First-party ecommerce fraud prevention: 8 tips to keep your business safe from returns abuse
Ecommerce companies have a difficult task — balancing the need to provide an ultimate user experience whilst offering a secure payment process. Preventing online payment fraud is vital.
Fraud trends and strategies must constantly evolve. Each season brings a new wave of online fraud tactics, so companies must be prepared to face new attacks at any time.
There are numerous techniques that can empower ecommerce merchants against fraud while ensuring fraud prevention efforts don’t impact the consumer experience.
What is ecommerce fraud, and how does it happen?
The term “ecommerce fraud” encompasses a variety of actions taken in bad faith to defraud online merchants out of money. This involves first-party abuse such as requesting undeserved refunds, claiming non-delivery of goods and taking unfair advantage of promotions and bonuses, as well as third-party fraud, which includes use of stolen credit card information and organized large-scale theft.
First party abuse is challenging to identify because it often involves customers who have a rich history of shopping with a business and can therefore be harder to detect. Many first party abusers are legitimate consumers who will occasionally claim an unearned refund to bolster their own finances. Others make a career out of defrauding ecommerce retailers, either as a paid service or as a moneymaking scheme for themselves.
Some fraudsters are highly advanced in their tactics, and they may work as part of criminal organizations. Companies without defenses capable of stopping these bad actors may suffer significant losses at their hands.
Why is post-fulfilment ecommerce fraud protection so important?
The losses from post-fulfilment ecommerce fraud can add up quickly and place an enormous strain on a company’s budget. The National Retail Federation found that in 2023, 13.7% of all returns were fraudulent or abusive and the total losses attributed to those returns were $101 billion.
Returns abuse and other kinds of first-party fraud also exist alongside more direct, third-party fraud. When asked what types of digital and ecommerce fraud they were most worried about by the NRF, merchants cited account takeovers as the No. 1 danger, followed by “item not received” delivery claims in second place and third-party stolen card fraud in the third position.
Types of first-party ecommerce fraud to watch out for
The arms race between fraudsters and retailers, with new methods and countermeasures constantly rolling out, is ongoing. Some of the primary tactics for ecommerce merchants to guard against include:
- Buyer’s Remorse Chargebacks: Some abusive consumers have discovered that, in many cases, it’s easier to go around a retailer’s return and refund policies and simply raise a chargeback with their credit card provider, claiming fraud has happened on their card. When this type of fraudulent transaction comes from a legitimate customer, it’s classified as “1st party chargeback abuse / buyer’s remorse”. Companies that don’t have mechanisms in place to dispute chargebacks may lose significant money to this method, while suffering other consequences, such as penalties from payment providers.
- Returns abuse and wardrobing: Customers may purchase an outfit, wear it once and then return it for a full refund. Alternatively, shoppers may buy multiple pieces, choose one to keep and return all the rest, losing the company money on packaging and return shipping for the many packages.
- Item not received claim: A more direct form of return fraud, which may be carried out by professional criminals, involves lying about whether a product arrived. The criminal claims a refund or replacement for a package that did come. With both the money and the product, the fraudster is free to keep the item or resell it to add to the profit. Some ambitious thieves also falsify multiple non-delivery instances on the same order, claiming the replacement never arrived.
- Promo abuse: Companies that offer promotions for newly created customer accounts may discover individuals are abusing this system by creating multiple accounts to collect more credit than they are entitled to. Any promotion that is vulnerable to duplication is a potential target for attackers, who could potentially use automated tools to increase their reach.
See more details about “wardrobing” and other ecommerce return issues.
[3] Accertify, 2023
8 tips for preventing ecommerce fraud
Due to the prominence of fraud in today’s ecommerce landscape, staying neutral is no longer an option. Companies must implement specific post-fulfilment ecommerce fraud prevention techniques and make changes to help them cope with the threat posed by bad actors.
Useful approaches to detecting potential abuse and preventing the resulting damage, some operational and some technological, include:
- Training customer care teams: Despite the digital nature of ecommerce, people are still the core of the business. When customer care professionals can effectively process legitimate consumer concerns — and detect abusive transactions — companies should fight fraud more effectively.
- Clarifying, strengthening and enforcing return policies: When companies have clear return policies without loopholes, opportunistic criminals may look elsewhere. Consumers considering occasionally abusing these policies could be dissuaded by threat of consequences. At the NRF PROTECT conference, Petco’s Stephen Dubeck reported that 26% of people who commit return fraud would refrain if threatened with a ban.
- Updating ordering platforms: The software tools that power ecommerce stores often represent a vulnerability if not updated frequently. Fraudsters searching for weaknesses in ecommerce merchants’ systems may notice opportunities to process illegitimate transactions when dealing with merchants using unsophisticated or outdated store software.
- Strengthening payment authentication tools: Not all fraudulent activity involves specific tactics like promo abuse, return abuse or refund fraud. Some retail crime revolves around age-old tactics like the use of stolen credit card information. Stopping these financial crimes calls for a strong, updated payment authentication system.
- Automating chargeback assessments and disputes: Chargeback fraud is an issue that can overwhelm merchants with its relentless volume and pace, leaving employees without the time to sort transactions into legitimate and illegitimate, or to dispute them. Using automated tools to analyze chargebacks and prepare disputes helps in this regard.
- Implementing account management technology. Account fraud takes a few forms. Some criminals open a large volume of fraudulent new accounts to take advantage of promotions, while others pursue account takeover fraud using legitimate customers’ credentials and payment information. Automated account management systems help safeguard against this kind of identity theft.
- Studying customer device information: One way to detect fraud early is to analyze the device statistics of people logging into an ecommerce merchant’s systems. By studying location, device type or even more granular data points like screen resolution, these systems can point out which connections are likely to come from spoofed devices and commit a fraudulent transaction.
- Analyzing community data with AI and ML: Artificial intelligence (AI) and machine learning (ML) are enabling data analysis at previously impossible levels of scale and sophistication. Considering that recent fraud trends involve using these technologies to exploit companies’ weaknesses, it’s important for businesses to use the same solutions to strike back. By analyzing customer data across multiple retailers, an AI-powered Accertify system implemented by Guitar Center cut chargeback losses by 62% and doubled fraud savings.
Discover the value of technology in stopping ecommerce payment fraud
[4] NRF, 2024
Guarding businesses against ecommerce fraud
The threat posed by fraudsters is constant, but the specific techniques used by criminals are always evolving. Having the right technology and policies in place is a good first step in fighting back against potential fraud, but from there, it’s important to keep evolving. Ecommerce fraud prevention can’t be a “set and forget” matter for companies.
With support from experts at Accertify, organizations can get ahead of the pace of modern ecommerce fraud. Using these specialized ecommerce fraud detection solutions allows organizations to find issues as they occur and adjust to make sure all loopholes are closed against future abuse.
While locking down ecommerce platforms against fraud, it’s also important to keep the customer experience strong. Ecommerce companies are in the business of providing seamless, user-friendly services for consumers, so ecommerce fraud prevention techniques must always be implemented with the customer top of mind.
When it’s time to transform your business to cope with today’s threat landscape, you can view Accertify’s lineup of online fraud and abuse prevention technologies.