8 types of ecommerce fraud and how to prevent them

Ecommerce fraud poses a significant threat in today’s digital marketplace. As online shopping expands, fraudsters have developed increasingly sophisticated methods to exploit vulnerabilities, from fake transactions to stolen payment details. Fraudulent activities continue to rise, with the e-commerce fraud detection and prevention market forecast to more than double between 2023 and 2027, exceeding $100 billion. These attacks disrupt not only finances but also customer trust and business reputation.

The consequences of fraud can be severe from revenue loss to chargeback penalties. For businesses, understanding the types of fraud and implementing effective defenses is crucial. In this article, we’ll break down key types of ecommerce fraud, highlight warning signs, and share strategies to safeguard your platform. Whether you’re a startup or a well-established marketplace, protecting your platform is essential to ensuring security and customer confidence.

What are the 8 most common types of ecommerce fraud?

Ecommerce fraud comes in many forms, each targeting vulnerabilities in online systems. Whether it’s exploiting return policies or testing stolen credit cards, fraudsters are constantly evolving their tactics. Below, we break down the most common types of ecommerce fraud and how they affect businesses.

1. Chargeback fraud

Chargeback fraud, also known as “friendly fraud”, occurs when a customer disputes a legitimate transaction, often claiming they never received the product or didn’t authorize the payment.

Businesses face financial losses from refunding the transaction and paying chargeback fees, not to mention reputational damage with payment providers.

It’s like dining at a restaurant, enjoying the meal, and later demanding a refund by claiming the food never arrived. The merchant ends up footing the bill twice - once for the service and again for the refund.

Chargeback fraud is a growing problem. It is estimated that 2023 saw 238 million chargebacks globally, with that number expected to rise to 337 million by 2026, a 42% increase. On average, chargebacks impact 6 in every 1,000 transactions, which highlights the widespread nature of the issue.

2. Return fraud

Return fraud exploits refund and exchange policies. Fraudsters may return stolen merchandise, counterfeit items, or even empty boxes, claiming refunds or replacements. This type of fraud disproportionately affects businesses with flexible return policies.

For example, fraudsters might purchase high-end clothing for a one-time event and then return it as “unused.” Others might take advantage of lenient policies to replace broken items with cheaper knockoffs.

In fact, return fraud is particularly rampant in the retail industry. Retailers estimate that 13.7% of returns, or $101 billion worth, were fraudulent last year (2023), according to a survey by Appriss Retail and the National Retail Federation. The share of returns expected to be fraudulent during the peak holiday season was even higher, at 16.5%, or $24.5 billion worth.

3. Account Takeover fraud (ATO)

Account takeover fraud occurs when hackers gain unauthorized access to customer accounts through stolen credentials, phishing attacks, or credential stuffing. Once inside, they can make purchases, withdraw funds, or steal personal data.

Imagine someone stealing the keys to your house, not only can they take your belongings, but they can also change the locks to keep you out entirely. For businesses, this often means refunding fraudulent purchases and managing angry customers.

Studies show that around 26% of companies face ATO attempts on a weekly basis, highlighting the persistent and frequent nature of these attacks.

4. Online payment fraud

Online payment fraud occurs when cybercriminals use stolen credit card or payment details to make unauthorized purchases. It’s one of the most widespread forms of ecommerce fraud, often exploiting weak payment security systems. 

Fraudsters might buy high-value items that are easy to resell, leaving businesses to deal with disputes, chargebacks, and inventory losses. Strengthening payment gateways and adding authentication layers can help mitigate this risk.

For instance, in the UK, 75% of retailers reported a decrease in online payment fraud after the implementation of Strong Customer Authentication (SCA), highlighting the effectiveness of robust security measures in reducing fraud.

5. Card testing fraud

Card testing fraud occurs when criminals test stolen credit card details by making small transactions. Once they confirm the card works, they escalate to larger purchases, often draining accounts before detection.

Think of it as a burglar testing locks in a neighborhood before deciding which houses to break into. The initial tests may go unnoticed, but the consequences can be devastating when larger amounts are stolen.

6. Bonus abuse fraud (promo, affiliate, or loyalty abuse)

Bonus abuse targets promotional programs, referral systems, or loyalty points. Fraudsters create multiple fake accounts to claim discounts, rewards, or referral bonuses repeatedly.

For instance, someone might open dozens of fake accounts to exploit a "first-order discount" multiple times. While each instance may seem small, these actions accumulate, leading to substantial losses for businesses.

7. Triangulation fraud

Triangulation fraud involves a three-step scheme:

1. Fraudsters list products at discounted prices on legitimate marketplaces or websites,
   
   

2. When buyers place orders, the fraudsters use stolen credit card information to purchase the products from another retailer,
   
   

3. The items are shipped directly to the unsuspecting buyer, leaving the actual cardholder and the original retailer to deal with the fraud.

This creates a web of confusion where victims may not even realize fraud has occurred until charges show up on their accounts.

8. Inventory fraud (for marketplaces)

Inventory fraud manipulates stock levels or product availability data to create false scarcity or demand. Fraudsters might also sell non-existent products, leaving buyers with empty orders and businesses facing reputational damage.

It’s like hosting an auction for items that don’t exist - buyers bid, pay, and leave empty-handed, while sellers vanish with the proceeds. This type of fraud undermines trust in online marketplaces.

Ecommerce fraud is constantly evolving, targeting businesses through both sophisticated and opportunistic schemes. From exploiting return policies to testing stolen cards, fraudsters are always looking for weak spots.

Understanding these different types of fraud is the first step in strengthening defenses and creating safer shopping experiences for customers. Businesses need to stay proactive, adopting tools like multi-factor authentication, real-time verification, and secure payment gateways to minimize risks.

How to identify ecommerce fraud?

Detecting ecommerce fraud early is crucial to protecting your business from losses. Fraudulent activities often leave behind subtle warning signs, red flags that, when recognized, can help businesses act before damage occurs.

Here’s how to spot potential ecommerce fraud:

Inconsistent order data

Mismatched billing and shipping addresses, incomplete contact information, or discrepancies in customer details can signal fraudulent behavior. For example, an order with a billing address in one country and a shipping address in another may warrant additional checks.

Larger than average orders

Fraudsters often make unusually large purchases to maximize gains before detection. These orders may include high-ticket items or bulk quantities, which stand out compared to typical customer behavior.

Unusual location or IP address changes

Sudden changes in a user’s location, especially from regions known for high fraud rates, can indicate account compromise. Monitoring IP address shifts during checkout can help detect suspicious activity.

Orders from unusual countries

Transactions originating from countries where your business doesn’t typically operate may be a red flag. Fraudsters often use VPNs or proxies to obscure their real location, making geographic anomalies important to investigate.

Many transactions in a short timeframe

Multiple purchases within minutes or hours could indicate card testing fraud or automated attacks. Legitimate customers rarely make consecutive transactions in quick succession.

Multiple orders from different credit cards

Receiving several orders linked to different credit cards but using the same IP address, shipping address, or account can be a sign of stolen card usage. Fraudsters often test stolen card details to identify valid ones.

Changes in account information

Sudden updates to email addresses, passwords, or shipping information, especially right before placing an order, can indicate account takeover fraud. Monitoring account changes helps detect unauthorized access early.

Fraudulent activity often leaves subtle traces, from unusual orders to sudden account changes. Recognizing these red flags early enables businesses to act quickly, minimizing risks and protecting their platforms from costly attacks.

How to prevent ecommerce fraud?

Preventing ecommerce fraud requires a proactive, multi-layered approach. By combining technology and best practices, businesses can create stronger defenses against fraudulent activities. Below are some effective strategies to protect your platform and customer data.

1. Use Multi-Factor Authentication (MFA)

Adding multi-factor authentication (MFA) is like installing multiple locks on your front door: it forces fraudsters to break through several layers of security instead of just one.

MFA requires users to verify their identity through multiple steps. For example, after entering a password, they might need to input a one-time password (OTP) sent via SMS.

• SMS verification codes provide an extra layer of security by linking authentication to a physical device (the user’s phone), making it harder for attackers to gain access,

• It also deters bots and automated attacks by requiring manual input of the verification code.

This approach helps protect sensitive accounts, especially those with saved payment information or personal data.

2. Real-time phone number verification

Fraudsters often rely on temporary or stolen phone numbers to bypass security checks. Real-time phone number verification acts as a gatekeeper, ensuring that users are who they claim to be: 

• It verifies phone numbers instantly, blocking suspicious or disposable numbers before they can be used,

• It’s particularly useful for preventing account takeover fraud and card testing fraud.

By integrating tools like Prelude’s AI-driven verification systems, businesses can check risk scores in real time and reduce fraudulent activity without disrupting the user experience.

3. Use secure payment gateways with fraud detection

Secure payment gateways act as fraud prevention hubs, analyzing transactions for suspicious patterns before processing payments. They not only streamline the checkout process but also act as a watchtower, keeping a close eye on unusual behavior.

What makes a payment gateway secure?

• Encryption and tokenization: these technologies protect payment details, ensuring sensitive information isn’t exposed,

• Fraud detection algorithms: built-in systems flag anomalies, such as unusual locations or mismatched billing and shipping addresses,

• Chargeback protection: features designed to minimize losses from disputes caused by chargeback fraud.

This added layer of scrutiny ensures payments are verified before funds are transferred, reducing the risk of online payment fraud while maintaining a seamless experience for legitimate customers.

4. Implement Address Verification Systems (AVS)

An Address Verification System (AVS) works like a background check for customer addresses. It compares the billing address provided during checkout to the one associated with the credit card on file at the bank. Why is this important?

• Mismatched addresses are often a red flag for stolen card usage,

• AVS helps prevent chargeback fraud and card testing fraud by verifying address authenticity before approving a transaction.

For even stronger protection, pair AVS with CVV verification, which checks the security code on the back of the card.

5. Require verification for high-risk transactions

High-risk transactions - such as unusually large orders or purchases from new locations - deserve extra scrutiny to minimize exposure to fraud. Implementing additional verification steps for these cases provides a safety net without disrupting legitimate buyers.

High-risk scenarios include:

• Orders that exceed a predefined monetary threshold,

• Transactions involving expedited shipping to unfamiliar addresses,

• Purchases from regions with higher fraud activity.

By adding identity checks or requiring customers to re-verify payment details, businesses can filter out fraudsters while ensuring seamless service for trusted users.

In a fast-paced digital world, staying ahead of ecommerce fraud is a must. With the right mix of smart tools and proactive strategies, you can fortify your platform, protect your customers, and keep things running smoothly. By staying vigilant and adaptable, you’re not just fighting fraud – you're building trust and ensuring a secure shopping experience for everyone.

Ready to reduce fraud and streamline your verification process? Start for free with Prelude or contact our sales team to learn more.