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Shopify eCommerce Fraud Prevention Tips Every Merchant Should Know

You perhaps considered many things when setting up a business, but Shopify eCommerce fraud prevention was probably not among them. Anyway, it is needless to point out that e-commerce fraud is a growing call for an alarm for brands, and it's more crucial than ever for business owners to safeguard themselves and their cash flow.

    Unfortunately, the majority of businesses only identify fraud after it has been committed. The most painful part of it all is that you can’t revert the damage done to your online shop after it has occurred. 

On average, approximately 4,800 websites are at risk of being attacked monthly, which isn’t a small number. You never know as your website might be the next target, and when that happens, you’ll run into lots of trouble if you don’t have any software to protect it. 

The research has proven that Global e-commerce sales reached $4.9 trillion US dollars in 2021, and that’s poised to grow to $7.4 trillion by 2025. Those numbers are fabulous news for business owners, yet still with growth in sales also comes growth in fraud. E-commerce fraud costs a whooping estimated $20 billion US dollars in 2021—a huge 14% increase on 2020 numbers.

If in one way or the other, you have or help run an e-commerce store, the regrettable reality is that fraudsters and cybercriminals may target you and your business. And this not only negatively impacts your profits and consumes your time, but it can also adversely affect your brand's reputation as well as your potential customer experiences.

Luckily, you can still implement features and processes to safeguard your business.

By having been equipped with as much education and effectively prepared as possible, combined with the right e-commerce fraud prevention tools and measures, you can safely keep your profits and business. Let's dive into this guide where we have comprehensively covered what e-commerce fraud is, the different types of fraud merchants can face, and tips for how to combat it including Shopify’s free, and built-in tools like Shopify Protect, and Fraud Analysis.

What is Shopify e-commerce fraud?

Shopify eCommerce fraud is any intentional deception undertaken during an online transaction with the objective of financial or personal gain for the cybercriminals or fraudsters, even if it negatively affects the merchant.

There are numerous types of eCommerce fraud, and the phrase itself is largely an umbrella term involving any fraud that takes place on an eCommerce platform. You might also have heard of e-commerce fraud being called payment fraud. Even though different fraudsters use a variety of methods, the ultimate goal of all types of online fraud is similar: to steal money or products from the merchant secretly without being noticed. 

To effectively carry out their eCommerce fraud, cybercriminals need both personal and credit card information. Nevertheless, as opposed to committing fraud at a brick-and-mortar store, they never need a physical card, and fraudsters might even purchase this information—which was also probably stolen—from the underground market.

The cost of e-commerce fraud increases each year, and there are some reasons why this happens. Firstly, it’s simple to commit—they need only credit card information to have full access to the required takes—and it’s as easy as ABC to get away with. Whereas e-commerce fraud costs billions of dollars, that amount is obtained from thousands of different merchants worldwide who are each defrauded of different amounts. This makes it super hard to get police or authorities to carry out a proper investigation. Besides being that online fraudsters have the relative anonymity that they can maintain while carrying out their schemes, e-commerce fraud seems quite appealing to cybercriminals.

What are the types of e-commerce fraud?

Initially, we highlighted that the phrase “e-commerce fraud” is more of an umbrella term for all varying types of fraud that can be performed on an online commerce platform. To help safeguard and prevent fraud from being committed against your store, it’s essential to understand the different types of fraud you and your store could face. Here are seven carefully analyzed types of eCommerce fraud you should be aware of:

  1. Credit card fraud

Credit card fraud involves any fraud conducted using a credit or debit card. In an eCommerce setting, it's also referred to as card-not-present fraud simply because a customer doesn't need to present the card to the merchant, as they always do in a brick-and-mortar store.

This type of fraud typically operates when a fraudster acquires illegalized access to credit card information, often through the underground market. They then make use of the card information to purchase a product or service. The criminals, to begin with, defraud credit card holders by making use of their details unlawfully. Eventually, they defraud the merchant, who intends to refund the unlawful sale. 

The refunds generally take place after the product has already been shipped or the services have been implemented. The merchant is rendered pocket-less for the product or service and is painfully issued a chargeback fee by the cardholder's bank. Whereas individual instances of credit card fraud might not cost too much, these can still result in a significant amount.

 Moreover, criminals may conduct card testing fraud– in other words, they test their stolen card information by making meager purchases to check it hasn't been by any chance canceled and then making big-ticket purchases.

  1. Friendly fraud

In banking, a chargeback or reversal is a process whereby credit card funds used in a transaction are returned to the buyer. In this scenario, the bank or credit card company returns the money to the cardholder and claims the refunded amount back from the retailer.

Card owners can ask for chargebacks in clear and transparent circumstances if someone suspiciously made a payment without their knowledge or permission. For instance, if their credit card details were stolen and the thief made a purchase. Nevertheless, these can equally be done with the intention to commit so-called friendly fraud, a.k.a chargeback fraud. In this situation, someone will carry out a purchase, yet upon receiving the item, they will demand the purchase was made without their knowledge, refute the transaction, and ask their bank to issue a credit card chargeback. When committing every friendly fraud, a fraudster’s aim is to get a free product.

Chargebacks can be a particular hassle to e-commerce merchants since if a store has excess chargebacks, payment processors can refute your ability to accept payment from specific credit card companies. In addition, chargeback fees can be incapacitating to small businesses costing $15 per chargeback.

  1. Account takeover fraud

Account takeover fraud is a type of identity theft that takes place when cybercriminals acquire access to customers’ login details. 

In most cases, these are accessed via a fraudulent practice called phishing. Phishing is when fraudsters send messages or emails identifying themselves to be from the company tactfully to get customers to reveal their personal and account login information. In 2021, 7.6% of phishing attacks were on e-commerce and retail stores.

With the login credentials in hand, these criminals enter their accounts, make changes to their personal information such as their passwords and addresses, and carry out illegal shopping. Worse still, your personal data may as well be sold on the dark web. 

Account takeover fraud can be eminently damaging to online businesses. It results in chargebacks and other fees, and a store’s dignity can also be massively affected should victims take their complaints public.

  1. Interception fraud

This is a condition whereby criminals make purchases of items online using someone else’s payment details and then shamelessly redirect the goods to themselves. 

The order and checkout processes take place as they would in normal cases, and the online store is informed to deliver the items to the shipping address it has on file. However, once the order is placed and confirmed, the fraudster hijacks the delivery and has it shipped to their desired location instead. This can be realized by contacting the store’s customer service team to get their shipping address shifted or directly contacting the shipping company to reroute the goods elsewhere. 

In certain cases where the criminal's residence is close to the victim, they can just wait for the goods to arrive and either sign for them while pretending the victim isn’t home or steal them from their drop-off locations.

  1. Triangulation fraud

Triangulation fraud is a type of eCommerce fraud whose end result is to make money selling goods purchased using stolen personal information. It usually takes place in three processes and includes three parties to pull off: the fraudster, the online business, and the shopper. 

In the first step, fraudsters come up with a fake online storefront, specifically selling popular products at low prices to attract buyers. Next, unsuspecting shoppers land on the website to make a purchase and, while doing so, enter details such as their names, addresses, and payment information as part and parcel of the checkout process. In the last step, the fraudsters use stolen credit card information together with the buyer information collected from their fake storefront to buy the items the victim ordered, and have them delivered to the victim. The victims of triangulation fraud fully trust they've gotten a purchase at a bargain when they’ve actually given up their personal information in exchange for it. 

In most cases, triangulation fraud doesn’t just end here. These fraudsters will go on using the stolen personal details to commit further purchases. Because victims actually obtained their goods, triangulation fraud can remain undisclosed for a long time, especially if the fake online storefront appears legal and trustworthy.

  1. Affiliate fraud

With affiliate fraud, criminals aim to make monetary acquisitions through commissions. The origin of the tactic is affiliate marketing, where an online business rewards a third-party commission for referrals and/or sales.

For instance, an online store selling smartphones may offer a tech blogger a commission for each visit (and/or resulting sale) they obtained via their blog. This is closely monitored using trackable, tagged links that provide the store with where its online traffic comes from.

Criminals participating in affiliate fraud, cheat the system to boost the amount of commission they receive illegitimately. They can handle this through methods like IP spoofing, cookie stuffing, malware, and typosquatting, all of which create a fake human activity to conduct the affiliated action.

  1. Refund fraud

Refund fraud is when cybercriminals try to get a refund for their online purchase as a result of a wide range of illegitimate reasons. 

Below are a few common examples of refund fraud:

  • Claiming the order didn't arrive and then trying to get a refund through an alternative method 
  • Saying the box arrived empty and/or that the item(s) arrived, but with defects,
  • In case items must be returned to validate the refund, fraudsters may tactfully stick the return shipping label on junk mail, send it off, and claim to have sent the items back

In some situations, fraudsters can also make use of a stolen credit card to purchase something and then ask for a refund using an alternative method, claiming that the original credit card used has been canceled.

5 e-commerce fraud prevention methods

With e-commerce fraudsters increasingly becoming very prevalent and unrelenting, it’s hard to fully secure yourself from fraud. Nonetheless, you can take precautionary measures to safeguard yourself as much as possible from fraudulent activities that can be a great threat to your online business.

  1. Leverage Shopify’s fraud detection and analysis tools

If you’re a merchant on Shopify or thinking about how to start an online store with them, you’ll be very happy to know that Shopify offers fraud analysis tools that assist in e-commerce businesses spot red flags. 

Shopify merchants have access to its fraud analytic tools. Engineered by machine learning algorithms, it painstakingly analyzes data across its whole network to ascertain the degree of fraud risk in an order, so that business owners can make an informed choice about whether to fulfill it or not.

A few of these indicators include: 

  • In case the shipping and billing addresses match.
  • Whether an order volume is greater than the average order volume of your store
  • Whether a buyer has placed a variety of orders within a short span of time.

This tool flags middle-sized or high-risk orders so as for merchants to take follow-up preventive measures like:

  • Estimating the shipping address using a map to make sure that it’s not a fake location or doesn’t look like a real residential building. 
  • Confirming the customer’s real identity by sending them an email
  • Where necessary,  canceling the order
  •  Addition of the account to a block list.
  1. Make use of a service to cover fraud-based chargebacks

Another e-commerce fraud avoidance method is to involve services that secure you against fraudulent chargebacks. They make sure your business is protected in the event it receives a fraud-related chargeback on a transaction that has already been validated. 

Shopify project is an excellent and free solution that safeguards US businesses from fraud on legit Shop Pay transactions. So the next time a merchant experiences fraud, Shopify automatically covers the order amount and chargeback fee making it possible for you to safely keep your hard-earned cash. Moreover, the whole dispute process is carefully handled by Shopify, so there’s no paperwork needed from your business.

  1. Clearly Set up workflows to handle fraud seamlessly

Using e-commerce fraud prevention tools to assist in detecting illicit activity and safeguarding your business is an outstanding start. Nevertheless, incorporating such solutions into a workflow permits you to manage them quickly and in an easier way.

Shopify Flow is an e-commerce automation tool that assists you in safely managing fraud with your business set-up—specifically, on how to effectively handle orders that have been deemed as “high risk.”

With Shopify Flow (which is always available to businesses on an advanced Shopify plan and Plus plans), you can create your operations to streamline how you can best manage fraud like automatically procrastinating payment on orders that have been flagged as “high risk” and even go as far as canceling the order. After all, it is clearly stated, “Prevention is better than cure.” As you haven’t received any payment from the customer, it saves you the trouble of having to refund them. 

In case you like to get human eyes to review a purchase, Flow also makes it possible for you to structure it in such a way that strange-looking orders are forwarded to your support team via email. Additionally, you can prevent repeat fraudsters from placing extra orders by adding them to a block list. 

  1. Make sure to be PCI-compliance

As a recommendation, it is ideal that any online store that permits credit card payments  should make sure to abide by Payment Card Industry (PCI) requirements. 

PCI’s security standards are set to make sure online transactions take place safely. Businesses processing and maintaining credit card and cardholder information must comply with their guidelines and maintain their standards. This reduces your chances of fraud and without doing so may result in sanctions or fines.

Highly popular eCommerce solutions such as Shopify provide their stores with PCI compliance by default.

  1. Double down on security during peak shopping seasons

The shopping season is one that the majority of merchants look forward to, and just for an excellent reason. The influx in traffic and sales created during this period often contributes to the bulk of a store’s annual revenue. 

Nevertheless, it’s precisely due to this reason that store owners must be more cautious. In 2021 alone, the number of eCommerce fraud attempts between Thanksgiving and Cyber Monday was 25% greater  than in the initial parts of the year.

The great purchase volumes keeping businesses engaged may result in them subconsciously committing less time to fraud supervision. Consumers drawn to shopping may also inadvertently disappoint their guard when purchasing with their credit cards and find themselves victims of triangulation fraud. To be precise, the holiday season set up perfect conditions for cybercriminals to both put new schemes on trial and carry out e-commerce fraud. 

How to keep your chargeback rates low

A chargeback occurs when a customer disputes a transaction with their bank or credit card company, and the funds are returned to the customer. Chargebacks can be costly for businesses, as they often result in lost revenue, additional fees, and potential damage to the business's reputation. Here are some tips for keeping your chargeback rate low:

  • Provide clear and accurate product descriptions: Make sure that your product descriptions are accurate and detailed, so customers know exactly what they're getting. This can help prevent misunderstandings and disputes later on.
  • Communicate with your customers: Stay in touch with your customers throughout the purchase process, and be available to answer any questions or concerns they may have. Prompt communication can help resolve issues before they escalate to chargebacks.
  • Be transparent about your policies: Clearly state your return, refund, and cancellation policies on your website, so customers know what to expect. This can help prevent misunderstandings and disputes later on.
  • Use a recognizable billing descriptor: Your billing descriptor is the name that appears on your customer's credit card statement. Make sure it's recognizable and accurately reflects your business, so customers don't dispute charges they don't recognize.
  • Monitor your chargeback rate: Keep track of your chargeback rate, and take action if it starts to climb. Identify the reasons for chargebacks and take steps to address them, such as improving your product descriptions or communicating more effectively with customers.
  • Use fraud prevention tools: Use fraud prevention tools, such as AVS (Address Verification Service) and CVV (Card Verification Value), to verify the authenticity of transactions and reduce the risk of fraud.
  • Provide excellent customer service: Delivering exceptional customer service can help prevent disputes and chargebacks. Make sure you're responsive, helpful, and respectful to your customers, and work to resolve any issues quickly and effectively.

As more and more people shop online, there’s no question that cybercriminals will be strategizing on new ways to carry out e-commerce fraud.

Don’t let this demoralize you.

E-commerce fraud is, by no means, insurmountable. With sufficient preparation, unflinching vigilance, and the right e-commerce fraud prevention tools, you can discover these online threats before they even happen and safely defend both your business and your customers.

Common indicators of e-commerce fraud 

E-commerce fraud is a significant concern for online merchants. Fraudulent transactions can result in lost revenue, chargebacks, and damage to a merchant's reputation. Here are some common indicators of e-commerce fraud to watch out for:

  1. Unusual or high-value orders: Be cautious of orders that are significantly larger than average, especially from new or unverified customers. Fraudsters often attempt to make large purchases before disappearing.
  1. Multiple transactions on a single card: Be suspicious of multiple transactions on a single card in a short period, especially if the transactions are for different items or shipping addresses.
  1. Billing and shipping address mismatches: When the billing and shipping addresses are different, it can be an indication of fraud. Fraudsters often use stolen credit card information and have the goods shipped to a different address.
  1. Suspicious IP addresses: Watch out for transactions that originate from high-risk countries or from IP addresses that are known to be associated with the fraud.
  1. Rush shipping requests: Be cautious of orders that require rush shipping, especially if they are from new or unverified customers. Fraudsters often request expedited shipping to receive goods quickly before they are detected.
  1. Unusual email addresses: Be cautious of transactions with email addresses that contain random strings of letters or numbers or are associated with free email providers.
  1. Unusual behavior or activity: Be suspicious of transactions that seem unusual or don't match typical purchasing behavior. This includes multiple attempts to purchase the same item or unusual requests in the order notes.

It's important to note that these indicators are not always indicative of fraud, and many legitimate transactions may exhibit these behaviors. However, merchants should always be vigilant and use fraud prevention tools and techniques to protect themselves and their customers.

Bottom Line

Shopify eCommerce fraud prevention is a critical aspect of running an online store. There are several tips that every merchant should know to prevent fraudulent activities and protect their business from financial losses. In this conclusion, we will summarize the key takeaways from the tips mentioned above.

Firstly, it is essential to verify the identity of your customers by implementing strong authentication methods such as 2-factor authentication, AVS, and CVV. You can also use fraud detection software to monitor suspicious behavior and transactions.

Secondly, use secure payment gateways and avoid storing sensitive customer information such as credit card details to prevent data breaches.

Thirdly, be vigilant of high-risk orders, such as orders with a high value, from unknown or international customers, or with expedited shipping. You can manually review these orders and perform additional verification before fulfilling them.

Fourthly, educate your staff on fraud prevention techniques and create policies and procedures to follow when dealing with suspicious transactions.

Lastly, stay up to date with the latest fraud prevention trends and collaborate with other merchants and experts in the field to share information and strategies.

By implementing these tips, merchants can significantly reduce the risk of fraud and protect their businesses and customers from financial losses and reputational damage.

If you need more clarification about how our Webinopoly team of experts can be of help to you, kindly reach out to us and we will immediately assist you with your queries. We have the experience, expertise, customized approach, results-driven focus, and affordable pricing that you need to achieve success in your digital marketing endeavors.


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