E-Commerce Fraud is on the Rise: Here’s How Retailers Can Fight Back

With the pandemic spurring online shopping adoption, digital retail has never been more popular. E-commerce sites have become a channel of choice for many consumers to get their shopping done, but it’s also become a channel of choice for many fraudsters. As e-commerce sales increase, so do the number of malevolent attacks. By better understanding the nature of this growing threat and common methodology for perpetrating these types of attacks, retailers can more effectively protect their business.

What is E-Commerce Fraud?

E-commerce fraud is any type of fraud that takes place on an ecommerce platform. Types of eCommerce fraud can include account takeovers (ATO), “friendly fraud” committed by taking advantage of chargebacks and returns, loyalty or reward program fraud, Organized Retail Crime (ORC) activity, and employee theft. Part of why this type of digital crime is so common today is because prosecutions are so rare, often due to the time and resources required to gather evidence and build a case.

eCommerce fraud is the second most common type of fraud, according to the Federal Trade Commission. Online retail fraud makes up about 2% of all digital sales, which amounts to a staggering $12 billion in lost profits in the US alone. Retailers are faced with increasing losses but can look to data analytics to combat sophisticated fraud schemes.

5 Types of E-Commerce Fraud on the Rise

Account takeovers (ATO). Nearly every customer has an email-password account combination. Hackers use ATO methods to access customers' personal information and payment data. Once a retailer's systems have been hacked, they become a role model for cybercriminals, who may publicize their vulnerabilities to other hackers. ATO quickly erodes trust in the retailer’s client base, making it a long road back to reclaiming their brand.   An increase in bots and automation fueled a 374% rise in ATO attacks on e-commerce businesses just since the start of the pandemic.

Chargebacks and Returns. Whether it's "friendly fraud" of legitimate buyers requesting a refund but never returning the products or a more considerable effort to defraud a retailer with high-end returns consistently, chargebacks are a growing concern for retailers. One popular third-party scheme involves purchasing expensive items but returning a cheap knockoff in its place for a full price refund, leaving the retailer on the hook for the merchandise and the payment. However, friendly fraud is on the increase, occurring 50% more often than third-party fraud and can cause up to a 25% reduction in profits for online businesses.

Loyalty programs. Retailers depend on loyalty programs to attract and grow their customer base. Customers appreciate discounts, freebies, and special offers they receive as loyal members. However, criminals target the wealth of data stored in these loyalty accounts, often with lower security levels, giving them access to a customer's data and payment methods. It is estimated that $3.1 billion in redeemed loyalty points redeemed are fraudulent, making it a significant problem for retailers.

Organized Retail Crime (ORC). Retail crime is big business, especially if there is a focused effort by a large group of people. Theft ranges from lower-priced drug store items to high-end luxury goods with the same purpose: steal goods and sell them for a profit. ORC can range from two or more people collaborating on retail theft to national and international ORC groups responsible for hundreds of billions in losses on a global scale.

Employee theft. Employees can drain the bottom line from an unintentional lack of knowledge that can be easily corrected with additional training. On a larger scale, employees may work individually or as a group to defraud retailers by trying to outwit their systems. ORC groups also recruit employees, infiltrating the company for more significant opportunities. Retailers are tasked to identify potential issues and stop them early. The average number of apprehended employees is up to 560 per retailer, leading to over $61 billion in shrink for all retailers.

Fighting Back Against Digital Fraud

Patterns exist in online crime. Whether it's a series of ATO attacks over a week or an unusually high number of chargebacks to the same credit card, data analytics can provide retailers with the evidence and protection they need to stop the growing number of offenders.

Sudden jumps in website traffic can be indicative of a larger problem. It could mean that there is increased activity looking for vulnerabilities in your online ordering or payment systems. You’ll need to find out why it is happening and look for patterns in site visitors.

Data will reveal suspicious purchases and returns of high-value items, pointing to underlying patterns. Program alerts will indicate items, locations, card numbers, or other indicators to help eliminate fraudulent return activity before losses build up.

Analytics is a critical way to identify payment card fraud, issuing alerts for various suspicious transactions. For instance, comparing the name on the card to the person's name at the shipment destination will reveal anomalies that might not always be a gift item sent to a favorite relative.

Inconsistencies appear when a routine customer suddenly makes high-value purchases that far exceed their average transaction. This purchase can indicate that a stolen card and system alerts can stop the transaction early and help you keep your customer's trust. It may also indicate an employee fraud issue if their personal address matches the shipment address.

While tools exist to secure retail websites from offenders, data analytics uncover the patterns that occur once bad actors have used your system. Retailers must still be vigilant at protecting their site, customer, and payment systems. However, they also require the tools that help them reduce the impact of increasingly sophisticated schemes that can drain hard-earned revenue and profits.

Streamlined reporting, robust analytics, and automated alerts will provide retailers with the insights they need to protect their business from bad actors. Solutions that are easy to use and integrated with various other business systems will help to remove the bottlenecks that traditional manual reporting presents. Experts recommend re-evaluating your existing tools and moving toward a robust data analytics platform to minimize the impact of ecommerce fraud. Fraud trends, flexible staffing requirements, and recurring anomalies are part of a robust dashboard with near real-time information.

Learn more about how Loss Prevention professionals are using technology in our on-demand webinar with APEX Retail, TalkLP, and various LP industry experts in “The LP Investigator’s Favorite Tools to Catch a Thief.”

Learn more about how to Combat Theft & Fraud.