The rise of online shopping has made eCommerce fraud an increasingly prevalent and sophisticated threat, necessitating advanced security measures to protect both merchants and customers. But, what exactly are those threats? What, exactly, are we talking about when we talk about “eCommerce fraud?”
eCommerce fraud refers to deceptive activities that occur during online transactions. The intent is to use stolen money, personal information, or both, to take advantage of both consumers and businesses.
This type of fraud can take various forms, including identity theft, chargeback fraud, and phishing attacks. Fraudsters exploit vulnerabilities in online payment systems and often use stolen credit card information or create fake accounts to make unauthorized purchases.
How Big of a Problem is eCommerce Fraud?
eCommerce fraud has grown into a significant global issue, affecting businesses of all sizes and across all industries. And, as online sales continue to skyrocket, so too does the number of fraud attempts.
According to recent studies, eCommerce fraud is expected to cost retailers billions of dollars annually. This will come not only from direct financial losses, but also from the indirect costs of chargebacks, reputational damage, and heightened security investments. Small businesses, in particular, are vulnerable as they may lack the advanced security infrastructure of larger corporations.
Furthermore, the growing sophistication of fraud techniques, including synthetic identity fraud and account takeovers, exacerbates the challenge. This makes it imperative for businesses to stay ahead with robust fraud detection and prevention strategies.
Acquiring banks have a vested interest in helping their merchant clients stop eCommerce fraud, as it directly impacts the financial stability and reputation of both parties. By assisting merchants in implementing effective fraud prevention measures, acquiring banks can reduce potential losses and enhance trust in the payment ecosystem.
Common eCommerce Fraud Tactics
So, how to scammers actually engage in eCommerce fraud? Here are some of the most widely used tactics:
Phishing
Phishing is a fraudulent tactic where scammers pose as legitimate entities, such as banks or online services, to deceive individuals into revealing sensitive information like usernames, passwords, and credit card details. This deceitful technique often involves sending fake emails or creating counterfeit websites that closely mimic legitimate ones.
Account Takeover Fraud
Account takeover fraud involves cybercriminals gaining unauthorized access to a victim’s online account, often through the use of stolen login credentials or phishing schemes. Once they have control, fraudsters can make unauthorized transactions, change account details, and steal sensitive information.
Synthetic Fraud
Synthetic fraud occurs when criminals create fictitious identities by combining real and fake information, such as using a real Social Security Number with a fake name and address. This type of fraud can be particularly difficult to detect, as the synthetic identity appears legitimate and can even build a credible credit history over time.
New Account Fraud
New account fraud involves scammers using stolen or fake information to open new accounts in the victim’s name. These fraudulent accounts are then used for illicit activities, such as making purchases or applying for loans, leaving the victim responsible for unauthorized transactions and damaged credit.
Triangulation Fraud
Triangulation fraud involves a scammer acting as a middleman between a legitimate buyer and a legitimate seller. The fraudster uses stolen credit card information to purchase goods from the seller and then resells them to the buyer, often at a discounted price, while pocketing the profit.
Return Fraud
Return fraud occurs when individuals exploit a retailer’s return policy to obtain refunds or store credits for items that were not purchased from the retailer or that were purchased fraudulently. This deceitful tactic can result in significant financial losses for businesses and disrupt inventory management.
Transaction Laundering
Transaction laundering is the process by which illegal businesses use legitimate online payment systems to process payments for prohibited goods or services. This deceptive practice enables criminals to evade detection and bypass fraud prevention measures, ultimately laundering illicit funds while appearing to operate legitimately.
Bust Out Fraud
Bust out fraud is a method where fraudsters build up a credit profile over time, only to max out the credit limits on various accounts before disappearing. The criminals intentionally default on these obligations, leaving lenders with significant unpaid balances and essentially “busting out” with the stolen funds.
Social Engineering
Social engineering is a manipulation technique used by criminals to deceive individuals into revealing confidential information or performing actions that compromise security. This type of fraud exploits human psychology rather than technical vulnerabilities, making it challenging to detect and prevent.
How to Detect & Prevent eCommerce Fraud
Detecting and preventing eCommerce fraud requires a multi-faceted approach. Merchants must combine technology, vigilance, and best practices as part of a broad, multilayered strategy.
Implementing robust fraud detection systems that utilize machine learning and artificial intelligence can help identify unusual patterns and flag suspicious transactions in real-time. Regularly updating security protocols, such as requiring strong customer authentication methods and maintaining up-to-date encryption standards, is essential, too.
Additionally, businesses should conduct continuous monitoring of transactions and audits to detect potential fraud early. Educating employees on recognizing signs of fraudulent activity and encouraging them to report anomalies can bolster defenses. Finally, fostering a culture of transparency and communication with customers, including advising them on safe online practices, can further mitigate the risks associated with eCommerce fraud.
As we addressed before, acquirers have a vested interest in helping merchants with this challenge. By providing risk management services and tools, regulators can help prevent fraud from damaging the eCommerce industry’s reputation and growth. Collaboration between merchants, payment processors, issuers, and law enforcement agencies is crucial to staying ahead of ever-evolving fraud tactics.
