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The Evolution of Fraud Tactics in the Digital Age
The rising tide of online fraud
The 2024 Global eCommerce Payments & Fraud Report reveals a troubling, yet unsurprising trend – fraud is on the rise globally. The data, collected from hundreds of merchants around the globe, shows that they faced a greater variety of fraud attacks in 2023 than in any other year. Most commonly, merchants encounter three to four different types of fraud every year, including refund/policy abuse, first-party misuse, account takeover, loyalty fraud, and triangulation schemes.
Key insights
- Refund/policy abuse impacted 48% of merchants in 2023.
- First-party misuse affected nearly 45% of merchants.
- Account takeover is increasing in prevalence with a significant impact.
- Loyalty fraud and triangulation schemes are steadily emerging as major concerns.
These numbers indicate a growing challenge for merchants worldwide, emphasising the need for fraud prevention and management strategies that tackle fraud head-on and stay one step ahead of the perpetrators.
After all this time, why do people still fall victim to scams?
One would be hard-pressed to find a merchant or consumer who has not been affected by fraud or scams, in one way or another. While we are increasingly aware of the ubiquitous phenomenon, many of us still find ourselves or those around us falling victim to online scams.
There are several reasons for this persistent issue:
- Increasingly sophisticated scams. While we know that scams are out there and may think we know what to look for, fraudsters continually refine their tactics, making scams harder for consumers and merchants alike to detect. Phishing schemes, for instance, have become more convincing, mimicking legitimate communications from trusted entities to a frightening degree.
- Emotional manipulation. Scammers prey on emotions such as fear, urgency, and desperation. Creating a sense of urgency or fear prompts victims to act quickly, without fully considering the request’s legitimacy. Mimicking a merchant to request a customer share a one-time passcode to complete a transaction is a common method of initiating an account takeover, playing on the perceived legitimacy of the request in the face of their pending transaction.
- Lack of awareness. While many merchants know about common scams, new fraud tactics can catch people off guard. Continuous education and awareness are essential in combating this issue. However, the perpetrators behind these tactics know that every new trick they pull from their sleeves will soon be widely recognised and less effective. One example of this evolution that both merchants and customers must contend with today is the nefarious use of artificial intelligence (AI) to generate proof-of-identity images, videos, or voice samples. We can expect this trend to grow as generative AI continues to exponentially improve each day.
- Technological vulnerabilities. As technology evolves, so do the methods used by fraudsters. Vulnerabilities in modern technologies can be exploited before adequate security measures are put in place. Furthermore, when those solutions are deployed, fraudsters immediately set to work, engineering creative ways to bypass, override, or otherwise render those solutions ineffective.
- Process vulnerabilities. Fraud protection starts with the merchant’s processes. Weak verification steps, overly lenient refund policies, and outdated fraud detection methods are open invitations for fraudsters to strike. According to MRC’s 2024 report, up to 40% of merchants identified gaps in fraud tool capabilities as a significant challenge. Strengthening internal processes, tightening refund policies, and ensuring consistent staff training can close these gaps. Just as fraudsters use AI in their methods of attack, merchants can also leverage advanced AI-driven fraud detection tools to add an essential layer of defence against crafty fraud schemes.
The financial impact of fraud
According to the same MRC report, merchants estimate that fraud schemes drain roughly 3% of their total ecommerce revenue annually. This figure highlights the substantial economic burden that fraud places on businesses, which can amount to millions of dollars in lost profits. The repercussions of fraud affect everyone, from the CEO and suppliers to employees and consumers.
Financial impact by region:
- North America: Merchants report a fraud rate of 3.3% of total revenue.
- Europe and APAC: Slightly higher rates, around 3.5%.
- SMBs: Small and mid-sized businesses experience higher fraud rates compared to larger enterprises.
Strategies for combating fraud
Unfortunately, fraud is here to stay. Wherever money changes hands, a malicious entrepreneurial fraudster will lurk, waiting for the opportunity to pounce. The good news is that there are several ways merchants can protect themselves and their customers from this ever-present threat.
- Enhanced verification processes. Implementing stronger verification processes can help prevent fraud at various stages of the transaction. This includes using multi-factor authentication (MFA) and biometric verification.
- Advanced fraud detection tools. Leveraging AI and machine learning (ML) can enhance fraud detection capabilities. These tools can analyse patterns and detect anomalies in real time, providing an additional layer of security.
- Educating employees and customers. Regular employee training sessions about fraud KPIs and security protocols can reduce the likelihood of merchants falling victim to sophisticated fraud schemes. For example, frequent reviews and updated training on protective policies like return windows — and how to enforce those parameters with customers — can help stem fraud at the front line. Merchants can also shape these proactive measures into consumer awareness programmes. Moreover, reminding customers never to share their passwords, account information, or other common scams like gift card purchases alerts them to be mindful of these tactics during all transactions.
- Collaboration with industry partners. Working with industry partners and participating in forums, such as those provided by the MRC, can help merchants stay informed about the latest trends and best practices in fraud prevention.
The road ahead
As we look towards 2024 and beyond, the fight against online fraud remains a top priority for the ecommerce industry. The data from the Merchant Risk Council’s 2024 report underscores the need for ongoing vigilance, advanced security measures, and robust fraud management strategies. By understanding the numbers and recognising why people still fall victim to scams, merchants can better prepare and protect their businesses in an increasingly digital world.
While the battle against online fraud is far from over, staying informed and proactive can make a vital difference for the safety of merchants and consumers alike. With the right tools, education, and collaboration, we can strengthen our defense against the ever-evolving threat of online fraud.
