5 Types of eCommerce Fraud and How Merchants Can Spot It


Merchants strive to have as frictionless eCommerce payment experience as possible.  Yet such flexibility creates an ideal landscape for fraudsters to exploit merchants' vulnerabilities.  Traditionally eCommerce merchants in the UK have put their resources into fighting credit card fraud, and quite rightly.    Overall losses on UK cards rose by 6 percent in 2014 to £479m and the total value of credit card fraud in the UK more than doubled last year to £1.5bn, the highest value since 2011, according to the BDO’s FraudTrackreport.  

For many merchants though, fraud prevention has evolved into profit protection, as more than payment fraud needs to be monitored.  Fraudsters are changing their tactics to how they operate their “business”, whilst other scams are coming to light that were traditionally considered the by-product of operating a business.  Merchants can strengthen their overall fraud prevention strategy by learning about the newer tactics the fraudsters are using to defraud their business and understanding the ways to spot them.

Employee Fraud

Employee fraud is a global epidemic – much more than merchants may realise. In the UK, retailers saw £770 million stolen by employees in 2014, according to the Global Retail Theft Barometer, and employees committed almost a third of the fraud (32%) according to the BDO 2015 Interim Fraud track report.  Theft of actual goods is not the only risk merchants face; employees can also set up complex systems to divert cash from customers or your business.

A number of practices can help prevent and spot employee fraud:

  • Scrutinise applicants before hiring them and run a background and credit check on them.
  • If employees are able to use discount codes, monitor employee IDs against total value to see if there are any unusual spending patterns.
  • Have the ability to pull daily reports to see the total amount of refunds or write-offs being offered and ensure these can again be correlated with an individual employee ID.
  • Implement sound inventory practices and surprise audits.

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Omni-Channel Fraud

The flexibility of eCommerce has paved the way for multi-channel fraud such as mobile fraud, web fraud, mail order fraud, IVR fraud, kiosk fraud, call centre fraud, etc.  When operating a multi-channel distribution strategy, it is easy for a merchant to overlook fraud in one channel when trying to combat a fraud assault in another.  Fraudsters are extremely agile and look to exploit the most vulnerable distribution channel.  They also know that when their fraud attempts in one distribution channel begin to be thwarted by the merchant, that its best for them to move on to another channel to reduce their chance of detection.  Increasingly, attacks are taking place on several channels simultaneously.



To spot multi-channel fraud merchants should:

  • Have a centralised fraud platform with a dedicated fraud team that monitors all multi-channel transactions.  This enables the merchant to look for velocity on certain data elements, no matter what the channel is.
  • Ensure that any rules or models implemented are designed for each specific channel.  For examples, looking for IP addresses from a kiosk channel could produce a lot of false positives.
  • Understand the weakest channel within your organisation and ensure best practices and training are offered for that area e.g. Call Centre.

Collecting and analysing fraud data in real-time enables the merchant to make a consistent and well-informed decision at any given moment.  It is also key to profile the behaviour of your customers across the different channels and look for both consistencies and unusual patterns.  It is essential that merchants use tools that are as agile and reactive as the fraudsters.

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Delivery and Returns Fraud

Fraud across the supply chain is one of the fastest growing areas of fraud for eCommerce retailers.  These fraud tactics come in many guises from ‘Missing or Damaged claims’, ‘Returns’, ‘Bait and Switch’, ‘Wardrobing’, ‘Delivery Intercepts’, etc.  According to the 2014 National Retail Federation Return Fraud Survey, the industry would report an estimated $10.9 billion to return fraud in 2015.  Yet, despite the increase in the amounts lost to delivery and returns fraud, retailers tend to do very little to prevent it, especially in the growing online and mobile sales channels.

Today, acts of Delivery and Returns fraud can be carried out from the comfort of a person’s home.  Whether the fraudster is claiming an item never got delivered, or an item was missing, or wearing something once and then returning it, these purchases are transacted with a genuine card with the actual deceit taking place later on.

Retailers can try to detect and prevent this type of behaviour by:

  • Ensuring that both the purchase and return transactions are stored in the same database.  This enables cross reference of a customer’s purchasing and returns history when deciding to fulfil future orders placed by the customer.
  • Calculating the true value of a customer by comparing the amount spent on new purchases against the amount of refunds provided and/or claims made.
  • Looking for ways to legally share this information across other retailers. It may be the first time this customer is coming to buy from you, but they may be a serial returner or claimant against other retailers.

Comprehending the thieves’ tactics can help determine an effective method to combat future losses.  The key is to identify high-risk consumers who make many claims.  Getting a handle on delivery and returns fraud will help improve profit margins and limit back-office losses.

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Account Takeover Fraud

Account Takeovers (ATOs) are one of the more widespread forms of fraud. ATOs occur when a fraudster gains unauthorised access to legitimate personal information such as an account number, password, username or social security number and changes the contact information.  Once the legitimate information is amended, the fraudster has established a window of opportunity in which transactions are conducted and their victims usually have no idea their accounts have been compromised.

Spotting slight changes in behaviour is critical to detect and prevent fraud.  Behavioural changes to look for include:

  • Change in password and email address within a short period of time.
  • An update to a shipping address on file, shortly after a password or email address has been changed.
  • Unusual spending habits on the account.

The more a merchant knows about its customers the more it can identify both characteristic and uncharacteristic behaviour.  In addition, having a well-informed staff and a fraud prevention system in place to help pre-empt ATOs is important to the overall protection of revenues and profits.

Sleeper Accounts Fraud

With fraud prevention methods improving, fraudsters have had to change their approach to be able to continue their “business”. One new approach is the use of sleeper accounts.  Fraudsters learnt from experience that many prevention tools look for a trend between account creation date and the number or value of purchases.  To get around this, fraudsters have started creating accounts and purposely keeping these accounts inactive for a long period of time, say 90 days, leaving the account “asleep”.  After this period of time has lapsed, fraudsters begin using the accounts, circumnavigating rules and processes that look to identify purchases on brand new accounts.  With this in mind, merchants should be willing to change their approach and:

  • Store data elements used in creating accounts and validate there are matches when purchases are made 90 days later.
  • Look at velocity on data elements to see how many other accounts are being created.  It’s not unusual for a fraudster to create multiple sleeper accounts before coming back to make a purchase.
  • Look at correlations between first transaction and second transaction, rather than purely on account creation.

With the increased number of data breaches over the past few years, millions of personally identifiable information records have been made available to fraudsters.  They can now create accounts using real data, making it harder to detect.  It’s therefore important to ensure you are using underlying data elements to help view consistencies between account creation, initial transaction and future transactions after that.  Whilst sleeper account fraud is difficult to pin point, spotting slight modifications in behaviour is key to detecting and preventing losses generated by fraudulent accounts.

With so many perpetrated fraud schemes that look to take the money out of merchants pockets, it may seem like losing money is inevitable.  The opposite is true.