E-Commerce Fraud 101: How It Happens, Its Impact, and Comprehensive Strategies to Protect Your Business

As observed in the 19th century, the simple idea of cross-border trading is known as globalization. This transformation seemed far-fetched until recent technological innovations and the advent of the Internet began to dismantle traditional barriers. E-commerce has primarily eliminated the biggest barrier to cross-border trading, empowering consumers to checkout from anywhere in the world with just a single click. Shopify, the online shopping giant projects global e-commerce revenues to reach US$6.3 trillion by 2024, underlining its significant role in driving this e-commerce transformation.

The boom of online shopping, driven by globalization, has come with a dark side: a surge in e-commerce fraud. Experts at Juniper Research predicted a staggering rise in online fraud losses: $48 billion by 2023. Cunning tactics like phishing scams, account takeovers, and identity theft fuel this spike. These fraudulent activities threaten the security of online transactions and put traditional stores at a significant disadvantage. Brick-and-mortar businesses struggle to compete with the ease and vast selection offered by online retailers while facing a potentially less risky shopping environment.

In this article, we will be exploring e-commerce fraud: its types, the latest trends, and how to protect your business in the digital age.

What is E-commerce Fraud?

E-commerce fraud refers to the various unauthorized activities that exploit online shopping platforms and payments, where fraudsters manipulate digital systems or deceive businesses and consumers to access sensitive information and make financial gains. It seeks to sneakily acquire personal and monetary gains, challenging the security of e-commerce operations.

The impact of e-commerce fraud on businesses and their customers can be significant. It leads to unauthorized transactions and substantial financial loss, potentially harming the relevant companies' reputations. Consequently, this situation can erode customer trust, increase operational costs, and impact the business sustainability and customer relationships.

Which Type of Business Should Worry About E-commerce Fraud?

All online businesses, regardless of their scale or industry, must remain alert to the threat of e-commerce fraud. However, certain companies may face more consequential risks and thus should adopt stricter precautions. These include:

Individual Online Retailers (Big Merchants): Whether selling products or providing services, any Business-to-Customer (B2C) operation conducted via online platforms and websites is susceptible to fraudulent activities. Bad actors tend to target larger retailers due to the substantial number of transactions they process and the extensive amount of confidential customer information they hold.

Payment Service Provider (Payment Gateway, Digital Wallets, etc.): These entities facilitate online transactions between buyers and sellers. They process payments through various methods, including credit cards and digital wallets, making security a paramount concern to prevent unauthorized transactions and data theft.

Banks (Traditional banks, neo banks, etc.): Whether traditional or neo banks, they provide a financial backbone for e-commerce transactions. These financial institutions are involved in authorizing and processing payments, making them a key target for fraudsters.

Travel and Event Booking Sites: Online platforms that allow users to book services for flights, hotels, and events. The high value of transactions and the sensitivity of customer data make them a prime target for fraudsters.

Subscription-Based Services: These services charge customers regularly for continued access to products or services, such as Spotify Premium, YouTube Premium, Disney+, and many more. They store payment information for recurring billing aimed at unauthorized use and subscription fraud.

Auction and Marketplace Listing Sites: An online service that connects sellers with buyers, often for unique, used, or handmade items. These sites are susceptible to fraud, including fake listings, counterfeit/fake products, and fraudulent transactions.

Latest Trend of E-commerce Fraud

Juniper Research flags a skyrocketing trend in e-commerce fraud, with losses leaping from $20 billion in 2021 to a projected $48 billion in 2023 as the digital marketplace explodes. North America is the region most affected, contributing a stark 42% to the global fraud value, while Europe, especially Germany and France, accounted for 26%. Latin America encountered considerable obstacles to combat fraud, experiencing a loss of 20% of revenue and 3.7% of e-commerce transactions identified as fraudulent.

In addition, the United States has seen 34% of consumers fall victim to e-commerce fraud in many varieties. Fraudsters employ mixed tactics to achieve their goals, including identity theft, phishing, and account takeovers. According to the 2023 Global E-commerce Payments and Fraud Report 2023, below are some common types of e-commerce fraud

Phishing/Pharming/Whaling: Globally, 43% of businesses encountered this problem last year. It's a manipulative tactic that urges individuals to accidentally disclose confidential information such as passwords, bank account numbers, or social security numbers. Fraudsters might use deceptive emails, fake websites, or direct communication to trick individuals into handing over their details.

Friendly Fraud: It is also known as chargeback fraud, which occurs when an individual purchases online and disputes the charge with their bank instead of seeking a refund directly from the merchant. It can also result from buyer's remorse, misunderstanding, or a deliberate attempt to defraud the merchant. Last year, 34% of global e-commerce merchants experienced friendly fraud.

Card Testing: It involves unauthorized use of credit or debit card information to conduct transactions, known better as card not present (CNP) fraud. Rank number three (33% globally) as the most frequent e-commerce fraud, it often occurs without the physical card being present, relying instead on stolen card details.

Identity Theft: Criminals leverage stolen personal details, such as Social Security numbers, addresses, and birthdates, to impersonate victims and make unauthorized purchases or open new accounts. This type of fraud leads to direct financial loss and can damage the victim's credit score, which takes considerable time and resources to resolve. Statista states that it most commonly occurs in India (27.2%) and the US (13.5%).

Account Takeover: It occurs when hackers gain control over a person's online account(s) by acquiring sensitive login credentials. Once access is secured, fraudsters can make unauthorized purchases, change account details to their own, or transfer funds. Globally, 27% of e-commerce platforms have suffered from account takeover incidents, with the highest frequency of these attacks reported in Latin America.

Tactics employed in e-commerce fraud continuously adapt to technological advancements in online retail. With each innovation, there's a constant threat of new fraud methods emerging. Therefore, institutions need to deploy fraud prevention measures and strategies that can evolve to counteract these ever-changing fraud techniques.

Future Outlook: Insights, Trends, and Predictions

For effective prevention and tackling of e-commerce fraud, it's important to understand the evolving trends and other factors that drive its phenomenon and highlight susceptibility. Keeping up-to-date with recent developments is vital.

Drawing from diverse research findings, it has become apparent that multiple contemporary trends are significantly impacting e-commerce. To navigate these challenges, we've outlined strategic measures for businesses to adopt, as detailed below.

Growth in Phishing, Pharming, and Whaling Attacks

Enterprises of all sizes must be aware of these types of cyberattacks, ranked as the number one threat in 2022 and 2023. According to the 2023 Global E-commerce Payments and Fraud Report, there has been a notable rise in the global occurrence of phishing, pharming, and whaling attacks.

A significant 43% of merchants reported experiencing this fraud, a sharp increase from 35% the previous year (2022). Thanks to the rise of generative AI tools, such as ChatGPT, Google Gemini, and others, it's an ultimate weapon for cybercriminals to execute their deceptive schemes effectively.

Enhanced Focus on Data Security and Privacy Regulations:

Growing customer awareness of data privacy and security drives stricter regulations that businesses must comply with. For example, the General Data Protection Regulation (GDPR) and Payment Services Directive 2 (PSD2) set higher standards for data handling and payment security.

Additionally, Zero Trust architecture strengthens defenses against data breaches and fraud by assuming that no entity within or outside the network is trustworthy without verification.

The Rise of Biometric Authentication

Security in the digital world hinges on usernames and passwords, a system developed in 1961 to manage multiple users on early computers. However, with its explosion of web services (Web 2.0), the ever-expanding online landscape has exposed its vulnerabilities. Weak, stolen, and reused passwords are at the heart of a major security concern. In 2022, 80% of data breaches stemmed from a shocking compromise of 24 billion passwords.

In recognizing the need for stronger security and smoother user experience, major organizations like Google, Microsoft, and Apple have collaborated to develop and enable a global authentication solution called Fast Identity Online (FIDO).

This innovative approach leverages public key cryptography, in combination with biometric factors such as fingerprint and facial recognition to replace the legacy username and password system. FIDO not only streams account access but also enhances security by meeting Multi-Factor Authentication standards, significantly reducing the risk of unauthorized access.

AI-Backed Fraud Prevention to Combat Fraud

Today, we rely on risk-based authentication (RBA) to secure online payment. This approach analyzes attributes like location, device, and transaction history to flag potentially suspicious activity. While it offers protection, it often creates friction for legitimate customers. For instance, requiring a one-time password (OTP) delivered via SMS adds an extra step to checkout, causing potential delays and frustration. In some cases, users might even abandon their carts entirely if the wait time for the OTP is too long.

This friction directly impacts conversion rates and revenue. In recognizing this challenge, solution providers leverage artificial intelligence (AI) and machine learning (ML) to secure e-commerce.

However, the rise of AI and ML is a double-edged sword. While businesses leverage these tools to analyze massive datasets and efficiently pinpoint fraud patterns, fraudsters also adopt them to craft more sophisticated and targeted attacks.

Then, how did online businesses safeguard all transactions? It resembles a strategic cat-and-mouse game, where vigilance and adaptability are vital. As businesses get better at catching fraudsters with new technology, fraudsters will keep refining their tricks. With both sides constantly moving, things can get tricky for online stores.

Solution: AI Fraud Detection And Fraud Prevention

While often used interchangeably, fraud detection and prevention have distinct purposes. Fraud prevention acts as a first line of defense, proactively stopping fraudulent attempts before they can even occur. Conversely, fraud detection functions as an early warning system. By analyzing past breaches across vast datasets, the AI/ML system learns from these incidents. This learning allows it to identify patterns and suggest improvements that can prevent similar fraudulent activities in the future.

Both e-commerce and financial platforms can leverage fraud prevention and detection, with the choice of emphasis depending on specific needs. With 25 years of expertise in the payment industry, HiTRUST developed Veri-id to assist financial institutions and e-commerce platforms to fight against fraud. To identify fraud, AI-powered Veri-id can retrieve up to 100 data points from user devices, including location, potential robot activity, browsing behavior , and many more.

Veri-id's AI risk-scoring engine analyzes each transaction and assigns a risk level. Based on this insight :

• Low-risk transactions proceed straight to authorization for smooth payments.
• Medium-risk transactions require additional authentication for enhanced security.
• Veri-id automatically flags high-risk transactions for rejection to prevent potential fraud.

Moreover, Veri-id empowers teams without employing software engineering skills by offering unparalleled maneuver through its user-friendly interface, enabling the effortless creation of custom rules.

Interested in exploring Veri-id in greater detail? Do not hesitate to connect with HiTRUT today! Our team of professionals stands ready to serve you round the clock, offering continuous support 24 hours a day, 7 days a week.