As the holiday season approaches, so does the risk of ecommerce fraud. Much of the fraud is caused by the merchants’ own customers. Seeing fraud as an inevitable cost is insufficient; indifference can lead to financial stress. A proactive stance against fraud is crucial for navigating challenges successfully. Merchants must protect their businesses from fraud as more transactions happen online. I’ll discuss four common types of holiday e-commerce fraud and offer tips for fraud prevention.
eCommerce Fraud at Large
- North America leads global ecommerce fraud with over 42% of global fraud, driven by extensive data breaches and the widespread availability of stolen credit card information, according to Juniper Research.
- Per ACI data, fraud activities in new customer accounts rose by 5% compared to last year and are expected to increase by an additional 5% this holiday season.
- Online retailers can expect to see an average of 17.9% of merchandise returned during the holiday season. Of the approximately $212 billion of returned online purchases, 10.7% will be deemed fraudulent according to the National Retail Federation.
- Chargebacks911 estimates $117.46 billion in total chargeback losses by the end of 2023, with friendly fraud comprising 61%. Merchants are anticipated to bear nearly $79 billion of these losses.
Catalysts for Fraud During the Holiday
The drivers of eCommerce fraud during the holiday season stem from various factors, including the surge in online transactions, extensive data breaches, and the prevalence of stolen credit card information. Understanding these catalysts is pivotal for effective fraud prevention strategies, enabling merchants to proactively safeguard their businesses against the heightened risks posed by fraudulent activities.
Chargebacks & Friendly Fraud
A chargeback occurs when a customer disputes a credit or debit card transaction, prompting the merchant to refund the purchase and undergo a rigorous process to prove the transaction’s validity. While conventional figures suggest that the cost of chargebacks is $240 for every $100 disputed, the true impact extends beyond these numbers.
The actual cost of chargebacks, estimated to be a $117 billion problem, includes not only direct financial losses but also hidden expenses such as wasted time, expensive fees, and penalties. Merchants bear over 75% of the financial impact of friendly fraud. Merchants face mandatory chargeback fees and penalties, which, if unresolved, can escalate, leading to increased fees, additional penalties, or even the termination of merchant accounts. This places a substantial financial burden on merchants, impacting their stability and risking relationships with major card brands. Managing risks related to friendly fraud requires a combination of fraud prevention as well as tools that can streamline the dispute process.
Returning items and taking advantage of online retailers’ policies can be a real problem. It’s called return abuse and it’s a big challenge for e-commerce. A common form is called “wardrobing.” People buy things for events, then return them for a refund. Another facet involves criminal organizations orchestrating the return of stolen or counterfeit merchandise, capitalizing on shipping complexities to secure fraudulent refunds.
The financial toll of return abuse on online retailers is substantial. Retailers lose $165 million in merchandise returns for every $1 billion in sales according to The National Retail Federation. Return abuse causes retailers to lose $10.40 for every $100 in returned merchandise they accept. During the holiday season, the impact is especially noticeable. The average return rate is 17.9%, which means around $171 billion is returned. To combat this issue, online retailers must leverage a data-driven and strategic fraud prevention approach for their returns process. This approach minimizes the risk of accepting fraudulent returns, preserving both the financial integrity of the retailer and the overall customer experience.
Account Takeover (ATO)
A recent study found that 22% of US adults faced identity fraud in the past year, resulting in nearly $288 billion in nationwide household costs. ATO fraud is a prevalent identity theft attack where hackers illicitly gain access to a site using stolen credentials. Merchants bear substantial consequences, including expenses tied to customer service, lost customer lifetime value, and harm to brand reputation. Account takeover incidents often lead customers to blame merchants, impacting trust, brand image, and customer loyalty. In light of this, it is crucial for both individuals and businesses to implement fraud prevention software.
It’s estimated that promotional abuse costs merchants 1.2% of their revenue. The primary form of abuse is sign-up bonus exploitation, where customers use multiple accounts to take advantage of a merchant’s sign-up deals repeatedly. Tactics range from basic logins to advanced methods like creating fresh IP addresses or synthetic IDs. Another instance of promotional abuse involves consumers exploiting free-trial schemes without payment and amassing free gifts from multiple accounts for resale. Additionally, referral bonus abuse occurs when customers use multi accounting to receive rewards for self-referrals, allowing organized fraudsters to exploit businesses by publicly releasing referral promo codes and accumulating benefits. Merchants must find a balance between deterring loyal users from opportunistic promotional abuse and efficiently addressing prolific fraudsters.
How to Stay Ahead and Prevent Fraud During the Holiday Season
As the holiday season approaches, safeguarding against fraud becomes paramount for e-commerce merchants. A nuanced understanding of specific fraud types – chargebacks and friendly fraud, return abuse, account takeover (ATO), and promotional abuse – empowers merchants to enact targeted preventive measures. Here are customized recommendations for fraud prevention in each category:
1. Chargebacks & Friendly Fraud:
- Implement advanced fraud prevention software for real-time transaction analysis.
- Enhance security with 3D Secure authentication during online transactions.
- Regularly update and educate customers on purchase details to minimize misunderstandings.
- Leverage Token of Trust’s Identity Verification for comprehensive customer authentication, covering ID verification and qualifications/certifications validation.
2. Return Abuse:
- Implement stringent return policies, including restocking fees or shorter return windows.
- Utilize advanced analytics to identify patterns indicative of return abuse.
- Integrate Token of Trust’s Identity Verification to authenticate customers and minimize fraudulent returns.
- Regularly cross-check shipping and billing addresses; flag discrepancies and match shipping addresses against known suspicious addresses reported for fraud.
3. Account Takeover (ATO):
- Implement multi-factor authentication (MFA) to fortify account security.
- Regularly update and strengthen password requirements for user accounts.
- Monitor user behavior for unusual patterns signaling potential ATO attempts.
- Employ Token of Trust’s Identity Verification to enhance user authentication and thwart unauthorized access.
4. Promotional Abuse:
- Set limits on promotional offers per user or household to discourage abuse.
- Monitor user activity for suspicious patterns, such as multiple sign-ups from the same IP address.
- Implement fraud detection tools to identify and block synthetic IDs.
- Integrate Token of Trust’s Identity Verification for streamlined verification processes, preventing the abuse of promotions by the same customer across multiple accounts.
Adopting a holistic approach that combines technological solutions with strategic policies enables e-commerce merchants to substantially mitigate the cost of fraud during the holiday season. Token of Trust’s services, particularly Identity Verification, emerge as a pivotal resource in augmenting security measures and shielding businesses from diverse fraudulent activities.