Ecommerce continues to soar both domestically and abroad, as more and more business takes place on the internet rather than in brick & mortar stores. In 2025, ecommerce transactions were projected to hit $1.2 trillion. While shopping from the comfort of your couch bring convenience to consumers, it also opens the door to massive fraud opportunities as online transactions are often easier to hack en masse compared to in-store transactions.

Today, ecommerce transaction fraud has become a significant threat in the digital marketplace, impacting businesses, consumers, and financial institutions alike. According to research by Experian, global losses due to this issue were estimated to be $50.5 billion by 2024. This alarming trend underscores the urgent need for robust fraud prevention strategies to protect all stakeholders involved in online commerce.

Defining Ecommerce Transaction Fraud

Ecommerce transaction fraud refers to illegal or deceptive activities conducted during online transactions with the intent to achieve financial gain. Unlike traditional retail fraud, fraud in ecommerce exploits the anonymity and convenience of the internet, making detection and prevention more challenging. These fraudulent activities can lead to substantial financial losses, erode consumer trust, and damage the reputations of businesses and financial institutions.

One example is the continued rise of EBT card fraud where fraudsters steal the card information from Electronic Benefits Transfer cards – digital food stamps, colloquially – in order to drain accounts and steal the debit funds. In 2022, the amount lost to EBT fraud was estimated to be up to $4.7 billion annually, and particularly nefarious as this type of ecommerce fraud targets the most vulnerable populations of each US state.

Types of Ecommerce Fraud

1. Card-Not-Present (CNP) Fraud

How it works: CNP fraud occurs when a fraudster uses stolen credit or debit card information to make unauthorized online purchases. Since the physical card isn't required for online transactions, criminals can exploit this by inputting stolen card details during checkout.

Who it hurts: This type of fraud affects merchants, who may face chargebacks and lose revenue, and consumers, whose card information is misused.

Prevention strategies:

Dynamic Security Codes: Implementing dynamic CVV/CVC codes that change with each card-present transaction can effectively prevent the use of stolen card information.
Address Verification System (AVS): Verifying the billing address provided during checkout against the cardholder's address can help detect fraudulent transactions.
2-Factor Authentication: Requiring additional authentication steps, such as passwords or biometric verification, adds an extra layer of security.

2. Account Takeover (ATO) Fraud

How it works: In ATO fraud, cybercriminals gain unauthorized access to a user's online account by stealing login credentials through phishing, data breaches, or malware. Once inside, they can make purchases, withdraw funds, or access sensitive information.

Who it hurts: Consumers suffer financial losses and privacy breaches, while businesses may face reputational damage and financial liability.

Prevention strategies:

Multi-Factor Authentication (MFA): Requiring multiple forms of verification makes it harder for fraudsters to access accounts.
Regular Monitoring: Implementing systems to detect unusual account activity can help identify and prevent unauthorized access.
User Education: Educating users about phishing scams and encouraging strong, unique passwords can reduce the risk of credential theft.

3. Friendly Fraud (Chargeback Fraud)

How it works: Friendly fraud occurs when a customer makes a legitimate purchase online but later disputes the charge with their credit card issuer, claiming the transaction was unauthorized or the product was not received. This leads to a chargeback to the merchant.

Who it hurts: Merchants lose revenue and incur chargeback fees, and financial institutions must process disputed transactions.

Prevention strategies:

Clear Communication: Providing transparent product descriptions, delivery timelines, and return policies can reduce misunderstandings.
Robust Record-Keeping: Maintaining detailed transaction records helps merchants dispute illegitimate chargebacks effectively.
Enhanced Customer Service: Promptly addressing customer complaints can prevent disputes from escalating to chargebacks.

4. Identity Theft

How it works: Fraudsters steal personal information, such as Social Security numbers or email addresses, to create fake accounts or make unauthorized purchases. This can involve sophisticated techniques, including the use of AI-generated deepfakes to bypass verification systems.

Who it hurts: Victims may suffer financial losses and damage to their credit scores, while businesses face potential legal consequences and reputational harm.

Prevention strategies:

Identity Verification Tools: Implementing robust verification processes, such as biometric checks or document verification, can prevent fraudulent account creation.
Data Encryption: Protecting stored personal information with strong encryption methods reduces the risk of data breaches.
Regular Audits: Conducting frequent security assessments helps identify and address vulnerabilities in data storage and processing.

5. Phishing and Social Engineering

How it works: Fraudsters send deceptive emails or messages that appear to be from legitimate sources, tricking individuals into revealing sensitive information like login credentials or credit card numbers.

Who it hurts: Consumers may have their personal and financial information compromised, leading to unauthorized transactions. Businesses can suffer from data breaches and loss of customer trust.

Prevention strategies:

Employee Training: Educating staff about recognizing phishing attempts can reduce the risk of internal breaches.
Email Filtering: Implementing advanced email filters can block malicious messages before they reach recipients.
Public Awareness: Informing customers about common phishing tactics and encouraging vigilance can help prevent successful attacks.

6. Card Testing Fraud

How it works: Fraudsters test the validity of stolen credit card numbers by making small purchases or donations online. Once a card is confirmed to be active, they proceed with larger fraudulent transactions.

Who it hurts: Merchants may incur fees for multiple small transactions and face chargebacks from unauthorized larger purchases.

Prevention strategies:

Transaction Monitoring: Detecting patterns of small, rapid transactions can help identify card testing activities.
CAPTCHA Implementation: Requiring users to complete CAPTCHA challenges during checkout can deter automated card testing scripts.
Velocity Checks: Limiting the number of transactions allowed from a single IP address within a short time frame can prevent card testing.

EVC Prevents Ecommerce Transaction Fraud

EVC (Ellipse Verification Code) is quickly becoming the industry standard to prevent ecommerce transaction fraud. By placing a dynamic security code on each payment card, stolen card data is rendered useless by the time a fraudster attempts to use the information. And because the code changes automatically, the protection is frictionless. No change in user habits, but all the ecommerce fraud protection needed to keep fraud at bay.

So while consumers and merchants must always remain vigilant against ecommerce transaction fraud, employing preventive strategies like EVC dynamic security codes, multi-factor authentication, and regular monitoring, financial institutions can take the lead in combating fraud effectively for their customers.

Institutions need to invest in advanced security technologies which are widely available today. As ecommerce continues to expand, proactive investment in EVC and similar fraud-prevention technology is essential for maintaining the integrity and security of online transactions.