E-commerce Fraud Detection and Prevention: The In-depth Guide [2022]

It is hard to underestimate the role of Marketplaces in a world where most communications happen on the web and our virtual environment is full of advertisements with attractive products and services to buy. Meanwhile, it is obvious that many criminals are trying to take advantage of it, using scams and malware to compromise users’ data.

Fraud Detection in E-commerce and Statistics

The level of E-commerce fraud is high, according to the statistics. With E-commerce sales estimated to reach $630 billion (or more) in 2020, an estimated $16 billion will be lost because of fraud. Amazon accounts for almost a third of all E-commerce deals in the United States; Amazon’s sales numbers increase by about 15% to 20% each year. From 2018 to 2019, E-commerce spending increased by 57% — the third time in U.S. history that the money spent shopping online exceeded the amount of money spent in brick-and-mortar stores.

The Crowe UK and Centre for Counter Fraud Studies (CCFS) created Europe’s most complete database of information on fraud, with data from more than 1,300 enterprises from almost every economic field. The studies show that 21% of consumers are afraid their credit card data will be stolen and 19% believe their confidential data may be misused. 54% of consumers said they faced fraudulent or suspicious actions on the Internet — more so than through mobile spam calls (18%), door-to-door sales (13%), postal mail (12%), or stores (5%).

Reports and user surveys show that E-commerce businesses should be aware of the potential risks of fraud as well of the tools and solutions to fight them, so that users feel much more relaxed and trusting while making payments online.

E-commerce Fraud Trends

Fraud has never been a new thing, although the trend for E-commerce fraud rises as the number of cash-free transactions increase. It is especially obvious now, when the world is moving away from in-store purchases. Due to the COVID-19 quarantine, people have to make more purchases online to stay safe or because the products they need are unavailable in closed local shops.
E-commerce Fraud Protection

As the trend for E-commerce fraud rises and E-commerce fraud scenarios and malware become more subtle and harder to detect, E-commerce fraud protection has never been so important. To make sure that their business is protected, every merchant and bank should pay attention to the latest trends in fraud detection such as modern E-commerce fraud software on Artificial Intelligence (AI), learn the best fraud prevention practices, and be aware of common types of online fraud.

Introduction to E-commerce Fraud Prevention

A famous Amazon founder Jeff Bezos once said:

“We see our customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better.”

What’s true about this quote is that it is very important to make each customer’s experience as satisfying as possible, especially when it comes to the security of their accounts and money spent online.

When thinking about how to decrease fraud, the first thing a banker, merchant, or other E-commerce participants should take care of is developing a risk management framework. It includes being aware of channel risk (e.g., mobile, online, staff/terminal, and network) and building a segmentation strategy based on operational risk evaluation methodology such as quantitative or qualitative methodology.

Vulnerabilities might be present in all channels, so it is vital to create a controlled environment with clearly defined layers that follow the transaction cycle and proves its resistance against relentless attempts from criminals to find weak places and hit them.

Business e-mail compromise: this type of scam aims at businesses working with overseas suppliers and partners who continually make wire transfer payments. The fraud starts by seeking out legitimate business e-mail accounts and compromising them through social engineering or special software that allows intrusion, with the goal to make illegal money transfers.

Data breach: this happens at personal or enterprise levels and implies the leaking of sensitive, confidential, or protected information. The information is usually stolen or copied from a database.

Denial of service: disruption of any user’s session of entering into a system or network caused by fraudulent activity.

E-mail account compromise: this is the alternative version of business e-mail compromise that is aimed at the general public as well as professional people working in financial and lending enterprises, real estate companies, and judicial firms. Criminals use the compromised e-mail account to transfer costs to a fraudulent location.

Malware/scareware: a kind of ill-natured software that is developed to intrude into computers and computer systems in order to damage or disable them.

Phishing/spoofing: both terms refer to a similar notion and imply forging e-mails in a way that makes them appear very close to those being sent by legitimate businesses.

Ransomware: this is a type of malware that targets technical and human weak points in enterprises with the goal to disable valuable data or systems. Once the victim finds out they cannot gain access to the valuable data again, they receive a demand from the criminal to pay a ransom to re-gain access.

What Happens if Fraud Scenarios are Successful

  1. Account takeover. Criminals try to obtain valuable information about users such as personal data, shopping history, and financial details through phishing. Most often fraudsters send malicious e-mails with forms for users to fill out. If a user fills out the falsified form, he will send his account access data right to the criminal’s computer. The criminal then will be authorized to make purchases and change access details such as the password.
  2. Identity theft. The second most common way for criminals to get illegal access is identity theft. Even though businesses follow many precautions to prevent criminals from breaking into their databases if the criminals succeed they will steal customers’ data in the form of usernames, credit card details, and personal information.

Prevention Measures

The best thing you can do in this situation is to not let fraudsters use the data they stole. You can do this by implementing a fraud prevention service that would automatically identify fraudulent behavior patterns, linked to the time, place, and device name related to the login or transaction. By recognizing malicious behavior on an account, you will stop criminals even before they enter the transaction process.

The layers of a fraud prevention system at an enterprise have to include safe authentication, device analysis, navigation steps, and the possibility to integrate these data sources with a real-time fraud prevention solution.

A fraud prevention solution must:

  • include risk-weighted control at different levels of user interaction with the channel gateway;
  • be planned in a way that allows the additional integration of third-party solutions in order to enforce the monitoring of every step a user takes in a session; and
  • be real-time scalable in order to handle the introduction of quicker payments corresponding to any integrated third-party software.

E-Commerce Fraud: The 8 most common types

The number of methods that criminals may use to get to your accounts are countless and limited only by their imagination, although there are some tricks that are most commonly followed by the perpetrators of financial crimes.

Here, we highlight five types of fraud in E-commerce:

  • True (classic fraud)
  • Triangulation fraud
  • Interception fraud
  • Card validity testing fraud
  • Chargeback fraud
  • Digital Payment fraud
  • Merchant App fraud
  • Sign-up fraud or the abuse of promotions

True (classic) fraud: this is the simplest type of fraud and implies the stealing or purchasing of a victim’s credit card details on the Dark Web. When a criminal makes an unauthorized purchase, a customer can dispute the purchase. The bank then closes the current account and issues a new credit card number and sends a new credit card to the fraudster. This is usually a method for newbie fraudsters.

Triangulation fraud: this type of fraud is called triangulation because it involves a fraudster, a legitimate shopper, and an E-commerce business. A criminal sets up an online shop at Amazon or eBay that sells high-demand products at unusually low prices. After he receives the card details from the customers who ordered, he purchases goods from a legitimate shop to send them to the customers.

Interception fraud: in this type of fraud, criminals create an order where the billing and shipping address match the address associated with the card. Then they will try to intercept the package by using one of these methods:

  • asking the customer service agent to change the address on the order before shipping it;
  • asking the shipper to re-address the order to a place where they can intercept the stolen item;
  • waiting for the delivery to arrive at the actual card holder’s address and asking to sign for the package in the name of the homeowner.

Card validity testing fraud: in this case, a criminal tests different card details to reveal if the credentials are valid and then uses them at another website to make unauthorized charges. If a website declines the card because of an invalid expiration date, they will know this is the number they have to permutate using bots.

Chargeback fraud: a customer will make order online, but then ask for a chargeback because their card was stolen. This usually happens after the product was delivered. This fraud is more typical for customers rather than for experienced fraudsters and is difficult to detect.

Digital Payment Fraud: the breakthrough in technology and the introduction of EMV standard (originally Europay, Mastercard, and Visa) increased the security level for brick-and-mortar retailers drastically. On the downside, the EMV chip in cards doesn’t offer protection for online transactions, which makes it easy for criminals to use stolen cards. Even legitimate customers can become fraudsters when they dispute their transactions with a bank and can obtain both the money and the goods. Only a cutting-edge fraud protection tool or a custom ecommerce fraud detection solution can effectively deal with it. The Machine Learning approach is very important here, because it allows the adaptation to new patterns of criminal activity and alerts you about any suspicious actions from your customers. We will talk about ML solutions to this problem later in the article!

Merchant App Fraud: while many organizations, especially retailers, are using some kind of application to improve their customer service, this could also be the root of major issues. When criminals hack into your app or use stolen credit card information to pay for goods, it can cost you twice as much — just like with Digital Payment Fraud. You will not only use your goods but also will have to refund the purchase price of it if the card information was indeed stolen. You can check every transaction manually, and this will definitely help reduce the risks. However, if your business runs on a big scale with a massive number of transactions, you can’t physically check every transaction manually. The parameters you have to monitor here to prevent a fraud scenario are the velocity of transactions (the number of times the transaction happened from a particular mobile app), the card number connected to this app, and even the device and IP address the customer is using. An automated solution can easily help prevent this type of fraud from happening.

Sign-up Fraud or the Abuse of Promotions: promotions are an awesome way to build the loyalty of your customers. Sign-up bonuses are an effective way to engage a new audience with incentives. It could be a giveaway, a free item for each new client, a discount, or a special subscription plan. However, with a database of stolen personal data or credit card information, criminals can use your special promotion multiple times by creating new fake client accounts. If you choose to battle this threat manually, you can spot this by different accounts using the same IP address, physical address, or phone number.

How To Identify Fraudulent E-Commerce Orders?

If you have a large-scale business, you probably need special software to detect fraudulent E-Commerce orders because it would be hard to handle the number of overall orders manually. In other cases, simply paying attention to the following key indicators might save your money and market reputation:

  • The information in the order is inconsistent; for example, the zip code and actual IP address don’t match.
  • The location of your regular customer is unusual when compared to previous places.
  • Compared to the account history, the order from your regular customer is way too big.
  • The buyer makes multiple purchases at the same time from one account but ships the items to different locations.
  • A large number of purchases is seen in a short span of time.
  • Multiple orders are placed using different credit cards in a short period of time.
  • More than two or three transactions are declined in a row. In this scenario, the client is unable to insert the correct credit card number, CVV, and expiry date despite trying multiple times, which can be a red flag for criminal activity.
  • An unusual set of orders is placed from a new country. Yes, your marketplace can hit a new audience and become a thing in the new region, but the chances are that a suspicious string of orders from the region you never marketed your online shop in could indicate fraudulent activity.

Wrapping up

We at ShopShipShake have been working with businesses like yours with fulfilling experiences. We offer one-stop services, including an efficient supply chain, over 10 thousand of China’s suppliers, and more.
With a successful track record of over 20,000 clients, we are sure to deliver your orders requirements. Let’s get in touch to build, sustain, and grow your businesses.

If you would like to know more details about us, please contact with us: 


If you are interested in cooperating with us. Please register on:https://bit.ly/3ks0m1M