Safeguarding Your E-commerce Business: Key Strategies to Prevent Fraud and Protect Customer Trust

E-commerce has transformed shopping by allowing businesses and customers to connect more easily than ever. Customers can shop anytime, anywhere, while businesses reach a broader audience. Online shopping is often tailored to individual preferences, creating a more personalized experience. However, this convenience also attracts cybercriminals who exploit e-commerce platforms for various types of fraud, targeting both customers and businesses.

E-commerce fraud includes a range of malicious activities, such as credit card fraud, identity theft, and inventory manipulation. It can involve simple tactics like redirecting a package to a fraudster’s address or more sophisticated schemes like taking over a customer’s account with compromised credentials. Such fraud can cause significant losses for businesses. In 2023 alone, consumers reported more than $10 billion lost to fraud, according to the Federal Trade Commission.

This guide will cover the different types of e-commerce fraud, explain their risks, offer practical advice on detecting and managing fraud, and highlight software tools that help prevent financial losses.

Did you know? 16% of e-commerce traffic is fake. Download the State of Fake Traffic 2024 report to learn more.

Types of E-commerce Fraud: An Overview

E-commerce fraud is increasingly sophisticated, with cybercriminals using a variety of tactics to exploit online businesses. Understanding these tactics is crucial for protecting your business and maintaining a secure platform.

Here are some common techniques fraudsters use, either individually or as part of a larger scheme:

1. Fake Account Creation Fraud

Fraudsters create numerous fake accounts using false information or fake emails, often with bots, to hide their identities. These accounts can be used for many purposes, from exploiting promotional offers to more malicious activities like money laundering, phishing, or posting fake reviews.

The presence of fake accounts distorts customer data, leading to poor marketing decisions and financial losses. These accounts can also strain system infrastructure, increasing operational costs and reducing efficiency.

2. Card Testing Fraud

Card testing fraud involves fraudsters making small purchases with stolen or fake credit card details to check which cards are active and their credit limits. These small transactions often go unnoticed until larger fraudulent purchases are made.

Beyond the immediate risk of not receiving payment, businesses also face costs related to packaging, shipping, and product losses, which can quickly add up. There are also expenses for investigating fraudulent activities.

3. Chargeback Fraud

Also known as "friendly fraud," chargeback fraud occurs when a customer disputes a legitimate charge to receive a refund. Fraudsters may claim a product was not as described or never received. Organized groups might use fake accounts and stolen cards to make purchases and later dispute them.

Chargebacks can be costly for businesses, with not only lost sales and product costs but also fees from credit card companies for each dispute.

4. Account Takeover Fraud

Account takeover (ATO) fraud happens when a fraudster gains unauthorized access to a customer's account through stolen credentials, phishing, or exploiting security weaknesses. With access to personal, financial, and purchase information, the fraudster can make unauthorized purchases or steal data.

On a larger scale, ATOs often involve bots using methods like "credential stuffing," where combinations of stolen email addresses and passwords are tested against e-commerce sites.

5. Inventory Hoarding Fraud

In inventory hoarding fraud, bots are used to place large quantities of items in shopping carts without completing the purchase. This creates artificial scarcity, frustrating legitimate customers and causing lost sales opportunities. It can also prevent competitors from selling those products.

This type of fraud is especially damaging during peak shopping periods, like holidays or special sales events, where limited-stock items are in high demand.

E-commerce Fraud’s Impact on Business

E-commerce fraud has far-reaching consequences, beyond just financial losses. Here are some potential negative impacts of a fraud attack:

• Financial loss: businesses face costs from chargebacks, replacing stolen goods, and extra shipping expenses, leading to significant financial losses.
• Damage to reputation: if customer data is compromised, trust in the business is eroded, impacting customer loyalty and sales.
• Legal liabilities: breaches of personal data can result in legal action, financial damages, and high legal costs.
• Increased workload for customer service: handling fraud-related complaints, tracking packages, and managing chargebacks can overwhelm customer service teams, reducing their ability to serve other customers.
• Disruption to supply chain: fraud like inventory hoarding can disrupt supply chain management, leading to inaccuracies, inefficiencies, and increased operational costs.
• Compliance issues: fraudulent transactions can lead to non-compliance with regulations such as PCI DSS or GDPR, resulting in fines.

Best Practices for Protecting Your E-commerce Business from Fraud

To safeguard your E-commerce business from fraud, consider implementing the following strategies:

• Keep software up to date: regularly update your website and payment gateway software to ensure security and prevent vulnerabilities.
• Use strong passwords and Multi-Factor Authentication (MFA): mandate complex passwords and MFA to make unauthorized access more difficult.
• Review suspicious behavior: monitor for unusual activities like orders from high-risk countries or mismatched billing and shipping addresses.
• Monitor for unusual purchase patterns: use monitoring systems to flag suspicious behavior, such as a high volume of small transactions (card testing) or abandoned shopping carts (inventory hoarding).
• Rate-limit high-volume transactions: limit the number of transactions from a single user or IP address within a specific timeframe to prevent malicious activities.
• Ensure PCI compliance: follow PCI DSS standards to protect customer information and reduce the risk of fraud.
• Invest in a security solution: a robust security platform like Tapper provides visibility into fraudulent activities, blocks malicious traffic, and helps maintain a secure E-commerce environment.