Mid-market fraud prevention: mistakes retailers keep making

Fraud doesn't just impact the bottom line and reputation of large enterprises, but also mid-market retailers. From account takeover and payment fraud to abuse of promos, frauds erode margins, frustrate customers, and trigger significant revenue losses. 

Moreover, fraud attacks are becoming increasingly sophisticated and traditional cybersecurity solutions are no longer enough. Hence, it can be extremely costly for mid-market retailers to underestimate the impact of frauds and not take appropriate preventive measures. 

Let's explore the common types of frauds mid-size retailers are grappling with, where they are going wrong, and what to do for enhanced protection.

Fraud Is Real and Rising 

These statistics shed light on the growing threat of fraud: 

• In 2023, global eCommerce loss due to fraud was pegged at $41-$48 billion and it's likely to hit the $107 billion mark by 2029. 
• Every year, payment fraud causes mid-market retailers to lose more than 3% of their online revenue. 
• Refund abuse is the leading type of fraud attack as per 47% of merchants. 
• Last year, fraudulent claims and returns led retailers in the USA to lose $103 billion. 
• For every dollar merchants lose to fraud, their chargeback and operational expenses come to $4.61. 

Common Frauds, What's Going Wrong, and Fixes

Here's a look at the frauds that widely affect mid-size retailers, why current protection measures are not enough, and how to fix the situation. 

1. Payment Fraud (Stolen Cards and Card-Not-Present)

The unauthorized or illegal use of payment methods leads to this fraud type. And these days, fraudsters are especially using stolen cards or card details (online transactions don't need physical cards anyway) to dupe retailers. This means, retailers end up bearing the cost of order and processing.  

• Retailers' Mistakes

Fraudsters nowadays leverage synthetic identities, automation, and credential stuffing to bypass conventional security controls. Hence, depending on the same-old rules and filters won't do retailers much good. Not verifying user identity or billing or shipping addresses is a big mistake too. 

• Resolution

Use advanced real-time verification tools to prevent order acceptance from fake identities and anomalous or mismatched addresses. Embrace aggressive fraud detection measures for device fingerprinting, risk scoring, velocity checks, etc. For high-risk orders, adopt stringent authentication like CVV or 2FA.  

2. Chargeback Fraud

Chargebacks happen when legit or fraudulent customers contest transactions post purchase. In fact, the number of real customers disputing valid charges is on the rise. Last year, over 70% merchants witnessed a spike in friendly-fraud chargebacks. 

• Retailers' Mistakes

Rather than looking at it as a preventable problem, retailers consider chargebacks as a common cost of running businesses. Improper documentation, absence of shipment tracking, and unclear billing are other mistakes. Merchants often delay responding to disputes too, which impacts their chance of winning. 

• Resolution

For every order, store proper evidence in the form of tracking details, delivery proof, photos, and straightforward billing descriptors. Leverage automation and data to handle disputes and improve the possibility of winning. 

3. Return or Refund Fraud 

This kind of fraud occurs when someone buys something, uses it temporarily, and then returns it. Returning empty boxes or filing false claims of product damage is a form of fraud too. 

• Retailers' Mistakes

Extra generous or lenient return policies without necessary verification often make room for such frauds. You might also miss out on repeat offenders if you don't track returns or do it inefficiently. Quickly accepting returns or processing refunds before inspecting returned items is another mistake. 

• Resolution 

Implement controls for validating returns, like SKU tracking or serial number, RFID or barcode checks, and photos of returned items. Analyse return behavior and patterns with data and spot customers or items that pose the most risk. Flag the same for in-depth review. 

4. Promo or Discount Abuse

Fraudsters often exploit discounts on first orders, referral bonuses, promo codes, etc. by stacking discounts or creating multiple accounts. They might also use some other loophole to enjoy benefits unduly and repeatedly. 

• Retailers' Mistakes 

Not conducting robust identity checks before offering promos to a customer is a major misstep. Many mid-market retailers also offer broad discount policies that are easy to abuse. It's also a mistake to not monitor multiple accounts associated with the same address, IP, or payment mode. 

• Resolution 

When applying discounts, particularly the first time, make sure you verify identities and addresses. Put a cap on promo codes per shipping address, user, payment method, or email. Also study the redemption patterns of promos and flag repetitions or volumes that seem unusual. 

5. Account Takeover (ATO)

Though going digital is a non-negotiable way for retailers to grow at present, fraudsters often take over customer accounts via data breaches, phishing, or credential stuffing. And after accessing the accounts, they carry out payment or return frauds.  

• Retailers' Mistakes

Poor authentication practices, involving weak passwords, unsecured cookies, or absence of 2FA, often trigger account takeovers. Not monitoring login patterns is another mistake, as you cannot spot anomalies like multiple failed login attempts, device changes, etc. 

• Resolution 

Wherever possible, enforce multifactor authentication or MFA. Detect anomalies in terms of speed, login location, etc. Combine anti-fraud tools used at the time of order placement with ATO defense, so that suspicious accounts don't get through order checks.  

Make Address Validation an Integral Part of Fraud Prevention 

Many fraud types, especially those associated with payments, returns, and promos, happen due to addresses that are high-risk, mismatched, or fake. Hence, to reduce such risk, you should validate shipping and billing addresses, cross-check them against fraud lists, and flag those that are high-risk. 

With address validation, you can:  

• Minimize delivery frauds or false claims of non-delivery
• Avoid shipping to fake, reship, or mule addresses 
• Spot patterns that are suspicious (like frequent change in delivery address) 

Pairing address validation with behavioral monitoring, strict authentication, and data-backed fraud signals is ideal for mid-market retailers.  

Prevent Fraud without Alienating Real or Loyal Customers 

In a nutshell, fraud has become multi-faceted, automated, and more organized. Hence, relying on standard security measures is no longer an option. At the same time, putting off real customers with cumbersome checks or strict return policies is not the answer. 

What you need is a smarter and proactive anti-fraud strategy. Leverage multi-layered fraud prevention, real-time and frictionless address validation, customer behavior analysis, and automated dispute management. Also, make fraud prevention an integral part of checkout, thoroughly check returns, verify identities during account creation, and educate employees on fraud detection. 

The right strategy can help you save money, build resilience, streamline operations, and protect brand reputation.