Guest post: Chargeback and Fraud Prevention Guide for Shopify Plus Merchants

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These chargeback and fraud stats might blow your mind:

  • e-commerce merchants now deal with ~206,000 attacks on their stores.
  • A report by Jupiter indicates that spending on fraud detection and prevention platform services will exceed $11.8 billion globally in 2025. 
  • Recent research by Ravelin estimates that 76% of retailers foresee an uptick in their fraud prevention budget for tackling fraud in the next 12 months – and one in five anticipates a significant rise in fraud mitigation expenses.
  • Chargebacks cost e-commerce businesses an estimated $200 billion annually.

Chargeback and fraud present a significant challenge to e-commerce businesses today. And in this post, we share an essential chargeback and fraud prevention guide to help you level up and plug any revenue leak in your business.

Let’s dig in!

Why are e-commerce frauds prevalent today?

Chargeflow’s research shows three reasons for the significant uptick in payment fraud.

First, e-commerce fraud is widespread among online shoplifters today because committing fraud is relatively easy. Before the widespread internet adoption, anyone that planned to commit payment fraud had no option but to manually steal someone’s credit card to make an unauthorized payment. 

That presented significant risks, hence limiting the volume of card fraud incidents. Now contrast that with today’s realities where a fraudster can conveniently visit the dark web, purchase tons of stolen credit cards and make their moves.

For example, the Federal Trade Commission reported that in 2021 alone, there were over 2.8 million credit card fraud cases in the U.S. 

Second, you don’t quickly see fraudsters committing frauds, unlike their counterparts that rob people at gunpoint or break into a store in broad daylight – and risk being captured on camera. e-commerce fraudsters only have to log into a laptop wherever they see fit to make their moves. And they can quickly conceal their identities with fake emails and addresses.

Third, when law enforcers are lax in punishing cyber criminals, it gives others reasons to commit payment fraud. And such negligence in tracking down offenders is quite understandable because, most often, e-commerce frauds involve small sums of money. Again, many police forces might be unable to pursue scammers carrying out e-commerce frauds from other jurisdictions.

That said, it’s essential to highlight the various forms of fraud Shopify Plus merchants face today.

Shopify chargeback and fraud: Most common payment frauds merchants deal with today

The cost of global e-commerce fraud rose by 14% to reach $20 billion in 2021. Understanding cyber criminals’ strategies will help you craft commensurate mitigation tactics. Below we narrow down the most rampant attack vectors fraudsters use to carry out payment fraud.

  • Credit card fraud

As we intimated in the preceding section, credit card fraud happens when a scammer uses stolen card details to make an e-commerce transaction. Credit card fraud covers a spectrum of all frauds committed over a card-not-present transaction. And industry estimates put the cost of CNP fraud to e-commerce businesses at $32.04 billion in 2021.

Credit card frauds often lead to chargebacks, which makes them a double-edged sword in the hands of the perpetrators. The merchant is defrauded of the transaction cost and incurs enormous ancillary expenses due to the chargeback. 

Apart from the outright payment frauds where a scammer makes a payment with a stolen card, credit card frauds are often in the form of card testing; a criminal tests different cards to ascertain the valid ones.

  • Friendly fraud

Friendly fraud happens when a cardholder makes a purchase, receives their order, and then files a chargeback. Some friendly fraud incidents are honest mistakes by the buyer when they don’t recognize a merchant’s billing on their statement. In other instances, it could be driven by the good-old buyer’s remorse. 

Whatever the case, friendly fraud is escalating to an all-time high, as research puts the annual cost of friendly fraud to merchants at $48.02 billion. A quarter of all e-commerce vendors have a chargeback rate above 1%, and up to 80% of merchants say their chargeback rate exceeds 0.6%.

  • Phishing scams and account takeover

Traditionally, e-commerce websites store customers’ details for optimum repeat transactions and product recommendations. However, if such crucial real estate falls into the hands of a determined online fraudster, it can be used for harmful purposes.

A scammer can hack into a merchant’s Shopify store to steal data. Fraudsters can also access a merchant’s store by taking over a customer’s social media account or stealing credentials with bots. They can steal the customer’s credentials by sending the customer messages or emails from the vendor to reveal their account and login credentials. 

  • Affiliate marketing fraud

In affiliate marketing, third-party publishers earn commissions for driving customer visits to a merchant’s store. The vendor gives the “affiliate” a unique, trackable, tagged link that points prospective customers to the Shopify vendor’s store. When prospects click on the link or make a purchase, the merchant will give the publisher a predetermined commission. Hence, affiliate marketing fraud happens when a cybercriminal circumvents the standard affiliate marketing system to defraud the e-commerce merchant. 

They achieve that through various unscrupulous methods such as IP spoofing, cookie stuffing, malware, and typosquatting, thereby using fake customer activities to increase their earnings.

  • Triangulation fraud

In triangulation fraud, the scammer builds a fake online storefront claiming to sell popular products at overly-subsidised prices. Their aim here is to steal cardholders’ credentials and card details. Hence, if a customer makes an order, they purchase the order from an actual merchant and ship it to the buyer. The buyer is happy they got their need met at a super affordable price point, but the fraudster goes on to make several other purchases for themselves with the cardholder’s details. 

  • Order interception fraud

The scammer aims to redirect the shipment to a preferred address here. First, they use a stolen card to make a transaction from a merchant’s Shopify store and instruct the storefront to ship the order to the address on record. Immediately after the company confirms the order, the fraudster intercepts the shipment and reroutes it to their preferred location. They can call the vendor’s customer service or contact the shipping agency to block the delivery.

Dispute and fraud prevention guide for savvy Shopify Plus merchants

The rate of escalation in fraudulent activities in the e-commerce industry is horrendous. Knowing what steps to take to shield your store from determined criminals goes a long way to ensuring your business sustainability.

Below are some valuable tips to get you started.

  • Play by industry best practices to minimise exposure

Shopify provides merchants with fraud analysis tools powered by machine learning to help vendors quickly identify fraud red flags. Their framework scrutinises data across the Shopify network to help merchants ascertain specific order fraud risk levels and decide whether to fulfill such orders or not. By using this tool, you can quickly review fraud indicators marked in the following color codes:

  • Green icons – legitimate transactions.
  • Red icons – associated information has fraudulent activity.
  • Grey icons – flag data used to evaluate order legitimacy.
  • Use chargeback automation to recover disputes on autopilot

High-risk orders can still slip through the Shopify framework, resulting in expensive chargebacks. Using Chargeflow’s chargeback automation solution powered by advanced algorithms and human-proofed by dispute experts, you can be sure of a reliable tool to manage the entire chargeback process when a customer files a dispute. Chargeflow helps you to better forecast your business revenue, future-proof your sales, enhance your team’s productivity, and take your business to uncharted territories.

  • Make your site PCI-compliant

It’s crucial to be Payment Card Industry (PCI) compliant if you sell anything online. These security protocols make online transactions safe and reduce your fraud exposure. Not complying with the PCI regulation can also attract penalties, apart from opening your store to fraudulent transactions.

  • Make security your first principle during peak shopping seasons

TransUnion research found that the number of e-commerce fraud attempts between Thanksgiving and Cyber Monday 2021 was 25% more than earlier seasons of the year. Ideally, you should establish optimum QA processes to ensure the high purchase volumes in these seasons do not create a loophole for fraud and chargebacks. 

Frauds and chargebacks consume tons of your company’s revenue and time. A high chargeback volume is a recipe for injury to your online business. Prioritising fraud prevention helps you keep your chargeback rates low. With these tips, you can better align your strategies with best practices and improve your chances of e-commerce success.

About the Author:

Tom-Chris Emewulu is Chargeflow’s Content Marketing Manager

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