The Three Types of E-Commerce Fraud

As e-commerce continues to grow in popularity, so has fraud: Merchants overall saw 35% growth in e-commerce fraud over the last year — 43% for mid to large e-commerce merchants. Worse, every dollar of fraud costs merchants an estimated $2.94 in revenue losses.

To stop these losses, you need to know how fraud happens. The three types of e-commerce fraud include:

  • CNP fraud
  • Chargeback fraud
  • Friendly fraud

Here’s what you can do to avoid them.

1. CNP Fraud

Card-not-present fraud is often the result of identity theft. It occurs when a merchant accepts payment from a fraudster who is using a stolen or fraudulently obtained credit card number. After the fraudulent purchase is made and the customer who owns the credit card discovers the purchase on their credit card statement, the customer contacts their credit card issuer to dispute the transaction. The issuing bank closes the card account, issues a new account number and card to the customer, and credits the customer with the amount of the purchase while the issuer investigates the dispute. This typically results in a chargeback to the merchant.

In the past few years, fraudsters have gotten sneaky about the ways they take advantage of innocent consumers to get sensitive financial data. Some pose as a figure of authority in an email, phone call or a text message and convince the victim to reveal passwords and account numbers. Others use fake or stolen credit card applications to open accounts in someone else’s name.

How to Reduce Your CNP Fraud Risk

Luckily, there are several approaches to reduce your risk of CNP fraud:

  • Stay compliant with new rules, like Payment Card Industry Data Security Standards (PCI DSS), which are designed to help keep you and your customers safe by ensuring transactions occur in a secure environment.
  • Use such verification systems as the Address Verification System (AVS) and the Card Verification Value (CVV) to verify customers are who they say they are.
  • Integrate predictive analytics to combine buyer details like email addresses, IP addresses, and billing and shipping addresses with order details to produce a score that indicates the likelihood of fraud.

2. Chargeback Fraud

While chargebacks were initially developed by card issuers to protect consumers, the chargeback process has become so easy that people often game the system and knowingly commit chargeback fraud. In these cases, customers intentionally file fraudulent chargebacks with the goal of keeping the product or service they ordered while also receiving a refund of the full transaction amount.

Chargeback fraud can take place in a variety of ways, including when the customer:

  • Places an order with the explicit intent to get free products
  • Experiences buyer’s remorse and regrets a high-priced purchase
  • Hides a purchase from a spouse or joint account holder
  • Tries to lower their credit card balance

It’s become such a pervasive problem that the FBI currently views it as the third-largest problem in e-commerce.

How to Reduce Your Chargeback Fraud Risk

Chargeback fraud starts out as a legitimate purchase, making traditional fraud prevention tools nearly useless in detecting and preventing it. But that doesn’t mean you can’t take steps to prevent it.

Here are just a few strategies to minimize chargeback fraud in your business:

  • Keep detailed purchase history information, including when, where and how a purchase was delivered or downloaded. This will help you prove the legitimacy of a disputed transaction.
  • Use historical data to create household profiles that include device IP addresses, purchasing habits and device types. This data can be used in the event you fight what you believe to be a fraudulent chargeback.
  • Publish easy-to-understand return and refund policies on your product pages, checkout pages, and order and delivery confirmations. When customers can see this information up front, they may be less likely to initiate disputes.

3. Friendly Fraud

Despite being labeled as fraud, customers who misuse the chargeback process aren’t always malicious. Instead, think of friendly fraud as “accidental fraud” that can occur when a customer doesn’t keep meticulous records of their credit card purchases or simply doesn’t recognize a purchase on their credit card statement that they did in fact make.

Friendly fraud may also result from misunderstandings like:

  • The customer forgot they made the purchase.
  • The customer forgot they agreed to a recurring payment, such as a software or magazine subscription.
  • Another family member authorized the purchase without the cardholder’s knowledge.
  • The purchaser misunderstood the return or refund policy.
  • The company name on the credit card statement differs from the company the customer made the purchase from, and the customer doesn’t recognize it.

The important thing to remember with friendly fraud is that these customers aren’t trying to be deceitful.

How to Reduce Your Risk of Friendly Fraud

Even if it’s accidental, friendly fraud can cost your business just as much as other types of fraud.

Easy steps to prevent customers from committing friendly fraud include:

  • Make it easy for customers to get in touch with your business in case they have questions.
  • Make sure your company name is evident on credit card statements.
  • Make it easy for customers to find return and exchange instructions on your website.
  • Remind customers of recurring orders and explain cancelation procedures clearly.
  • Require signatures for high-value deliveries.

While it’s impossible to eliminate every instance of fraud in your e-commerce business, it is possible to protect your revenue and reputation against emerging fraud threats. However, it may be tempting to think all you need to do is implement some basic fraud filters to prevent these transactions – but unfortunately, they often just aren’t effective. Instead, you need a comprehensive fraud prevention solution that can protect you and your business against the rising threat of card-not-present, chargeback and friendly fraud.

ClearSale uses an effective combination of trained human analysts with advanced machine learning to address your fraud threat in real time. Not only can we help protect your business over the long term, but we also guarantee transactions 100% against fraudulent chargebacks. Contact a ClearSale analyst today to learn more.

Merchant Guide for E-Commerce Fraud Protection