E-commerce fraud is a serious problem. According to Statista, online retailers around the world $41 billion in payment fraud In 2022.
You might think banks are busy refunding fraudulent purchases, but that’s not always the case.
When customers order online, they are at increased risk because they are not physically handing over their credit card for payment. As a result, online merchants are often responsible for repaying credit card charges that must be reversed.
So how can you prevent fraud in your Magento store?
Understanding the types of fraud and finding the best strategies to detect and prevent attacks is key to protecting the financial health of your e-commerce business.
Keep reading to learn:
What is e-commerce fraud?
E-commerce fraud refers to specifically targeted financial fraud. e-commerce platform. Also known as payment fraud, it can result in financial loss to an online store, its customers, or both.
Let’s take a look at the different types of e-commerce fraud to better understand how they can affect your business.
Types of e-commerce fraud
- credit card fraud
- chargeback fraud
- Refund scam
- Account takeover (ATO) fraud
1. Credit card fraud
Credit card fraud occurs when fraudsters use stolen credit card information to make purchases through e-commerce stores. It causes economic loss to customers.
That said, this type of fraud can still affect your e-commerce store. For example, someone whose credit card information was stolen may notice the purchase and file a fraud claim. In that case, a refund of the purchase price may be owed to you (and not to your bank).
Unlike brick-and-mortar stores, e-commerce sellers may be responsible for refunds because the credit card is not physically present at the time of purchase.
Online stores take on the additional risk of accepting card-not-present (CNP) transactions. Therefore, you may be held liable.
2. Chargeback fraud
Chargeback fraud, also known as friendly fraud, occurs when a customer or attacker purchases something from an online store and claims the purchase was fraudulent.
This is similar to credit card fraud, except the customer’s credit card information may not be stolen. Instead, customers can place an order, receive the item, and then claim it’s fraud and get their money back.
One thing to understand here is that chargebacks are different from refunds. When you issue a refund, your customer goes through you to get their money back. Therefore, you will need to get approval from the store.
In a chargeback, the customer bypasses you and gets their money back from the bank that issued the card. The bank will then charge that amount plus a chargeback fee.
We’ve also spent money on marketing, shipping, and fulfilling those orders.
According to research from Signifyd, e-commerce stores Average loss of $206.80 For every $100 of fraudulent orders. This is more than double the actual transaction amount.
3. Refund scam
In refund fraud, fraudsters use stolen credit card information to make a purchase and then request a refund from the online seller.
Often times, the person who defrauds your company will send you more money than the transaction is worth. You will then be asked to refund the excess amount using another payment method to avoid having to return the item.
If the person whose card was stolen notices a fraudulent purchase, they may report it to their bank. This will result in a chargeback of the transaction amount.
4. Account takeover (ATO) fraud
In full account takeover fraud, fraudsters gain unauthorized access to one or more customer accounts. Purchases are then made using the saved payment method without the owner’s consent.
This attack puts you at risk of a chargeback, which you may have to pay. Additionally, it can also damage your brand’s reputation if your customers blame a lack of security or account protection for their losses.
How to detect fraudulent e-commerce orders
The first step to protecting your Magento store from e-commerce fraud is learning how to identify it.
Below is a list of red flags that may indicate fraudulent orders during automated or manual review.
- Repeatedly placing small orders.
- Significantly more orders than average.
- Customers pay high prices for expedited shipping.
- Customers using multiple shipping addresses.
- The billing address and shipping address are different.
- The billing and shipping addresses do not match the buyer’s IP address.
- Customers using multiple credit cards when shopping from the same IP address.
- A customer has multiple orders shipped to the same address from different credit cards.
It is important to note that they may be too conservative in detecting fraud. Some of these red flags may be normal behavior.
For example, a customer ordering a gift may use a shipping address that is different from their billing address. Sometimes customers ship to multiple addresses during the holidays. This makes it difficult to distinguish between genuine and fraudulent purchases.
In fact, a Signifyd study estimates that e-commerce retailers rejected $24 billion in net purchases during the 2022 holiday season because they incorrectly classified orders as fraudulent.
These types of false positives cause financial losses and undermine the customer experience.
So how do you walk the line between protecting your business from fraud and allowing actual purchases?
In this case, automation becomes a valuable asset in helping detect and prevent e-commerce fraud. Finding the right plugin or extension for your Magento store will help you detect and identify fraudulent orders in real-time.
How to protect your Magento store from e-commerce fraud
Several anti-fraud platforms work well with Magento. Here are some recommended tools.
Kount Magento Fraud Prevention
Kount is the industry-leading fraud prevention tool for e-commerce platforms, including Magento 2.4. Analyze orders and identify potential threats using machine learning. You can configure Kount to automatically reject potentially fraudulent orders based on your preferred risk level or custom blacklist settings.
Kount reduces false positives by up to 70% and chargebacks by up to 99%. You can also monitor and evaluate customer accounts to mitigate his ATO attacks that damage your brand reputation.
price: Custom.
Enhanced Magento chargeback protection
Signifyd has an integration with Magento that provides an automated fraud prevention solution for Magento 2 users. The platform uses machine learning algorithms to review every transaction in real-time and notify you whether to accept it or not.
If the platform detects a fraudulent order attempting to checkout, we recommend rejecting the order.
One of the benefits of Signifyd is that it offers 100 percent service. chargeback protection. In other words, if Signifyd fails to detect a fraudulent order, you are not responsible for the chargeback as it will be paid by Signifyd.
price: Custom.
Fraudlabs Pro Fraud Prevention
FraudLabs offers a free fraud prevention extension that integrates with Magento 2. This extension is easy to set up and uses a set of customizable rules to run all orders through various checks.
FraudLabs verifies the email address, IP geolocation, billing and shipping addresses, and other factors for each order. Approve, reject, or mark orders as “pending review” based on fraud score, reducing the amount of manual order validation required.
FraudLabs is available for free for up to 500 transactions per month, making it perfect for small e-commerce stores looking to dip their toe into automated fraud prevention with Magento.
price: Free (limited functionality). Premium plans start at $29.95 per month.
Additional steps you can take to reduce e-commerce fraud
In addition to using fraud prevention tools, take the following steps to Improve the security of your Magento store Makes it difficult for fraudsters to complete orders.
Final thoughts: Top tools you can use to protect against Magento fraud
When processing e-commerce orders, the risk of fraud is higher because the customer is not physically using their credit card. This means you could end up in trouble for refunding fraudulent purchases made through your store.
However, if you overprotect your store, you run the risk of actual orders being rejected and a negative customer experience.
Adding automated fraud detection and protection to your Magento store helps optimize fraud detection. Doing so allows you to recognize more realistic threats without sacrificing your customers’ legitimate orders.
To further protect your online store, check out Nexcess’ PCI-compliant hosting plans.our Fully managed Magento hosting This plan offers secure payments, proactive security features, a free SSL certificate, and daily backups.
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