5 Types of eCommerce Fraud
Fraud is a major problem across all industries and sectors, but for online merchants, in particular, it’s especially concerning.
In 2016 alone, online fraud jumped 33% and by 2020? It’s expected to equal a whopping $7.2 billion in financial losses. On top of all this, online merchants are also losing money to incorrectly declined transactions—only adding to the revenue loss that fraud (and the fear that comes from it) can cause.
Types of Fraud
If you sell products online, you’re likely at risk for both these types of losses—as well as the chargebacks that can result from them. To understand how you might be at risk (and how you can take steps to start preventing fraud), it’s important to understand the types of online fraud that exist. In general, these fall into one of five categories:
This is the type of online fraud most people are familiar with, and it typically refers to a transaction done with stolen credentials—someone else’s credit card, banking info, etc.
True fraud has risen exponentially since online and EMV payments have taken over, making it easier for fraudsters to impersonate someone or use their cards without their knowledge. Studies show that 14% of all fraud stems from true fraud.
It sounds nice, but a friendly fraudster isn’t someone you want around.
This is when a customer knowingly makes a purchase, but then disputes the charge with their bank anyway—likely in an attempt to get a free product or service.
Friendly fraud also might occur when a customer is frustrated with a merchant (or their shipping or customer service) or out of impatience if a delivery has been delayed. In all, friendly fraud accounts for 18% of all fraud.
Phishing (Account Takeover Fraud)
Phishing fraud occurs when a thief gains access to someone else’s online account—maybe the login to Amazon or an online store or possibly to their PayPal, Apple Pay or other site where payment data is stored.
In many cases, this is easier than you’d expect. Most people use low-security passwords that fraudsters can easily hack with a little bit of personal information found on the web. About 11 percent of all fraud comes from phishing.
In refund fraud schemes, the thief purchases an item with a stolen credit card, and then returns it for a refund—on a different card or account.
This began as a common fraud strategy in brick and mortar stores (often with the fraudster seeking cash), but its prevalence has risen in the online environment in recent years. Refund fraud accounts for about 17% of fraud across all merchants.
Card testing fraud is one of the fastest growing types of online fraud out there, having grown more than 200% since 2017.
It occurs when a cyber thief “tests” a stolen credit card number.
They might do this by making smaller purchases at first, to see if they go unnoticed, and then branching into higher-cost items until they max out the balance. This type of fraud can be extremely costly for merchants, even at the beginning, since fraudsters typically charge a large number of smaller purchases all at once. If these turn into chargebacks, it could mean thousands in lost sales—not to mention chargeback penalties and more. In all, card testing fraud accounts for about 16% of fraud for all merchants.
Why Prevention is Crucial
When it comes to online fraud, it’s not just the lost product and incorrectly declined transactions that cost merchants cash.
The chargebacks that follow fraudulent purchases also cost businesses millions.
From the actual lost sales themselves to the chargeback fees, resources spent fighting the chargebacks and the looming threat to their merchant accounts, chargebacks pose yet another significant financial risk to today’s online retailers.
That’s why prevention of fraud—as well as the chargebacks that come with them—is crucial to operating a financially healthy business in today’s day and age.