Understanding and Optimizing E-commerce Fraud Prevention

The global market has undergone a significant shift in the e-commerce industry, driven primarily by the COVID-19 pandemic. Accelerated digitalization has moved consumer shopping habits online, increasing the number of digital buyers each year. According to research by Statista, more than 2.14 billion people purchased goods or services online in 2021, and retail e-commerce sales reached $4.28 trillion that same year.

This growth in e-commerce has also triggered an increase in fraudulent activity, with online businesses becoming frequent targets of cyberattacks and fraud. A Statista report estimated that global e-commerce losses from online payment fraud had reached $20 billion by 2021. Unfortunately, the cost of fraud as a percentage of revenue continues to grow each year.

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The Scope of E-commerce Fraud

According to a study by Juniper Research, online retailers could lose more than $206 billion in total between 2021 and 2025 due to card-not-present (CNP) fraud.

As online sales increased during the pandemic, financial crime also intensified, leading to an increase in account takeover fraud and greater use of synthetic identities. Fraudsters often target items with high resale value, making expensive physical goods their primary target. However, digital goods and services can also be attractive, especially those with entertainment value, such as video games or streaming services, or software that fraudsters could repurpose for other criminal activities.

Online businesses must protect themselves by staying informed and working with partners that specialize in fraud prevention tools and techniques.

Common Types of E-commerce Fraud

1. Card-not-present (CNP) fraud or payment fraud

CNP fraud occurs when a fraudster attempts to complete a credit card transaction without possessing the physical card. For online or phone transactions, the fraudster only needs to provide the cardholder's name, billing address, card number, three-digit security code, and expiration date. 

This information can be stolen electronically or purchased on underground marketplaces. If the fraud succeeds and the goods are received, the legitimate cardholder will likely discover the unauthorized transaction and file a chargeback, resulting in a financial loss for the merchant.

2. Friendly fraud or chargeback fraud

Friendly fraud occurs when someone makes a purchase and then files a chargeback to receive a refund while keeping the item. In these cases, the cardholder may claim they never received the product or did not order it. 

Chargebacks have a significant negative impact on merchants because they are costly for everyone involved. If a merchant receives a high number of chargebacks, this can lead to fines and even the loss of their ability to accept credit cards.

3. Card testing

This type of fraud occurs when a fraudster obtains numerous credit card numbers and uses them to make repeated low-value purchases at the same store. The goal is to identify which cards are valid and can be used to commit more fraud later. 

Fraudsters often choose online stores without authentication or security measures and frequently use bots and scripts to carry out this activity quickly. If the volume of this activity is high, card networks may temporarily suspend a merchant's ability to accept card transactions until the fraudulent activity is blocked.

Best Practices for E-commerce Fraud Prevention

The health of any e-commerce business depends not only on detecting fraudulent activity but also on finding the best fraud prevention tactics to keep your business and customers safe. Some best practices include:

• Know where your customer base is located: When you receive high-value orders from countries that do not usually generate sales, take extra care before fulfilling them.






• Know your customers' purchasing behavior: Out-of-pattern transactions may indicate fraud, so it can be helpful to review these orders more carefully.






• Require the CVV and billing address: Requesting the card security code (CVV) and billing address helps authenticate online transactions.






• Use 3D Secure 2.0 authentication: Implement the latest version of 3D Secure for more accurate and secure authentication.






• Implement CAPTCHA: Use CAPTCHA to protect against card testing fraud, adjusting it based on your customers' behavior.






• Communicate with your users: Keeping them updated on order status, shipping details, and previous orders will make the checkout process more resistant to fraud and increase your customers' trust in your services and business.

Payment security is a crucial factor for any e-commerce business, and it remains an ongoing concern for both merchants and customers. Understanding the most common types of fraud and how they occur is the first step toward preventing it. Partnering with the right payment service providers and optimizing your fraud prevention strategies are essential steps for keeping your business and customers safe.

What Have We Done at Tilopay?

As a payment gateway, Tilopay enables secure transactions by offering robust payment processing solutions that include advanced security measures to protect against fraud.

Although active fraud risk management is the responsibility of the merchant and its specialized partners, Tilopay helps minimize risk by implementing security technologies that help verify and authenticate online transactions.

This provides an additional layer of protection for transactions processed through its platform, supporting a safer shopping environment for customers.