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Do you know all the faces of fraud in transaction?

October 6, 2022
Do you know all the faces of fraud in transaction?

The Common Types of Fraud in E-Commerce

E-Commerce activities have increased significantly during the pandemic, despite hardships in logistics. Coming out of the global health crisis are the births of work-from-home and online-only businesses that are much more cost effective operating solutions.

Distant shopping is rapidly claiming its position as a convenient alternative for busy customers, especially with the availability of online buy-and-sell platforms that often offer great deals. New and innovative payment methods have caught up in the race, allowing purchasers to pay for items from almost anywhere using any internet-connected smart device available to them.

As the online selling environment grows in complexity, more types of fraud appear in the market and along with them comes more damages for merchants and cardholders. Despite the varying tactics attempted to pull off digital frauds, swindlers’ goal remains to deceive merchants and online shoppers for financial or personal gains while staying anonymous.

This article will inform you on the common types of fraud in E-Commerce, the different steps that fraudsters take to carry them out, as well as a conclusion of possible solutions to lower fraud rates and further secure transactions.

Transaction Fraud

When online shopping began to flourish, a handful of advanced payment methods were developed by financial institutions and payment service providers to meet the needs for contactless purchases. Online payment provides customers with ease and convenience, without having to pay in person or transfer at the ATM and the bank. However, this has given fraudsters some more space to roll out their advanced criminal practices.

Online transactions are usually problematic when a fraudster uses a fake credit card to pay for something over the internet, and below are the steps taken by the criminal to gain from their victims.

Step 1: Fraudster gets unauthorized access to a credit card number and uses it to pay for a purchase at an online store

Step 2: The online store processes the payment

Step 3: The legitimate cardholder notices a strange transaction in their account

Step 4: Cardholder contacts the bank to request for a chargeback

As far as we can see, the legitimate cardholder seems unharmed because they are most likely eligible for a chargeback and will be refunded for the transaction that they did not authorize. On the other hand, chargebacks are costly to process and are charged on a unit basis.

Without a doubt, the responsibility for chargebacks falls directly onto the online store, meaning that they would have to pay for the administration fees and provide the refund to the legitimate cardholder for the fraud. If frequently repeated, chargebacks will significantly damage the online store’s finances and reputation.

From the fraudulent chargebacks, the online merchant will have to:
● Give refund for the payment
● Sacrifice a sale
● Pay for the administrative charge

Other than that, if it is found that too many chargebacks are filed at a particular merchant, the card network may decide to put the store on a high fraud target list. Within there, the fees payable for chargebacks are certainly higher and the merchant will be considered extremely vulnerable to fraud.

It is no secret that chargebacks are disputable, meaning that if the merchant desires, they can actually request to not pay for both the refund and the fees. Nevertheless, these disputes take a long time to be resolved and require provision of the evidence proving that the merchant is a victim of fraud, which could be a bit of a hassle.

Friendly Fraud

Despite the surprisingly high volume of online frauds happening daily to unprotected transactions, not all of them are conducted by professional fraudsters. Chargebacks can sometimes be initiated by someone using their own card. As nice as the name sounds, these are the three different categories in which this type of fraud falls into:

Accidental request: In this case, the request is made directly by the cardholder who does not realize that they purchased something using the card. This is also known as first-party fraud because it is coming from the legitimate cardholder who conducted the transaction themselves.

Opportunistic friendly fraud: Some refund requests are initiated by customers who are dissatisfied with a store, its payment policy or simply because they regret buying the product.

Malicious friendly fraud or chargeback fraud: This is when a customer who is a legitimate cardholder purchases an item, receives and keeps it, but instead claims that the package never arrived. It is called malicious because although the payment was authorized, the payer’s sole intention was to personally gain from the merchant.

Chargeback Guarantee Fraud

Risk-based fraud prevention is one approach for merchants to secure their payments, aside from them, chargeback guarantee programs in which service providers offer a guarantee pricing model for businesses to subscribe to are also popular among online stores. What this does is to block all transactions and friendly fraud, and in the case that the merchant still receives chargeback requests, the anti-fraud vendor will handle the case’s administrative fees.

Ideally, this type of service is suitable for smaller businesses that are vulnerable to fraud but cannot afford more advanced solutions to prevent them. With a subscription to a guarantee program, they can solely focus on selling products and leave the chargeback issues to the guarantors.

However, there are also cases where false positives happen. These are instances when legitimate customers are marked as fraudulent due to the autonomous approach in blocking all transactions and friendly fraud.

In providing chargeback guarantee programs, these service providers must be excessively careful with payments, and therefore, end up blocking more transactions to maintain a low fraud rate. As a result, the merchants will be hurt because accidental blocking will likely take away legitimate buyers as well as their returning purchases in the future. Additionally, for stores and products with low switching costs, chances are that customers will immediately seek alternatives.

Triangular Fraud

This type of fraud is a new tactic born amid the pandemic, though it has attracted great attention in the E-Commerce world. The reason behind its name goes back to its composition, which involves three parties that are a legitimate customer, a legitimate store, and a fake store operated by fraudsters with stolen credit card details.

Below are the different steps that fraudsters take to deceive their targets in a triangular fraud:
Step 1: The customer makes a purchase on an online selling platform

Step 2: The seller, who is actually fraudsters, processes the order and turn to purchase the real item from the real store

Step 3: The fake seller will use fake credit card details using the real customer’s shipping address

Step 4: he real store will pack up and deliver the bought product to the real customer’s address

Step 5: The legitimate cardholder of the transaction, whose card details were stolen by the fraudster, noticed the strange purchase and file for a chargeback

Step 6: The real store will contact its direct buyer – the fraudster, but will receive no response

Step 7: The legitimate store owner has to pay for the chargeback fee, while the real payment is kept by the fraudster, which also happens to be the real customer’s money

Within this scenario, it appears that the real buyer will be receiving the item that they paid for and nothing seems abnormal to them. However, behind all that, an amount of money is stolen from the real store having to refund despite their shipment. In addition, the actual amount of money spent by the real buyer is gained by the fraudster.

Triangular fraud is a clear example of how sophisticated and complex E-Commerce fraud has grown into and that fraudsters will always be implementing new strategies to gain from others while remaining untraceable.

Conclusion: More Complex Fraud Calls For Better Protection

It has been predicted that E-Commerce platforms and sellers will continue to profit as the trend to distant-shop proves itself of prospects and convenience. This brings about greater growth opportunities for young entrepreneurs or even large enterprises who are quickly leveraging online.

Beside the obvious benefits, this predicted growth also means that there will be more frequent and advanced fraud schemes targeting both buyers and sellers in the online marketplace.

Having said that, it is fundamental to establish a comprehensive solution to detect fraud before it is too late. Nowadays, many protocols and solutions have been developed to equip merchants and card issuers with better protection against as many types of fraud as we can name. Not only that, advanced solutions can also ensure a seamless checkout experience for customers, which could help increase the merchants’ returning sales.