Practical Ecommerce

How to Choose a Fraud Prevention Service, for Ecommerce

Ecommerce merchants love the holidays. So do fraudsters. Chargeback cheats and organized criminals know you’re busy driving sales, fulfilling orders, and keeping customers happy. They hope you are not as vigilant in manually reviewing their orders.

To help reduce fraudulent purchases and chargebacks, it may be worth using a fraud prevention service.

What Is a Fraud Prevention Service?

A fraud prevention service is a company dedicated to identifying fraudulent card-not-present transactions — i.e., ecommerce transactions — that will result in chargebacks and lost revenue. It helps catch organized account takeover attacks, purchases made from stolen credit cards, and the so-called “friendly fraud” chargeback cheaters, who purchase products using their own, legitimate credit card numbers but then fraudulently file a chargeback with the credit card company after receiving the goods.

A fraud prevention service is a company dedicated to identifying fraudulent card-not-present transactions — i.e., ecommerce transactions — that will result in chargebacks and lost revenue.

These services analyze an extensive amount of information from many sources to make an order approval recommendation. The analysis is typically much more thorough than what your card processor offers — address and security code verifications, usually. Best of all, it can integrate into your ecommerce platform and to make those recommendations quickly.

Fraud prevention services typically charge a percentage of your transaction value or a fixed fee that ranges from $80 to $1,000 per month, typically. To determine if a fraud prevention service makes financial sense to you, calculate your total fraud and chargeback costs and then add in the lost revenue from orders that you declined.  Compare that overall total to the cost of the service.

Save Money and Time?

Chargebacks hurt your profits with the double impact of lost margin from unreturned product and additional fees from the bank. Then, MasterCard and Visa can charge additional amounts if chargebacks exceed 1 percent of your transactions. Plus, you have lost opportunity costs of your time when you fight chargebacks.

Prevention is the best approach. The address verification system (AVS) and CCV security code services from your merchant account provider or payment gateway are a start. However, solely relying on your merchant account provider to flag questionable orders is not enough. (For example, MerchantVoice columnist Erica Tevis, owner of Little Things Favors, an online gift boutique, recently explained the nine checks she uses to detect fraudulent orders, in “How I detect ecommerce fraud.”)

Still the bad guys have many tricks. They can spoof their location, use mobile devices, and respond to your email inquiries. They can even answer your phone calls. It’s often complex and time consuming to manually cyber sleuth each risky order.

For many ecommerce businesses, therefore, a fraud prevention service is worth the money.

Fraud Prevention Services: Questions to Ask

Here are ten questions to ask to help you choose the right fraud prevention service for your ecommerce business.

  • What service plans do they offer? Vendors offer different plans to fit the level of control or involvement you want. Determine if you want to be completely hands off or if you want to define the rules. Consider vendors that can customize their rules engine to match your policies and risk tolerance.
  • What data is analyzed? An extensive number of data sources are available to help make a risk decision. How does the service incorporate IP geolocation, proxy detection, chargeback blacklists, social graphs, issuing-bank data, and address, phone, and email verifications? Find out what is being monitored and how frequently new data sources are added.
  • How is mobile data identified? Mobile sales are growing quickly. Fraud from mobile devices is on the rise as well. Sophisticated vendors can establish a buyer’s online fingerprint and determine activity patterns from of a buyer’s computer, smartphone, and other web access devices.
  • How are false positives reduced? Declining a good order also costs you profits and new customers. It’s easy to make a policy that declines all transactions from certain countries, for example. However, a robust fraud detection service can help capture more sales by digging deeper and validating orders that you would otherwise cancel.
  • Do you have to approve or decline an order? Even with advanced fraud detection monitoring and analysis, the service provider may just make a recommendation or score the order. You may still have to make the final decision to accept or decline an order. Ask if they have any triggers or rules that can then be used to automatically cancel any bad orders and process all good orders.
  • Is it integrated with your shopping cart? You will want order data to pass seamlessly from your shopping cart into the fraud prevention systems. Ask the vendor what ecommerce platforms it works with. Most vendors support the most popular platforms. Then find out what you need to do to grant access permissions and if there is plugin installation or other coding required.
  • Are other order channels supported? Are there other credit-card-not-present transactions that you need to process, such as phone orders? Find out how the service supports all of your channels. What does it take to submit order data into the fraud analysis systems for offline channels? And if you also have a brick and mortar store, some vendors can augment your in-store fraud services.
  • What guarantees are offered? Some providers offer chargeback guarantees or insurance — i.e., if they approve a transaction that turns out bad, you are covered for some or all of your financial loses. However, if you are still making the final approval decision, it is likely that you may not qualify for compensation. So check the legal terms closely on any guarantees.
  • Dedicated support is available? Having a dedicated contact or, better yet, a direct fraud support team can be a big benefit to you. Vendors can improve their performance if they know more about your business. For example, the vendor can improve its fraud rules based on the products you sell, typical order values or quantities, or if you are targeting a new market. Plus, it is helpful to have someone to quickly call to discuss a questionable order.
  • What service level agreements are included? Speed is key when making decisions about orders, even risky ones. You don’t want to sit on an order for too long. Understand a vendor’s commitment to quick communications and alerts, system up-time, performance during high volume times, and direct contact support.

Fraud Prevention Companies

There are many fraud prevention services that focus on helping ecommerce businesses. Here is a partial list, arranged in alphabetical order.

Bob Angus

Bob Angus

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Comments ( 3 )

  1. John martin December 9, 2014 Reply

    Very useful information for an ecommerce webmaster like me. These are new to me and I need to check a lot before entering into ecommerce transcations. Thanks Bob for sharing this information in right time.

  2. Tiffany December 10, 2014 Reply

    Very good article the issue we had was with friendly fraud. So we trailed vantage point friendly fraud chargeback system. The software makes video recordings as evidence which contain all the users meta data once we show the customer the recording they suddenly remember them placing the order. Very effective in proving our cases. I would like to add it onto the list of services as it works in a unique way and we also use maxmind alongside it.

    • Bob Angus December 10, 2014 Reply

      Great point Tiffany. Friendly fraud is becoming more and more common.

      Working with a fraud prevention service that also helps you with your evidence and response process after a chargeback occurs can make your life much easier. Plus, you get the direct financial benefit of recovering some of the funds.