E-Commerce Fraud Is on the Rise, Leaving Retailers Vulnerable as They Embrace Selling Online

The surge in online purchases has also resulted in a greater need for e-commerce fraud prevention, according to a number of industry experts. With many retailers and brands selling online for the first time, or dealing with unprecedented volumes of online orders, they are increasingly vulnerable to cybercrime, which could cause significant damage to their bottom lines.

“Several factors are making it harder for risk teams to spot fraudulent behavior during the pandemic, including changing consumer behavior,” said Jason Cheung, product manager of fraud at Digital River, a global e-commerce solution. “Customers are shopping online more frequently and at different times, which can trigger false positives within risk models.”

Other issues could arise from increased bulk buying, whether due to consumers trying to stock up on product or take advantage of discounts (bulk orders have traditionally been a red flag for fraudulent resale activity). Cheung recommends that merchants work closely with risk teams on any new feature or service, so that they can vet potential risks and improve their e-commerce fraud prevention.

Retailers may be tempted to cut costs on risk teams right now, but this could leave them vulnerable. A recent report by brand protection company Red Points found that 41% of brand respondents had observed an increase in cybercrime, with a majority of those experiencing damage to business reputation as a result. And 68% of respondents deemed e-commerce fraud prevention very important at this time, with a further 22% agreeing it was “somewhat important”.

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The average fraudulent transaction increased in value by 13% in March 2020 YoY, according to payments processor ACI Worldwide.
CREDIT: Shutterstock

Unauthorized Sales

To combat cybercrime, companies must be aware of the different risk areas within their business. Bill Snowden, VP of business development at G2, has noticed that unauthorized selling has increased due to the amount of product inventory currently locked up in the supply chain, estimated to be worth around $500 billion.

“We’ve seen a dramatic increase of overseas-based, third-party sellers opening new seller accounts in online marketplaces,” said Snowden. “China now represents over a third of all 3P sellers on Amazon. We expect this to be a release valve for ‘goods in process’ or ‘finished goods’ that were cancelled by U.S. brands and retailers.”

While this tactic helps free up space, it can damage brand reputation if items are sold below price or in unapproved markets — either by unauthorized sellers or authorized sellers that are opening up new, unverified accounts online. While not necessarily illegal, these sales can violate existing brand policies and weaken a company’s control over brand protection.

Counterfeit Products

Similar damage can be done through counterfeit goods, which consumers may find through trusted channels like Google.

“Counterfeit and false product claims are showing up in search results via legitimate search engines,” said Snowden. “These search results are either leading to websites that offer counterfeit product or websites that would take your order, take your payment and never ship the product.”

These scams have been particularly popular during COVID-19, due to consumers spending more time online and also wanting to believe in good deals, such as for PPE, said industry experts. The economic climate has also weakened the financial position of many consumers, who may be more susceptible to scams — or may commit friendly fraud themselves.

Friendly Fraud

Friendly fraud (which is the fabricated dispute of a purchase by a consumer) already had been growing prior to the pandemic, according to Monica Eaton-Cardone, co-founder and COO at fraud solution Chargebacks911. However, new delivery channels such as curbside pickup have provided fraudsters with fresh avenues to make claims, as has the general rise in online purchases.

Mastercard, credit card, fintech
Friendly fraud occurs when a consumer dispute a charge with their credit card provider, placing the burden of proof on the merchant.
CREDIT: Elise Amendola/Shutterstock

In order to defeat friendly fraud, Eaton-Cardone outlined a process called representment. Organized transaction records can help support merchants against these claims in a timely fashion, by providing easy access to necessary information. She also recommended the Visa Merchant Purchase Inquiry plugin offered by Visa, which can instantly recall transaction data for the issuer and potentially resolve a customer inquiry before it becomes a dispute.

“While engaging in representment can be a very complex and time-consuming process, merchants can’t afford to allow friendly fraud to go unchallenged,” said Eaton-Cardone. “Research suggests that roughly 50% of all cardholders who get away with friendly fraud will do it again within 90 days.”

While the internet has provided a great opportunity for retailers to reach new consumers, particularly while stores have been closed, experts said that strong anti-fraud protocols are critical. Sneakers can be particularly vulnerable to fraud, due to the high-value resale market. But introducing a comprehensive solution for e-commerce fraud prevention does not need to be a huge investment of time or money, said Cheung.

“Don’t put off investigating different solution providers,” said Cheung. “Deprioritizing the creation of a risk management strategy, in order to push marketing initiatives, just prolongs the issues and potential financial losses. No one wants to be forced into shopping for a solution and rushing into implementation once they find themselves on a credit card brand’s list for high fraud rates.”

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