Top 10 Ecommerce Fraud Detection and Prevention Best Practices for 2021

Ecommerce fraud detection is defined as a method that helps ecommerce businesses detect high-risk transactions using fraud detection and prevention practices. It supplements them with fraud detection tools that employ algorithm-based analysis to assess each transaction’s potential risk. This article shares the top 10 best practices to detect and prevent fraud in 2021.

Table of Contents

• • What Is Ecommerce Fraud Detection?
  • Top 10 Best Practices for Ecommerce Fraud Detection and Prevention  

What Is Ecommerce Fraud Detection?

Ecommerce fraud detection helps ecommerce businesses detect high-risk transactions using fraud detection and prevention practices. It supplements them with fraud detection tools that employ algorithm-based analysis to assess each transaction’s potential risk. 

Ecommerce fraud detection has gained significance in recent years as ecommerce fraud trends are on the rise, and frauds have become more subtle and harder to detect. To protect a business, every merchant and bank should follow the latest fraud detection techniques, for example, an AI-based ecommerce fraud software. They should also keep themselves updated about the common types of online frauds so that they do not fall prey to them.

The first and foremost task for any banker, merchant, or other ecommerce player is to develop a risk management framework to decrease frauds and lower their impact on the organization. This includes being aware of channel risk (e.g., mobile, online, staff or terminal, and network) and building a segmentation strategy based on the operational risk involved.

Security vulnerabilities can be spotted across channels. Therefore, creating a controlled environment with clearly defined layers that follow a complete transaction cycle is crucial. Such an environment can prevent hackers’ attempts to find and target weak spots.

Also read: What Is Fraud Detection? Definition, Types, Applications, and Best Practices

Why is fraud detection and prevention relevant today?

The COVID-19 pandemic has significantly altered how individuals and businesses approach their day-to-day activities. For ecommerce players, online activity has surged as consumer volumes continue to fluctuate considerably. The increasing number of online users has not just impacted how ecommerce merchants approach their business practices, but they have also affected the pattern of fraud occurrences.

Ecommerce fraud prevention leader Forter released its ninth Fraud Attack Index, providing insights into the impact of COVID-19 on online buyer behavior and ecommerce fraud trends. According to the index, new users now account for nearly 30% of all online transactions. In addition, a five-fold growth in new online account openings was accompanied by an increase in false declines and a rise in omnichannel fraud, including a 55% jump in buy online pickup in-store (BOPIS) fraud.

According to LexisNexis Risk Solutions, fraud volumes increased in 2020, which translated into a 7.3% increase in the cost of fraud year-over-year for U.S. ecommerce and retail merchants. As a result, fraud now costs companies $3.36 for every dollar lost to fraud compared to $3.13 in 2019. As per another 2021 study by Juniper Research, online payment fraud, including ecommerce fraud, is set to exceed $200 billion by 2024, with fraud attacks becoming more sophisticated as time goes by.

Also read: What Is a Security Vulnerability? Definition, Types, and Best Practices for Prevention

Top 10 Best Practices for Ecommerce Fraud Detection and Prevention

An online store can be protected from fraudulent credit card transactions, affiliate fraud, and other types of ecommerce fraud by recognizing the fraudulent activities. Preventive measures can reduce the fraud risk and ensure that it does not impact the business. Businesses have several tools at their disposal for fraud detection and prevention. Here are the top 10 best practices that businesses can implement to protect themselves from ecommerce fraud.

1. Conduct frequent site security audits

Ecommerce merchants can find flaws in their security framework before criminals and fraudsters discover and target them by regularly conducting site security audits. If such audits are conducted often enough, they will ensure the following:

1. 1. Verify if shopping-cart software and plugins are up to date
   2. Locate active and inactive plugins for further action against inactive ones
   3. Validate working of the SSL certificate
   4. Confirm if the ecommerce store is PCI-DSS-compliant (payment card industry data security standard)
   5. Cross-check the backup frequency of the online store
   6. Confirm if the passwords used for admin accounts, hosting dashboards, CMS, database, and FTP access are strong enough
   7. Confirm if the website is being scanned regularly for malware
   8. Identify if communication between the store and customers & suppliers is duly encrypted

2. Ensure PCI-compliant ecommerce business

The PCI Security Standards Council established PCI DSS payment security standards in 2006 in response to the increasing data theft. The council comprised Visa, Mastercard, American Express, Discover, and the Japanese Credit Bureau. It wanted to ensure that all merchants accept, process, store, and transmit credit card information in a way that minimizes the risk of fraud, data breaches, and data theft.

Thus, for an ecommerce online store that accepts credit card payments, the business needs to be PCI-compliant, as PCI compliance aims to protect sensitive cardholder information from being leaked due to credit card fraud. If you operate a SaaS-based ecommerce store, the platform will typically provide this compliance.

3. Monitor site for suspicious activity

Ecommerce merchants can protect themselves against fraudulent transactions by monitoring their stores for suspicious activity. Businesses can monitor accounts and transactions for red flags, such as inconsistent billing and shipping information and the customer’s physical location. In addition, merchants can use software tools that track customer IP addresses and alert them if the addresses indicate countries known to have a large base of fraudsters.

As such, regular site monitoring can help businesses protect themselves from potential suspicious activity that can snowball into quantifiable frauds in the future.

Also Read: What Is a Cyber Threat? Definition, Types, Hunting, Best Practices, and Examples

4. Use an address verification service (AVS)

Credit card processors and issuing banks generally offer an address verification service (AVS) to detect suspicious credit card transactions in real-time and prevent credit card fraud. This service checks if the billing address submitted by the card user matches with the cardholder’s billing address record in the bank issuing the card. 

This verification occurs as part of the merchant’s request to the payment processor to authorize the credit card transaction. When addresses don’t match, the system either declines the transaction or flags it for further investigation. This fraud prevention method is most commonly used in payment processing. Ecommerce businesses must ensure that their payment processor has an AVS.

5. Check card verification value (CVV)

The three-digit security code on the back of credit and debit cards (i.e., VISA®, MasterCard®, and Discover®), and the four-digit security code on the back of American Express® credit and debit cards, is called the card verification value (CVV) or card security code (CSC). By requesting all purchasers to supply the CVV code for every transaction, businesses can ensure that customers have the physical credit card in their possession.

Further, PCI’s advice for merchants is not to store the CVV with all the other credit card information of a user (e.g., card number and owner’s name), as it is considered illegal for merchants to do so. Thus, in a way, criminals cannot get this code unless they physically have the card, thereby reducing the chances of any fraud.

6. Use hypertext transfer protocol secure (HTTPS)

HTTPS is a primary protocol that exchanges data between a customer’s web browser (such as Google Chrome) and an ecommerce online store. It is a secure version of HTTP. HTTPS encrypts data to protect sensitive information, such as customer names, addresses, and credit card numbers, thereby securing critical customer data from attackers.

Using HTTPS prevents the online store from having its transactions broadcast in a way that is easily viewed by hackers, cybercriminals, and fraudsters. The ecommerce business can use HTTPS by buying an SSL certificate. HTTPS is considered an effective preventive measure against commonly occurring online frauds that are less sophisticated in nature.

Also Read: What Is Social Engineering? Definition, Types, Techniques of Attacks, Impact, and Trends

7. Avoid collecting excessive sensitive data

An effective way of protecting an ecommerce store in the event of a data breach or hack is to collect and store as little customer data as possible. This preventive measure goes by simple logic—attackers can’t steal what you don’t have. 

Thus, ecommerce stores should only collect data that they supposedly need to complete a transaction and ship the product. Businesses can therefore avoid collecting social security numbers, birth dates, and other unnecessary sensitive customer data, so their business remains safe even in case of a data breach.

8. Set limits on purchases to lower merchant errors

Ecommerce merchants can set limits on the number of purchases and total dollar value that they will accept from one account in a single day, based on order types and business revenue trends. This reduces the merchant’s exposure to a minimum, should fraud occur.

Further, Chargebacks911 estimates that 20 to 40% of chargebacks occur Opens a new window because of merchant error. Such chargebacks can be circumvented by avoiding unclear billing descriptors or confusing return policies that can frustrate legitimate customers.

9. Use anti-fraud solutions

Several fraud prevention software solutions are available in the market today. These tools vary widely depending on how much work is involved in the installation and ongoing management. Some businesses prefer hands-on solutions, while others prefer leaving them to experts. Following are some of the types of anti-fraud solutions that ecommerce merchants can employ:

• • Elementary anti-fraud tools: These tools are typically integrated into online shopping carts and ecommerce platforms. They employ machine learning algorithms to identify fraudulent transactions through IP geo-location, validate email addresses, conduct device fingerprinting, and verify addresses. Such tools perform very specific and single functions at a time.
  • Mid-level anti-fraud tools: These tools offer a wider variety of functions, including chargeback guarantees, auto declining of high-risk orders, protections against new account fraud, and account takeover protection.
  • Top-level anti-fraud tools: Such tools offer everything that other tools offer, plus outsourced case management, expertise working with large merchants, loyalty fraud management, policy abuse protection, automatic decisions, and manual review of suspicious transactions. These tools make sure that no authentic order is declined mistakenly by the software.
    

10. Cross-check if IP address and credit card address match

Every order placed on the ecommerce online store has an associated unique public IP address (i.e., a string of numbers separated by periods that identifies each computer using the internet protocol). From the IP address, one can generally detect the geographic region or the city of the customer making the online purchase. If this city or region does not match the address of the credit card being used, that is a red flag for the transaction. This can act as a strong fraud preventive measure, as it can detect and flag fraudulent orders in their initial stages itself.

In addition to these best practices, online merchants should also ensure they don’t ship orders to PO boxes and other virtual addresses, such as those of freight forwarders. Fraudsters usually avoid detection by keeping their physical address a secret and prefer using a PO Box or any other anonymous location. Fraudsters are aware that the police can’t figure out an address that is virtual and not physical. 

Eliminating all frauds is highly unlikely for any ecommerce business. However, if merchants take these fraud prevention practices seriously, they can certainly do a lot to reduce the impact of fraud on the bottom line of their company.

Also read: What Is Vulnerability Management? Definition, Lifecycle, Policy, and Best Practices

In conclusion

The number of ecommerce businesses is on the rise across the world. The volume of online purchases and transactions is especially booming due to the ongoing COVID-19 pandemic. However, this trend has also led to a rise in fraudulent activities. Therefore, online businesses must implement fraud detection and prevention tools. 

They should opt for solutions that employ machine learning-based algorithms that can learn, adapt, and improve over time. Such tools can seamlessly find new fraudulent patterns without any human intervention. In addition, online stores should also abide by common security policies and PCI standards to make their business more secure and reliable for customers.

Do you think ecommerce players should follow the above best practices for enhanced fraud detection and prevention? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!