E-Commerce Fraud Explained: Five Common Types of Online Fraud

E-Commerce provides an incredible amount of convenience for customers. These days, you can order pretty much anything online, from fresh groceries to kitchen appliances, and have it delivered within a week or less.

Unfortunately, however, online fraud is a major concern for customers and businesses alike. Customers may lose control of online accounts, credit card numbers, money, and even their identity. Companies, meanwhile, may have to absorb losses due to fraudulent purchases, with chargebacks being a particularly expensive headache.

In this article, we’ll cover the most common types of e-commerce fraud. We'll then offer suggestions for preventing, reducing, and combating fraud online. We’ll also discuss how companies can manage and dispute chargebacks when necessary.

Credit Card Fraud: Stolen Info Leads to Bad Charges

Credit card fraud is perhaps the most well-known type of online fraud. Someone can steal a person’s information, including their credit card numbers, address, CVV, and other important details. Then, the fraudster can use that information to make illicit purchases.

When the cardholder realizes that their information has been stolen, they will likely contact their issuer and deactivate their card. However, by then, the fraudster may have made several illegitimate purchases, and when detected, the bank will issue chargebacks. In this case, the company that sold the goods may have to eat the loss.

These days, many companies use fraud filters and other tools to analyze purchases. If a business encounters a suspicious purchase, they can decline payment or may ask the customer for more information.

Card Testing: Taking Stolen Credit Cards for a Test Drive

Ultimately, the thieves who steal credit card numbers or other payment information want to maximize how much they can get. Yet before trying to make large purchases, many fraudsters take a credit card account for a test drive. They’ll make small purchases first to see if the card works and if retailers will accept it.

Traditionally, retailers focused on larger purchases. Thieves figured this out and thus will often make small purchases, both to test the card and to get some money out of the card. As such, it’s smart for retailers to also scrutinize smaller purchases as a possible precursor to larger fraud.

Automated tools, like a fraud filter, make it easier to monitor transactions big and small. These tools can flag suspicious transactions for your review.

Refund Fraud: Illegitimate Purchases Lead to Illegitimate Refunds

Often, criminals prefer cash to products. By using refund schemes, it’s sometimes possible for a thief to convert illegitimate purchases into illegitimate refunds.

Let's say a thief buys an expensive product, perhaps a laptop or smartphone, with a stolen credit card. Then, they return it in exchange for cash or money deposited into a different account, this one under their control, effectively stealing money.

Refund fraud has plagued brick-and-mortar retailers for many years. Many fraudsters have also targeted e-commerce stores. Refund fraud is an especially grave threat because a retailer may lose money through the refund itself and then may pay again, should a bank issue a chargeback.

Fortunately, some proven tactics may help reduce refund fraud. One common tactic is requiring that in the event of a refund, the returned funds can only be sent to the original payment method, say a specific PayPal account, credit card, or bank account. Requiring receipts or proof of purchase can also help reduce refund fraud.

Account Takeover: Hijacked Accounts Lead to Illegitimate Charges

Rather than stealing someone’s credit card data, a fraudster could instead try to take over a person’s account. If you have an account on say Amazon, Google Play, Apple’s App Store, or wherever else, someone could try to steal the login credentials. Once they’re inside your account, they can access your content.

A fraudster may also be able to make purchases once they’re in your account. These days, many websites allow you to store your payment information. This makes for an easier checkout. However, a fraudster may be able to use saved payment credentials to make illegitimate purchases.

Once a customer realizes that their account has been hacked, they may change their password and can contact their bank or another financial service provider to cancel cards or to put a hold on purchases.

If someone loses control of their account, it’s often because they didn’t take the proper steps to secure it in the first place. They may have used a common, weak password and a hacker may have simply stumbled into their account through sheer luck. Or, an account holder may have been tricked by a phishing email or something similar. With these emails, thieves often pretend to be an authority figure, say a customer service representative from PayPal. Then, they trick the person into providing their login credentials.

Unfortunately, however, it’s often merchants who end up paying for these security breaches rather than customers.

Hostile Friendly Fraud: Could Customers Try to Score Freebies?

When it comes to chargebacks specifically, “friendly fraud” is one of the biggest concerns. With friendly fraud, a customer will knowingly and legitimately purchase a product. Then, usually after receiving the product, they’ll dispute the transaction with their issuing bank who in turn issues a chargeback.

Friendly fraud differs from normal fraud in that the legitimate cardholder is the one committing fraud. Sometimes, the customer is actually a scammer. Other times, the chargeback is the result of a misunderstanding.

If a customer willingly purchases a product and initiates a chargeback in an effort to game the system, it’s sometimes referred to as “hostile” friendly fraud. With hostile friendly fraud, there’s nothing wrong with the product or the transaction. Instead, the card holder is simply trying to get a free product.

If you've suffered hostile friendly fraud, disputing the chargebacks will help protect your business. The chargeback dispute process is rather complicated, however, and if you miss key deadlines or fail to provide the appropriate information, you’re more likely to lose your dispute. Fortunately, chargeback dispute solutions can help you track and dispute chargebacks.

Benign Friendly Fraud: Confusion Can Lead to Chargebacks

Not all chargebacks are hostile. In some situations, a customer may initiate a chargeback due to slow shipping, misunderstood charges, or something else. Friendly fraud without an intent to deceive is sometimes referred to as “benign” friendly fraud.

Let’s assume that a customer orders a laptop from you. The computer takes longer than expected to arrive and the customer thinks that it was lost during shipping. They contact their issuing bank and begin a chargeback. Then, after the customer gets their money back, the laptop arrives. In this case, the customer is basically getting a computer for free.

Also, if a customer is looking through their bank statements and sees a charge that they don’t recognize, they may initiate the chargeback process.

Let’s say you own several retail websites, all of which are organized under your holding company “Smith’s Personal Web Holdings.” A customer bought a product from you on “AcmeAwesomeGifts.com.” However, when looking through their bank statement they see a charge from “Smith’s Personal Web Holdings,” a brand/name they don’t recognize. Confused, they contact their bank and secure a chargeback.

Here, confusion led to a chargeback, not malice. If you had labeled the charge “Acme Awesome Gifts,” they likely wouldn’t have pursued a chargeback. In this case, the customer may not have any bad intent but simply may be misunderstanding the charges on their account.

Fraud Prevention: Steps You Can Take to Protect Your Ecommerce Business

We’ve covered some of the biggest forms of e-commerce fraud. That said, fraudsters are clever and their tactics constantly evolve. Even as you stamp out one threat, you may quickly find yourself dealing with another. That’s why you should be proactive and strive to prevent fraud and chargebacks.

Many automated tools, such as a fraud filter, can help. These tools will automatically examine a transaction and rate them according to risk. The software can flag higher-risk transactions so that you can review them manually. If a customer files a chargeback, the right chargeback dispute management solutions will make it easier to track and dispute chargebacks.

It’s important to remember that not all disputes and chargebacks are due to criminal activity. Often, chargebacks are the result of poor communication. Improving communications may prevent issues from arising.

In the case of the “lost” laptop above, you can reduce chargeback risks by providing detailed, real-time tracking information. If a customer can see where their order is and when it will arrive, they may be less likely to try to file a chargeback.

Solutions like Verifi Order Insight and Ethoca Consumer Clarity can be used to connect merchant transaction data to the issuing bank and cardholder. As purchases and deliveries are made, transaction details are sent in real-time to the cardholder, reducing the risk of misunderstandings that may result in a dispute.

Also, make your transaction descriptors as clear as possible from the customer’s perspective. Charges in the customer's bank account or credit card statement should use a company brand/name that the customer will recognize. Further, provide details to cue a customer in. You may include a brief description of the product or your website address, for example.

A proactive approach to managing chargebacks could save your company a lot of money in the long run. And the right chargeback dispute management tools could also save time while reducing hassles.

When possible, it’s best to label charges as clearly as possible to avoid confusion. Providing detailed tracking, a clear return policy, invoicing, and other information may reduce benign chargebacks.