Everything merchants need to know about eCommerce fraud prevention. We look at fraud “red flags,” effective prevention tools, and best practices that can help stop fraud before it happens.
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Fraud prevention is a leading concern for many online merchants. When looking at recent stats, it’s easy to understand why.
In short: you can’t afford not to.
Three-quarters of merchants reported increases in both fraud attempts and fraud rates by revenue in 2021. Plus, the average cost of fraud management increased five-fold in just two years. In 2019, eCommerce merchants spent an average of 2% of their annual revenue on fraud prevention. By 2021, that share had grown to 10%.
How can you tell if you’re getting the most out of your fraud prevention efforts? What are your credit card fraud prevention best practices? What fraud prevention solutions and tools can you deploy to protect your business?
In this article, we will seek to answer these questions, outline some common tactics, and discuss lesser-known fraud prevention secrets.
“Fraud prevention” refers to the strategies, processes, and technologies deployed by organizations to detect, prevent, and minimize fraudulent activities and financial losses.
A proactive approach involves identifying potential vulnerabilities and threats. You must also implement security measures, and continuously monitor and analyze transactions and behaviors. This is the only way to intercept fraudulent activity before it can impact you or your customers. Effective fraud prevention encompasses:
The goal is to create a secure environment that stops the unauthorized use of resources, theft of sensitive information, and other deceptive practices that could harm your organization's financial health and reputation.
Learn more about fraud detection
Fraudsters can employ a variety of tactics to scam you out of your money. In another article on the topic of eCommerce fraud, we outline more than a dozen commonly used tactics like account takeover, new account fraud, triangulation fraud, friendly fraud, and more.
The first step towards preventing fraud is knowing what to look for. Even as criminals’ tactics evolve, there are a few key indicators that remain telltale signs of fraud. Red flags to watch for include:
Did a customer create a new or temporary (“burner”) email address to make a purchase? This may be a sign that the buyer is planning to commit fraud and then disappear.
Fraudsters want to get the most value out of their efforts. To do this, they often buy high-value goods that they can easily flip and turn into liquid cash.
When fraudsters gain access to valid account information, they often submit multiple transactions in quick succession to maximize profits before being discovered.
Fraudsters tend to pick the fastest shipping option. They want the goods to arrive before they’re intercepted. They don’t mind paying extra. After all, it’s not their money.
Again, fraudsters look for opportunities to maximize their efforts. They might pick a model of TV or other item and order as many as possible before maxing out the account.
The shipping address used by a fraudster will not match the billing address kept on file with the bank or that you have listed in previous transaction records.
If the same IP address is tied to multiple transactions and multiple cards, it’s a sign that the fraudster may be using information stolen from multiple consumers.
These are some of the most common signs of fraudulent activity. Remember, though: this is not an exhaustive list.
Criminals come up with new strategies every day. They’re resourceful and can learn to leverage new technologies, shopping channels, and industry practices before you identify the threat they pose.
Learn more about fraud red flags
3-D Secure (3DS) is a security protocol designed to enhance the security of online credit and debit card transactions. It acts as an added layer of protection to prevent unauthorized use of cards in e-commerce transactions.
The “3-D” stands for “Three Domain Secure.” It reflects the three parties involved in the process: the merchant, the bank that issued the card (the “issuer”), and the security infrastructure that connects them (the interoperability domain).
The implementation of 3DS offers several benefits. You’ll reduce the likelihood of fraudulent transactions. 3DS shifts liability away from merchants in the event of fraud, and builds customer trust by enhancing transaction security.
Also, with the evolution of 3DS protocols, including versions like 3DS2, the process has become more streamlined and user-friendly. It incorporates advanced technologies like biometrics for authentication, enabling a smoother shopping experience without compromising security.
Learn more about 3D-Secure technology
All the tactics we’ve outlined are important. The tools you use, however, will also impact your fraud prevention plan.
Deploying the right fraud prevention tools is vital to adopting the right internal processes. We talked about using 3-D Secure; however, that’s just scratching the surface. Below is a list of common fraud screening tools you can use to identify risky transactions:
We’ve examined some of the fraud red flags, and some tools you can use. Given the volume of orders you process, though, you don’t have the time to manually review every transaction.
Below are some fraud prevention best practices that will help scale your fraud prevention efforts wisely.
Learn more about fraud prevention best practices
It should be clear by now that payment authentication is the cornerstone of stopping fraud. To this end, lawmakers have stepped in, requiring base standards for buyer verification. Strong Customer Authentication, or SCA, is one such example.
SCA is a regulatory requirement introduced under the European Union's Second Payment Services Directive (PSD2) to enhance the security of electronic payments. It mandates a multi-factor authentication process for electronic transactions to reduce the risk of fraud. Specifically, it requires verification using at least two of the following three elements:
Certain low-risk transactions may be exempt from SCA requirements based on transaction risk analysis. This analysis involves evaluating the risk level of transactions in real time to determine if SCA is necessary, taking into account factors such as the amount of the transaction, the payment history of the customer, and any abnormal spending patterns.
Learn more about strong customer authentication
A manual review is the process of subjecting a transaction to human oversight. It can occur at any point in the transaction process at which the transaction is manually reviewed, as opposed to automatically reviewed using computer algorithms.
Manual review comes up when an automated system detects potential fraud indicators in a transaction, but the evidence is not conclusive enough to warrant automatic rejection. During a manual review, trained staff assess the transaction details, looking at various factors such as the transaction history, customer behavior patterns, and any anomalies in the purchase activity. They may also reach out to the customer for additional verification or clarification.
Manual review is a tedious and time-consuming process. However, it may also be necessary to ensure that you don’t lose valued customers to false positives.
Learn more about manual review
Fraud prevention strategies often incorporate automated decisioning and fraud scoring mechanisms. The goal here is to streamline the process of identifying and acting upon potentially fraudulent transactions.
Fraud scoring assigns a numerical value, or score, to each transaction based on a range of criteria that may indicate fraud. These criteria can include unusual purchasing patterns, discrepancies in billing and shipping information, the geographical location of the purchaser, and any deviation from typical customer behavior. The higher the score, the higher the risk that the transaction is fraudulent.
This scoring system enables businesses to make swift, straightforward decisions. Transactions with scores below a certain threshold can be automatically approved. At the same time, those above can either be flagged for manual review or outright rejected.
This binary, up-or-down decision-making process significantly enhances efficiency by reducing the need for human intervention in clear-cut cases. It allows companies to focus their manual review efforts on borderline cases where human insight is necessary.
Learn more about fraud scoring
Fraud prevention is about employing the right tools in a coordinated manner so they work together and complement one another.
Of course, even with the optimal strategy, tools, and tactics in place, there’s still no way to “fraud-proof” or “chargeback-proof” your business. Criminals get more sophisticated all the time, and staying up-to-date on the latest threats can be a full-time job on its own.
Chargebacks911® offers the most comprehensive chargeback management services and products available on the market today. Our experts are constantly uncovering new fraud threats and developing innovative strategies and technologies to fight back. This applies not only to fraud prevention but even to hard-to-fight challenges like friendly fraud.
Whatever you need to prevent chargebacks, we can help. Contact us today for a free demo.
The objective of fraud prevention is to proactively identify, assess, and mitigate fraudulent activities to protect an organization's financial assets and maintain the trust of its customers. It involves implementing strategies and technologies that detect and prevent unauthorized transactions, thereby minimizing financial losses and safeguarding against reputational damage.
You can protect yourself against fraud by implementing multi-layered security measures, including strong customer authentication, real-time transaction monitoring, and fraud detection systems that use machine learning to identify suspicious activities.
You are the first line of defense against fraud. Being aware and careful with your accounts online is the very first step to effective fraud prevention.
Fraud detection involves identifying fraudulent activities as they occur or after they have happened, using systems to monitor and flag suspicious transactions. Fraud prevention, on the other hand, aims to stop fraud before it happens by implementing security measures and controls that block fraudulent activities from taking place.
You can detect fraud by using advanced analytics, machine learning algorithms, and real-time monitoring systems to analyze patterns and anomalies in transaction data and user behavior that may indicate fraudulent activities. These tools help identify suspicious actions quickly, allowing for immediate intervention to mitigate potential risks.
