.
How can I maintain customer trust and ensure that my business is seen as secure and reliable by shoppers?
An up-to-date, secure website, a clear privacy policy, and responsive customer service are all essential to retaining customer trust. Fraud prevention should also be continuously taught to customers through checkout process guidelines and thorough customer service.