Fraud Prevention Checklist

The Challenge:

Every eCommerce store owner experiences their share of online fraud and merchant chargebacks.  With online identity theft and friendly fraud being so prevalent, eCommerce stores have to get savvier at detecting fraudulent orders. Friendly fraud is defined as fraud that occurs through claims by cardholder that they either didn’t get the merchandise or the user of the card (family member) was not authorized.

Fraudulent order can add up and erode your margins and profits. Credit card processors virtually pass on all their risk through chargeback fees and purchased amount to the merchants.

The Solution:

You can’t completely eliminate fraudulent orders, but you can greatly reduce them by being vigilant at creating early detection rules and filters when you process your online orders.

  • Know your customer buying pattern
    By understanding your customer buying and activity pattern, you will be able to see any abnormal behavior. If you are not used to seeing $1000.00 order for 10 of your most expensive items, to be shipped next day air, this is a clue that something strange is up.
  • Create a Credit Card verification Procedure
    Once you have spotted a strange order, go through the process of ensuring the order is legitimate. Call the issuing bank for authorization, verify the cardholder’s billing/shipping address, and call the customer. Verify that the IP address of the order matches the customer’s GEO location. has an IP tool to help with this task
  • 3rd Party Bonded bonds the merchant’s terms and conditions. If a customer files a credit card dispute and Buy Safe finds that the merchant is in compliance with said policy, the merchant can use the reported findings to fight the chargeback with the credit card processor
  • Track Refund Data
    Review the reasons why refunds or chargebacks are being issued against your company. Are the reasons valid? Are there unusually high damage rates from shipping, due to insufficient packing protection?
  • Create a Do Not Sell List
    Using your CRM, start flagging orders that are fraudulent or disputes  from repeat customers. Review and study the patterns of the repeat offenders and don’t sell to them. It would also be worthwhile to start compiling types of credit used and source of fraud, meaning, does it happen more with traffic from search engine, PPC, affiliates or your email list? Segment your customer by tracking where they came from.

 In The Long Run:

More than 1 in 5 merchants sees an increase in Friendly Fraud*. Friendly Fraud accounts for theb2nd largest proportion of total fraud losses (24%) for large eCommerce merchants.* Don’t be overly risk averse as to start turning down valid orders.  Accept that there is a certain level of fraud that will occur, there is no way to have zero fraud or chargeback. So long as it’s within the acceptable range of under 1% of revenue or less, its not going to kill your business.

Your goal is to protect your profits. Chargeback fees, and your time chasing chargeback paperwork, can easily eat into your profits and affect your cash flow.  Therefore, it is important to ensure that you have procedures in place that will mitigate your potential lost.

There are also companies like Litle & Company and that help reduce credit card fraud through database management. It’s worth looking into, once you have large enough sales volume.

By: Shirley Tan


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