What is Fraud? What Does Fraud Mean?

Find out what fraud is, how does it happen and what are the best fraud prevention tools?

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Online businesses are growingly becoming prone to security breaches and there has been an alarming increase in ecommerce fraud incidents.

According to a credible fraud report by ConsumerAffairs, identity theft alone summed up to a staggering  $1.48billion in losses by 2018. And the numbers keep rising rapidly.

While the onset rise of internet access has helped revolutionize the e-commerce business sector by turning the entire world into a single global market, it has also opened a can of worms. In the past few years, online fraud has increased significantly, leading to huge losses for merchants and buyers.

But wait!

What if you could buy or sell online without fear of falling a victim to fraud? While the internet has made it easy for fraud to thrive, it has also provided various tools that could protect you from fraudsters. Which we'll review in a moment.

But the point of concern is, what can you do to be safe when shopping or selling online?

In this guide, we are going to look at what fraud is, how and why it happens, various types of frauds, and tools and prevention strategies you can use to stay safe. Let’s get on with it.

How and Why Fraud Happens?

One of the first steps to protecting yourself from ecommerce fraud is understanding how and why it takes place. However, before we get to that, let's first look at what fraud is.

What is fraud?

In simple terms, fraud is an intentional act of deception through the presentation of false or misleading information, which is done to gain an unfair advantage or profit. In the e-commerce industry, to be consice, unfair profit can be in the form:

  •  Money
  •  Goods and services
  • Sensitive information – e.g. personal identifying information, credit card details, banking details, emails, and passwords, etc.

With the ecommerce sector running on an infrastructure that supports significant transactions; money, goods, and sensitive personal information, cybercriminals have found it to be a hunting ground for unsuspecting victims. The fraud situation is even damper since it happens virtually.

Cybercriminals hide behind the screens, use very convincing scams, and usually target victims who are more likely to be vulnerable.

How does e-commerce fraud take place?

So, now that you know the basic context of what fraud is, the next pressing question is why it happens. To have a broad-ranging perspective, we'll, for the most part, focus on e-commerce fraud at large.

A typical scenario is where the fraudster approaches a merchant or buyer and proposes a transaction using fraudulent means.

For a scam to yield, the fraudster can initiate an online transaction using a lost, stolen, or fake credit card. When the process gets authorized the fraudster gets away the goods or services, while the merchant is left with claims to settle with the cardholder.

The merchant, in simple terms, is left with intimidating chargebacks to resolve. Even worse, it's hard for the seller to fight back and win.

Ecommerce fraud can equally hit online customers in various forms which we'll highlight in this guide. To give a quick description; the fraudster will more likely approach an unsuspecting internet user with misleading information designed to deceive them of their money or information. For instance, a fake transaction that's fabricated with a deceitful intent to steal credit card or banking details.

Aside from these two examples, fraudsters can also access money, goods, and sensitive information from merchants and buyers alike through hacking attacks.

E-commerce websites are full of valuable information such as credit card details, emails and passwords (which users usually use on other sites, e.g., online wallets), banking details, and personal information. Once the hackers access this information, they then use it to defraud merchants online or even sell them to other cybercriminals who conduct more fraudulent scams on the dark web.

Why does e-commerce fraud take place?

Ecommerce fraud is becoming more and more rampant, with merchants and buyers all over the world falling victim. However, online fraud is more prevalent in first-world countries such as the U.S, where online shopping is more popular. So why does this type of fraud persistently occur? And why is it on the rise like never before?

Well, first of all, it's easy to access stolen credit card information

Stolen credit card information usually comes from hackers who attack e-commerce companies and other organizations to acquire credit card details. Sadly, this information is easily accessible to any wannabe cybercriminals, as it is sold on the black market, or otherwise dubbed as the onion. From here, the information is used to defraud merchants, causing them to run into huge losses.

Ecommerce fraud cases are hard to prosecute.  This aggravates the reason why e-commerce fraud incidents are on the rise is the wall-brick that's hard to crack when it comes to preventing, detecting, and prosecuting such cases. Matter of fact, to get at the helm of fighting ecommerce fraud, merchants need to employ the latest technological tools and know-how. They must be data-savvy.

Unfortunately, this is not always possible, especially with small-scale businesses that lack adequate funds and technical knowledge to fight online fraud.

Another noticeable leak that makes it hard to fight online fraud is law enforcement agencies are sometimes poorly equipped to handle the cases.

To start with, cybercriminals, particularly hackers, are very adept at executing attacks remotely and anonymously. Therefore, catching them in the act is nearly impossible.

Secondly, law enforcement agents are sometimes unwilling or unable to investigate ecommerce cases. This is usually due to the difficulty of amassing evidence for such cases. On top of that, advanced tools and technical knowledge is required, which most law enforcement agencies lack.

Moreover, cases of fraudsters deceiving merchants using stolen credit cards, while they may seem rampant, are not as high or even more grievous than other crimes that law enforcement agencies have to deal with (think armed robbery).

Lastly, the geographical locations where hacking attacks originate from pose another huge drawback for law enforcement.

In other situations, hackers are based in developing countries, where insecurity and poorly equipped security agencies make it easy to conduct their operations.  Nevertheless, their reach is worldwide, which makes it that much harder to stop them, or even find a proper punishment when they are caught.

And that make's it difficult to trace their tracks.

Types of fraud

Aside from knowing why and how e-commerce fraud occurs, it is also important to understand the various types of fraud to protect yourself from each. Online frauds come in various forms and are very different from the usual scams that are seen to hit physical stores so hard.

Ecommerce fraud is more grievous. Below is a quick look at some of the top frauds that you can face especially while running e-commerce related transactions:


Chargebacks are one of the most common types of fraud facing e-commerce merchants. Also known as friendly fraud, it occurs when the fraudster, a customer, in this case, purchases an item, but then later makes a complaint to get a refund. The complaint given can vary, from lying that the item was never delivered to claiming it to be defective or not as described.

Another example of friendly fraud is when the customer makes a false complaint that their credit card details were stolen and used to make an illegal purchase. In the end, the customer ends up keeping the purchased item, while receiving a refund for the money spent.

Unauthorized purchases

Unauthorized purchases are another type of fraud that you should watch out for as a merchant. Also known as clean fraud, it occurs when the fraudster (a third-party this time) obtains credit card information without any consent from the owner / fraudulently and uses it to make an unauthorized purchase from a merchant.

When such an illegal transaction is detected, the genuine cardholder will usually receive a refund, while the fraudster flees with the purchased items. And yet again, the merchant is left to cover the loss.

Identity theft

And here comes one type of fraud that we can all relate to – identity theft.  This is another kind of malicious damage you don't want to ever experience. And if you've faced it firsthand, then you can accord to the fact that identity theft can hit victims (including children) with a loud detrimental effect.

But how do they get away with it?

You could ask perhaps.

Hackers mostly target personal credit card details of customers from a company's website database. This data can be rooted out using malware which can have the potential to pull a heist and gain remote control.

When the dirty job goes green, hackers use the information to create buyer accounts on e-commerce sites, where they purchase items while posing to be candid and unsusceptible ‘customers'.

This type of fraud can be the most devastating, as it is hard to detect.  And you can't get any luckier unlesss you're frugal enough to check your bank statements.

To unsuspecting victims who don't track their credit card transactions this damage could, unfortunately, carry on till your card gets maxed out. Needless to say, even if you realize what is going on, chances are, you may have a hard time trying to claim from the merchant and your credit card issuer.

Refund fraud

Refund fraud and chargebacks sound similar, right? The fact is, these two terms are quite different. While the chargebacks are perpetrated by customers, refund frauds operate as the soft for cybercriminals.

As soon as the credit card gets stolen, it's pretty much expected that a typical fraudster will purchase items from a merchant, then deliberately make an overpayment.

The scheme is systematic in the sense that they'll sooner or later contact the merchant and ask for a refund for the excess amount. However, they will then claim that the credit card has been closed, and ask for the money to be refunded through another method, say, for example, an online wallet like PayPal.

Unfortunately, once the genuine cardholder realizes the illegal transaction and makes a formal complaint, the money is returned to their credit card account. In the end, the fraudster gets away with the purchased item and the refunded money.

Credit card testing

Card testing fraud seems to take center stage as it's easy to carry out. It is perpetrated by fraudsters, usually hackers when they make low-value purchases from a merchant to test the validity of stolen or fake credit cards before using them to commit fraud somewhere else.

A red flag to detect credit card testing fraud, in most cases, is where a lost card is used to make many small purchases over a short time. Even where the card gets declined, fraudsters are still able to slip away.

Some of the warning signals that indicate a credit card testing fraud is where a transaction experiences several authorization failures. Another tip-off that merchants should be cognizant of is where an issue with a card's CVV information arises.

If an error prevents the transaction to bypass all security measures, then that could be a credit card testing fraud attempt.  In order to forestall this kind of fraud from happening, sellers can opt to work with payment gateways that use advanced infrastructure which is PCI compliant and supports end-to-end encryption.

Merchant fraud

Buyers can be victims of e-commerce fraud, just as much as merchants are. That might sound scoffing.

Merchant fraud is one such type of scam that targets buyers. Fraudsters will trigger this heist on online stores and marketplaces with loose security structures and weak risk management techniques.

The main goal of carrying out such fraud is pretty simple; the ‘so-called merchant' will attempt twice as hard to dupe as many customers as possible before the unscrupulous activity gets exposed.

It occurs when a fraudster creates a merchant account in a market place. Using this account, they sell non-existing items to unsuspecting buyers and then disappear with their money.

In the end, the business operating the market place ends up being responsible for the losses incurred by the buyers. Nevertheless, buyers are still inconvenienced as it might take a while for the money to be refunded.


Phishing is perhaps the most popular of online fraud that's carried out via emails. It stages mainly by hackers against merchants (e-commerce websites) or buyers, where they send emails with the intention of stealing credit card details and other sensitive information such as email addresses, passwords, bank account details, etc.

To dupe their victims, the hackers design the emails to seem as if they are from genuine institutions. For example, an email claiming to be from the credit card company asking you to change your password.

Scammers tend to hide their IP addresses to prevent their actual geolocation from getting traced easily. Phishing is a cybercrime that mostly targets consumers with recurring subscriptions that are signed up using credit cards.

If perhaps you don't recognize or have official contacts of the company that's claiming payment, then that could be a potential phishing attack.

Phishers can use an invoice that's branded to look genuine to extort money from their targets. To protect yourself from phishing attempts, it's important to use up-to-date software with automatic security protocols.


Re-shipping is one recurring type of fraud that's seen to traverse even across big-wig e-commerce platforms. While re-shipping scams are relatively new in the game, the unlawful activity is rapidly spreading under the counter across large marketplaces such as eBay and Amazon.

It all starts with a stolen credit card. Almost entirely, the scam involves a couple of henchmen from different locations. According to a report by the FBI, West Africa, Nigeria to be particular seems to sprout as a hotspot for such fraud schemes which are dubbed by authorities as 419 scams.

With re-shipping fraud, the scammer will purchase items using stolen credit cards from online merchants. Then, to cover their tracks, they hire a third-party individual to receive the items and re-ship them to their location with the promise of payment.

Unfortunately, the hired individual unknowingly becomes an accomplice to the fraud and is usually the scapegoat if law enforcement agencies catch up on the crime. Even worse,  the fraudster is also likely to defraud the individual by failing to send the promised payment after the items are shipped.

Triangulation fraud

This kind of scam poses an unforeseen imminent risk to online retailers and can escalate further to affect consumers.

On the face of it, you might casually think hunting down triangulation fraudsters is such an easy task. However, that's' far off from the naked fact on the ground.

Online fraudsters are designing more and more ingenious ways of scamming their victims with little chance of them noticing. One such technique is through the use of triangulation fraud.

Triangulation fraud is a complex scam that involves many layers, making it harder to detect. It's more of a data-backed and skillful art than an experimental and speculative attempt to scam victims. There are so many components involved. And it works in different forms.

The most common scheme starts with the fraudster purchasing products from a merchant who has listings on a third-party marketplace using a stolen credit card. Then, they create accounts on e-commerce marketplaces, where they sell the products to unsuspecting genuine customers.

Fraudsters, through fake KYC details, sometimes purchase the items but have them shipped directly to the customers.  This, of course, makes it strenuous to trace their mode of operation on the internet. Therefore, the customer ends-up being in in the hook for possession of “stolen merchandise” while the fraudster gets away with the received the money.

With the rise and acute scaling of online marketplaces, it's practically hard to keep a track of each transaction. The victims who suffer the most include retailers, the genuine customer, the card issuer,  merchant account provider, and the cardholder.

Ecommerce fraud prevention best practices

We’ve looked at what e-commerce fraud is, how and why it occurs, and the common types of fraud. But wait! We are yet to answer what matters the most – how can you prevent e-commerce related fraud?

It turns out that there are several fraud prevention best practices that you can employ to protect your business and customers from scams.

Below is a brief overview of some of the viable protective measures:

 Comply with the industry's security standards

Failing to comply with industry security standards is one of the top reasons why merchants become victims of e-commerce fraud.

Hackers look for vulnerable e-commerce sites to attack, especially those that don't comply with security standards. Examples of security standards that every merchant should comply with include PCI (DSS) and SSL certification.

The SSL compliance framework is designed to ensure a safe and secure layout for transactions between websites and site visitors. For e-commerce merchants looking to sell across borders, we'd recommend selling on a platform that sources hosting services from a PCI compliant solution.

The same measure extends to payment gateways. With this at hand, merchants are now able to secure the cardholder's data. This document released by the PCI Security Standards Council shells out the best practices for securing e-commerce related transactions.

While the revenue growth for e-commerce continues to leap up from the increasing global online sales, scammers seem to find newer and easier hacks to bend and sway any security standards.

Use IP address verification systems

I know this might sound like too much tech jargon. An IP verification system, on the contrary, is as straightforward as it gets.

Well, it's now clear and audible enough that hackers will use several ingenious ways to mask their illegal activities when committing e-commerce fraud. And in this context, they'll mask their IP addresses, making it harder to locate them.

On top of that, cybercriminals – right after they get hold of a lost or stolen credit card – will use fabricated information, such as fake addresses when checking out from online shopping websites.

With an IP address verification system plugged in your selling channel, it's way quicker to flag a fraudulent purchase. Shopify, a third-party ecommerce website builder, has a built-in and one of the most robust fraud alert feature for retailers using its integrated payments system.

Ecommerce has seen its revenue explode!

And global sales market is expected to grow even further. While the numbers keep pacing up, online retailers must be on the lookout for any fraud indicators in a transaction.

If you plan to sell on Shopify, its fraud analysis technique helps you to easily detect any fake orders using simple indicators. These indicators are able to tell if:

  1. The Card Verification Value (CVV) number is accurate
  2. The billing address is the same as that which was used to make a purchase
  3. Attributes used to make an order resemble used in previous fraudulent attempts
  4. If there are any failed payment attempts

You can put a verification system to the test and detect any illegal transactions- which could save your business and customers from surging into unrecoverable losses.

Merchants can use this kind of technology to weed out suspicious traffic that emanates from actions in their e-commerce websites. Address verification systems can also curb cybercriminals using rigid and savvy enforcement.

Build a customer awareness platform

Aside from phishing, hackers make use of algorithms to map possible passwords for victims they target. On a bad day,  people with weak passwords will fall victim to such malware attacks. The merchant has an obligation to inform users of emerging fraudulent trends.

Buyers, on the other hand, must always make use of strong passwords despite how annoying the experience can be, as they offer the greatest protection against hackers. But that alone only proves to be insufficient– considering the many forms which amount to fraud.

So what if you ended up taking proactive steps to make secure transactions on the internet?   It would take them years to even come close. Right?

Aside from the obvious, which is– using secure payment gateways, merchants can deploy other security practices such as two-factor authentication. This would provide an extra layer of security making it even harder for hackers to breach customers’ information.

Customers need to be aware that the entire checkout process is safe and that all payment methods have high-security standards.

Employ website security tools

Looking for another great way to prevent online fraud?

Making your e-commerce website hard for hackers to bypass isn't as difficult as it may seem. But how can you make this possible, you might be a little eager to learn? Well, take this from the experts; it's relatively easy!

As a merchant, you should always employ a range of security tools to keep your site secure. A quick and light guide would be to start off with network scanning tools, firewalls, traffic analytic tools, and penetration and vulnerability scanning tools.

Automated computer systems are a great asset for e-commerce businesses as they make the buying and selling process smoother. But what knocks automation to the ground is the fact that you can miss out on risk alerts.

To chain that down from happening, it's quite decisive to manually review orders, as this can elevate the chances to catch up on any suspicious transactions.

For scaled-up merchants with a high sales volume e-commerce sites, manual processing of orders might seem like an overwhelming exercise. But at the same time, you can automate your store to flag suspicious orders, then later do a manual assessment to verify the authenticity to reduce the risk of fraud.

You want to also be vigilant during those seasons with high sales volumes. Seasons such as the holidays are a great time for e-commerce stores, where they rake in more sales. However, revenue growth equals to increased risk of fraud, as scams are much harder to spot with numerous orders being processed.

Therefore, instead of just paying focus on revenue projections alone, merchants should be on the watch for any fraudulent orders.

Fraud Prevention Tools

Not only are e-commerce fraud prevention practices great at reducing the risk of fraud, but they result in better and secure customer experience.

So, how can you protect yourself and customers from cybercriminals using automated solutions? That’s easy.

You need e-commerce fraud prevention tools designed to keep off from any imminent exposure. The fraud prevention tools work by analyzing traffic from your site as well as the orders placed by customers. As a result, they can detect a possible risk of fraud by running an analysis of any potential red-flags.

Huge cross-border purchases, fake shipping, and billing addresses, proxy IPs, and failed checkout attempts are some of the warning signs some tools look out for. If they detect them, they flag the order, allowing you to manually review it.

So, which are the best e-commerce fraud prevention tools for your website? Below, we have quick run-down at some of the top tools for merchants looking to sell securely in the e-commerce space:


Riskified is an automated anti-fraud tool that makes use of cutting-edge algorithms to detect and prevent fraud. The only light limitation I found on Riskified is that its API integrates with Shopify and Magneto.

Pricing is on the low end mostly for sellers with mid-range sales levels each month. It's tier-based which means the actual amount depends on your sales volumes.

The technical part here is Riskified auto-generates reports with suggestions to help the retailer approve or decline, in real-time, an order whenever the customer checks out.

It offers a range of analytical features including IP and geolocation, proxy detection, device and browser fingerprinting, chargeback prevention tools, social media analysis, order linking, and more.

Unlike other tools that offer risk scores and color warnings, Riskified offers a far more concise and time-saving report for every transaction. You can then decide whether to decline, approve, or review the transaction further.


Subuno is a fraud detection tool that uses a machine-learning mechanism to better detect suspicious and fraudulent transactions.

For now, Subumo supports Magneto, Shopify, PrestaShop, WooCommerce, and ZenCart. This solution has over 20 fraud detection tools to analyze any risk factors.  Subuno has a 30-days free trial period and you don't need any credit card commitments to get signed up.

Pricing starts from $19 per month up to $249(platinum package) for enterprise-level merchants. The fraud detection tools include customer location, customer details verification, validation of how long the email address has been used, etc.

The tool reviews all processed orders and displays them on individual pages with clear warnings on any potential fraud attempts. merchants can later decide to accept the order, reject it, or verify it further depending on the level of risk.

Fraudlabs Pro

Fraudlabs Pro offers over 40 validation rules for screening e-commerce fraud. It also grants you access to various blacklist records that have been submitted by other international merchants, which makes it easy to flag notorious fraudsters.

This solution supports e-commerce platforms such as Magneto, OpenCart, VirtueMart, VirtueMart, ZenCart, WooCommerce, and Shopify. Pricing starts from $29.95 per month.

Some of the fraud detection features offered by Fraudlabs Pro include email validation, ISP usage, IP geolocation, proxy detection, credit card BIN, custom country, email domain age, and transaction velocity.

That aside, merchants get access to more fraud prevention tools such as risk scoring, high-risk username and passwords (for user accounts), and merchant reporting tools.


DupZapper is a great solution for merchants who want to put tight any feeble leaks in their online stores. It uses sophisticated machine learning algorithms to detect potential threats by logins from remote devices.

While its backend seems a little off the beat from what regular e-retailers might be accustomed to, its simple to install and use the anti-fraud software. You only need to link its HTML code to your store, which takes 10 minutes or less to make integrations.

DupZapper offers high-level protection for your e-commerce business using the most unparalleled technology.

The software offers premium features such as device identification and fingerprinting, geo-location, cookie blocking attempts, proxy detection, account takeover detection, multiple accounts for a single user, and so forth. It then creates a report for all suspicious activities and transactions, which works as a gateway to detect fraud before anything goes haywire.


Kount is a fraud app for merchants who make global online sales and have a scaled target audience in the market.  In other words, it's designed to offer dedicated risk analysis support for large enterprises that trade on the internet.

For what it's worth, Kount runs as a fraud prevention application that uses adaptive artificial intelligence and machine learning to detect and prevent online fraud.

Looking at reviews from credible experts, it's right to say that Kount really keeps merchants from getting run over by fraud brainiacs. For the immensely greater part of it, Kounta seems to hang on tons of positive reviews from many stakeholders in the e-commerce industry.

Kount analyses online activities for fraud, utilizing over 200 factors, which makes its analysis more effective. It also uses advanced fraud detection features including device ID, mobile signals, geo-location, order linking, etc.

To cut it short…

There's so much revenue to make from e-commerce.

But money lost to fraud hurts the most.

Ecommerce fraud is one of the biggest risks and downside that a merchant can't recuperate from quite easily. While scammers get savvier each day, merchants and buyers must keep things tight to avoid being the prey.

Learning fraud detection hacks comes at a seemingly smooth curve.

Whether you are a merchant or a buyer, the above information offers you the necessary tools to protect yourself against fraud. Now, all you need to do is go out and do it. So, what are you waiting for?

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