What is buyer fraud and how does it affect your online business

One of the most common issues businesses must contend with in the 21st century is buyer fraud. 

Buyer fraud is increasing at an alarming rate and impacting profitability across all industries. Consider these alarming statistics from a report, updated in 2021:

• Online shopping fraud increased 30% in 2017, a more significant increase than ecommerce sales.
• ecommerce fraud grew by 45% in 2017. This cost retailers almost $58 billion.
• ID theft is on the rise, which has also cost consumers over $16 billion in 2017.
• Credit card chargeback rates increase almost 20% annually, accounting for just under $7 billion in lost revenue in the form of merchandise, fees, and sales.

No matter what type of business you run, whether you sell online or in brick and mortar stores (or use a hybrid model), you WILL encounter buyer fraud at some point. 

The key to winning the war against this behavior is to understand what buyer fraud is, the most common types of buyer fraud, and how they impact your company. 

Today, we’ll help you learn about all of these things so you can better protect your business.

What is buyer fraud in ecommerce?

In order to better protect yourself against buyer fraud, it’s important to first understand what buyer fraud is. 

In the broadest terms, buyer fraud is when a customer or potential customer attempts to defraud a seller during the process of completing a transaction. This can be achieved in a number of different ways, which we’ll discuss later in this article. 

With the growth of ecommerce, we’ve seen an alarming rise in the level of ecommerce fraud. The basic definition of buyer fraud remains the same for ecommerce sellers, but since these purchases are conducted online, there’s almost always a computer element involved. 

ecommerce fraud is a type of internet fraud aimed at enriching the perpetrator by negatively impacting the seller. It can also be referred to as buyer fraud and payment fraud. 

The most common types of ecommerce fraud

While the number of ecommerce fraud attempts rise each year, the one advantage for sellers is that the majority of fraudsters use the same types of scam. Understanding the most common scams, how they work, and how they impact your business will make spotting and preventing potential fraud much simpler. 

Here are the most common types of ecommerce fraud:

Card cracking

Also known as Card Testing, card cracking is something almost everyone has experienced at this point. 

The scam basically involves criminals obtaining credit card numbers through hacking, security breaches, or other methods. Armed with a multitude of card numbers, they run bots or scripts to use those cards to attempt to make online purchases. 

The initial purchases are very small, often a few dollars at most. The purpose is to verify that the card is active and usable. The small initial purchase amounts often go unnoticed, as well. 

If the card works, the thieves become more brazen and start making big-ticket purchases. This is when the victim realizes their card has been compromised, and the fraud becomes a real issue for banks and sellers. 

The cardholder is generally protected in card cracking scams. The bank or the retailer will cover the fraud amounts, and in the case of retailers, you might be out not only the merchandise and the money, but you may also have to pay chargeback fees.

Card cracking is one of the most common types of buyer fraud. Banks and businesses have gotten smarter about flagging suspicious transactions, but it still costs companies billions of dollars per year. 

Chargebacks

We touched on chargebacks in the previous example, but they’re a common enough problem that they warrant their own discussion here. 

Chargebacks are different from card cracking in that most chargeback fraud cases involve the actual cardholder. 

The scam works like this:

A buyer makes a purchase with their credit card. They receive the items they’ve ordered, and then contact their credit card company to report a problem (usually that the charge is fraudulent) and request the transaction be removed. The credit card company will almost always side with the customer and will demand the seller issue the refund (and sometimes pay chargeback fees on the transaction). 

Often called friendly fraud, chargebacks cost businesses huge amounts of money annually and are hard to fight. 

Refunds

Refund fraud is one of the hardest types of buyer fraud to spot because it often appears legitimate at first glance. 

In this scheme, a fraudster will purchase an item on a stolen card, then request a refund claiming they overpaid. Rather than request the refund on the card they used, they’ll explain that the card is now closed and that they’ll need the refund through other means. 

The retailer gets caught between a rock and a hard place here when the fraud is discovered. They’ll have to eat the lost refund, and cover the amount charged to the stolen card. On top of that, they may have to pay chargeback fees as well. 

This can add up to big losses in short order. 

Account Hacks

Account hacks are just like the name implies. The bad guys manage to hack into the customer’s account and then can make illegitimate purchases, change information, and generally wreak havoc. 

Account hacks are more prevalent than ever thanks to poor password security on the customer’s part and how sophisticated hackers have gotten at creating tools to crack passwords for online accounts. 

Tools like two-factor identification can help prevent this kind of fraud.

Interception

Picking off packages is one of the oldest types of buyer fraud around, but it’s still used because it works. 

In this scam, the scammer will purchase an item with a stolen card, have it shipped to the cardholder’s address to avoid raising suspicion, then either reroute it later (either through the seller or shipping service) or simply snag it when it’s delivered to the cardholder’s address. 

No matter how this one plays out, businesses wind up on the hook for the lost merchandise and fraudulent charges. 

How buyer fraud affects your business operations

Now that we know the types of buyer fraud to look out for, let’s talk about how fraud can impact your business negatively. 

Loss of money

Naturally, the most obvious way fraud affects your business is in the loss of money. 

In every type of fraud we’ve outlined, the seller is responsible for covering the fraudulent amounts. In some instances, they’re not only covering the cost of the fraud, but they’re out the items and dealing with chargebacks as well. 

Even small amounts of buyer fraud add up quickly.

Loss of time

Resolving buyer fraud issues not only costs you money in the form of lost products and expenses, but it will also cost you money in terms of time.

Investigating and resolving buyer fraud issues can be complex, time-consuming work. Your fraud team will spend hours or days conducting their investigations. This costs you money as well. 

Can’t hire staff

The loss of time and money can also impact your ability to budget for hiring staff. 

If you have to maintain large teams of fraud investigators, you might find you’re short of funding for filling other positions your business needs. 

Can’t buy product

By the same token, you might also find that the expenses caused by fraud impact your businesses’ liquidity to the point where you can’t buy products. 

Even worse, you may develop credit issues related to fraud. Banks are less likely to work with businesses that struggle to minimize the amount of fraud they deal with. 

Longer hours

Tying in with the loss of time, you’ll also find yourself spending more money on work hours as your team tries to unravel fraud cases. The more fraud you encounter, the more hours of staff time you’ll waste. Those hours cost money. 

Customer service hassles

If your business is a frequent target for fraudsters, you’ll not only need more customer service representatives to deal with the increased call and email volume to dispute issues, but your customer service staff can also become frustrated and burnt out from dealing with angry customers. 

Vendor issues with returns

And finally, an excess amount of customer fraud can even affect your relationship with your vendors, particularly when it comes to returns.

If you have a higher than average volume of returns because of fraud issues, most vendors will either stop working with you or impose new terms to the business arrangement in order to protect themselves. 

How can you resolve buyer fraud issues?

By this point, you might be terrified about the dangers of buyer fraud and how it could dramatically impact your business. It’s a good concern to have. Being aware of buyer fraud means you’ll be better prepared to stop it. 

The good news is, there are tools that can help you spot potential fraud before it happens and costs you money and resources. 

Third-party detection tools

One of the best ways to stop fraudsters in their tracks is by using third-party fraud detection tools. 

These software solutions will work around the clock to spot suspicious transactions and alert you before it’s too late. 

There are a number of options out there, with a wide range of features and prices. Determine what level of protection you want and then schedule demos to find the right product for you. 

PCI Compliance

PCI stands for Payment Card Industry. It means you’re working within the compliance standards set by the payment card industry. 

This will not stop fraud from happening, but these best practices can help reduce the number of successful fraud attempts you encounter. 

If you use an ecommerce platform, odds are it’s already PCI compliant. 

Blacklists

Another simple step you can take to protect your business is by creating blacklists. 

If you’ve experienced fraud and can find common threads, you can put systems in place to outright block or at least flag transactions that align with your list. 

By stopping or investigating these flagged events before completing a sale, you can significantly reduce the number of successful fraud attempts that get through. 

These are just a few of the ways you can protect yourself and your business.

Final thoughts

Ecommerce buyer fraud increases exponentially every year and doesn’t appear likely to slow down any time soon. Online crooks are smarter and have more tools than ever before, and they’ll use them to steal from you and your customers. 

The good news is most of the methods used to commit buyer fraud are easily spotted, and the good guys are making better tools to help automate the process and protect your business. 

Being aware of the different types of fraud and how they work is the first step. Armed with that knowledge, you’ll be better equipped to choose solutions to keep you and your customers safe. 

If you need more guidance, schedule a meeting with us. We’ll be happy to help you find buyer fraud solutions that are perfect for your business. 

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