Fraud Prevention Strategies for Online Stores

For an e-commerce business, one of the unfortunate realities of doing business online is the risk of fraud. A fraudulent transaction can lead to a "chargeback," where you lose not only the product you shipped but also the revenue from the sale, and you may even have to pay an additional fee.

While you can't eliminate fraud completely, you can implement a set of fraud prevention strategies to significantly reduce your risk and to protect your business's bottom line.

Common Types of E-commerce Fraud

• "Friendly" Fraud: This is when a legitimate customer makes a purchase and then falsely claims that they never received the item or that the transaction was not authorized, in order to get a refund.
• Stolen Credit Card Fraud: This is when a fraudster uses a stolen credit card number to make a purchase.

Key Fraud Prevention Strategies

A good fraud prevention strategy is about looking for the red flags and the inconsistencies in an order.

1. Use the Tools from Your Payment Gateway

This is your first and most important line of defense. Modern payment gateways (like Stripe and Shopify Payments) have powerful, built-in fraud detection systems that are powered by machine learning.

• Address Verification System (AVS): This tool checks to see if the billing address entered by the customer matches the address that the credit card's issuing bank has on file.
• Card Verification Value (CVV): This is the 3 or 4-digit code on the back of a credit card. Requiring the CVV proves that the customer has the physical card in their possession.
• AI-Powered Fraud Scoring: These systems will analyze hundreds of signals for each transaction and will provide you with a "risk score" to help you to identify potentially fraudulent orders.

2. Look for Mismatched Information

Manually review any orders that seem suspicious.

• Does the billing address match the shipping address? While there are many legitimate reasons for these to be different, a mismatch can sometimes be a red flag.
• Does the IP address of the order match the billing address? An order that is placed from an IP address in one country with a shipping address in another country can be a sign of fraud.

3. Be Wary of Unusually Large or Suspicious Orders

• A very large order from a brand new customer, especially for a high-value item or for expedited shipping, can be a red flag.
• Multiple orders placed in a short period of time with different credit cards but the same shipping address.

4. Require a Signature on Delivery

For very high-value orders, you can require a signature upon delivery. This provides proof that the package was received by the customer and can help you to fight a "friendly fraud" chargeback.

5. Maintain Good Communication with Your Customers

• Send a clear order confirmation email immediately after a purchase.
• Send a shipping confirmation email with a tracking number.
• If an order seems suspicious, don't be afraid to reach out to the customer by phone or by email to verify their identity before you ship the order.

Use a Dedicated Fraud Prevention App

For larger stores, you can use a dedicated fraud prevention app that integrates with your e-commerce platform. These apps use advanced AI to analyze every order and to provide you with a clear "approve" or "reject" recommendation.

• Popular Tools: Signifyd or ClearSale.

Conclusion

Fraud prevention is a critical part of managing a profitable e-commerce business. While it can be a complex issue, you don't have to be a security expert to protect yourself. By leveraging the powerful, built-in tools of your payment gateway, by being vigilant about looking for the common red flags, and by maintaining clear communication with your customers, you can significantly reduce your risk of fraudulent transactions and protect your business from unnecessary losses.