The level of convenience and accessibility to shopping online has made the e-commerce sector attractive not only to genuine customers but also to bad actors who are trying to make their own money using illicit methods and payment fraud, better known as the general term of e-commerce fraud, which targets various digital marketplaces and shops. From securing user profiles from account takeover fraud or unauthorized charges to monitoring transactions, as a business, your responsibility is to ensure a reliable service. If you want to scale and reach global markets, the only way to achieve all of this is to implement an e-commerce fraud prevention software.
However, the main challenge is that some can be naive and don’t exactly know how broad “fraud prevention” is. It consists of well-known processes, such as email verification at the account creation stage or age verification before checkout for buying age-restricted goods. To remain effective, these controls must extend across the entire customer lifecycle, ensuring continuous protection and ongoing due diligence (ODD). Businesses can face costly disputes and chargebacks, regulatory penalties for non-compliance regarding Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, and reputational damage that damages both investors’ and your customers’ trust and overall confidence in your brand.
So, failing to address fraud risks can result in more than just lost revenue. In this blog post, we explain the key types of fraud, useful integrations, and the best measures with specific fraud prevention software examples for the e-commerce sector.
What is E-Commerce Fraud?
E-commerce fraud is an unlawful or criminal activity that takes place on an e-commerce platform, often using channels like online transactions and unauthorized payments after account takeovers and cases of identity theft, sometimes using techniques like document forgery during identity verification at the user onboarding stage, or phishing using fake links that appear like the platform’s support team to steal credit card information. Other examples of e-commerce fraud include chargeback fraud, where the user intentionally disputes a transaction to get their money back and keep the item, even though it’s not damaged and is as described.
For marketplaces, selling replicas as real designer items is a common issue as well. In general, e-commerce fraud is a big issue that can’t be let loose without adequate controls in place. That’s why online platforms use monitoring software to detect anomalies and suspicious user behavior, including red flags linked to profile changes or atypical transactions (for example, very frequent or very large transactions that don’t align with the usual user’s behavior).
Related: What is a Transaction Dispute? [Challenges for Merchants]
What are the Three Main Types of E-Commerce Fraud?
The most common types of fraud in e-commerce include:
1. Payment Fraud
Cybercriminals use stolen or fake payment details, such as credit cards or bank accounts, to complete purchases. For example, a card-not-present (CNP) transaction occurs when a fraudster makes an online, phone, or mail purchase using stolen credit card information. Since the physical card isn’t presented to the merchant, it’s harder to verify the cardholder’s identity, making this a common method for credit card fraud.
Standard ID document checks, transaction monitoring, or other RegTech software solutions, such as iDenfy’s Bank Verification API, help connect to the user’s bank and access important details like their transaction history, IBAN number, etc. If needed, you can cross-check this data with their onboarding profile details and check if there are any mismatches or red flags linked to payment details.
2. Chargeback Fraud
Also called friendly fraud, occurs when customers dispute legitimate transactions to claim refunds. This can happen through various complaints, for example, linked to item return policy abuse. For example, a fraudulent customer purchases an expensive watch online, uses it for an event, and then returns it, claiming it was unworn or unsatisfactory. The e-commerce platform issues a refund, allowing the customer to use the items for free through chargeback fraud.
3. Identity Fraud
Fraudsters steal personal information through phishing, hacking, or dark web purchases to make unauthorized transactions or take over accounts. In general, the first line of defense against identity theft and related crimes is KYC verification or simply identity verification to help detect users who use fake documents, personal details that belong to family members, stolen details from social media accounts, or accessible databases that keep details like Social Security numbers (SSNs).
This is common for synthetic identity fraud, where real and fake data are mixed, for example, taken from senior or deceased citizens, to create a new and more convincing identity for fraud.
Related: How to Check if Someone Is Using Your Identity?
How Does an E-Commerce Fraud Prevention Software Work?
An e-commerce fraud prevention software is designed to detect fraud in real-time, often using automation and AI, in order to help e-commerce merchants handle large volumes of transactions and other compliance or fraud prevention-related operations effectively, such as:
- Onboarding new customers onto their e-commerce site
- Monitoring user behavior and flagging suspicious activity
- Detecting unauthorized payments or fraudulent chargebacks
- Blocking suspicious accounts on marketplaces to prevent account takeovers
- Conducting ongoing monitoring to detect changes in customer profiles (as even sleek customers with a clear history can develop criminal tendencies)
To save costs and get a better ROI, look for a fraud prevention service provider that has multiple different tools that can be combined and tailored to match your particular use case. Multi-layered fraud prevention systems, such as iDenfy’s software, combine several security measures to detect risks in real-time.
That’s because they offer AI-powered onboarding tools like ID document checks or selfie identity verification, device fingerprinting to spot suspicious logins, and IP address analysis to block users from shady or high-risk locations. Extra fraud prevention features, such as SMS verification, can also flag phone numbers linked to fraud. By automating these processes, e-commerce fraud prevention software identifies risks much faster than manual monitoring, reducing the risk of overlooked fraud attempts.
Related: AI in Fraud Prevention
Why Should I Use Fraud Prevention Software Instead of Manual Processes?
While internal Trust & Safety teams can manually review user activity on e-commerce platforms, their capacity is limited, especially when handling large transaction volumes. Fraud prevention software addresses this challenge by flagging suspicious behavior in real-time, such as unusually high-value orders, multiple accounts from the same device, or suspicious and quick changes in a user’s profile details.
Simply put, this helps save time and money and, at the same time, reduces the risk of making mistakes, such as not reporting a suspicious transaction on time.
A Practical Example of Fraud Prevention Software in Action
When suspicious activity is identified on an e-commerce platform, fraud prevention software can automatically initiate reverification. This step often happens after a user has already been approved and is actively using the platform or making purchases, making the fraud harder to spot compared to cases where a fake ID is flagged at the account creation stage or before the user’s first transaction.
That means, you use a software like iDenfy’s identity verification platform to:
- Ask the user to upload a Proof of Address (PoA) document, such as a utility bill.
- Trigger another KYC check, such as asking the user to upload an ID document, ideal for confirming a high-value purchase.
By highlighting these risks, the fraud prevention software allows in-house teams to focus their attention on the most critical cases, without relying on spreadsheets or scattered logs that could miss key signs of fraud or non-compliance due to data privacy restrictions.
So, even though Enhanced Due Diligence (EDD) is complex and can’t be fully automated, automated tools can help manage high-risk customers or users that require extra manual intervention more accurately.
How Can I Know Which Software is Best for My E-Commerce Platform?
The right software integration depends on your business size and risk profile:
- Small to mid-sized merchants often benefit from ready-to-use apps.
- Enterprise-level e-commerce platforms need API-based customization to handle larger user onboarding volumes and other tasks that require automated solutions.
For example, iDenfy supports both, ensuring that businesses can adapt as they grow while keeping fraud prevention seamless for end users.
Note: You can check out the full list of popular integration options that we offer.
How Much Does Fraud Prevention Software for E-Commerce Cost?
Unfortunately, there’s no universal rule or defined cost for all e-commerce fraud prevention software options out there, but there are factors that influence the overall costs that would affect your e-commerce firm. For example, your user and transaction volumes increase costs, and it depends on the concrete solution and what kind of level of sophistication it offers in terms of customization options and built-in compliance tools.
Basic fraud filters are cheaper, while advanced KYC/KYB verification, AML screening, and real-time alerts raise costs. So, it can range from $20–50/month for basic fraud monitoring and up to 1,000+/month for large-scale e-commerce businesses and similar high-risk platforms.
For example, iDenfy offers multiple e-commerce-focused solutions under a single platform. Such an approach of a feature-rich software is beneficial for two reasons:
- It reduces the need for multiple vendors (due to factors like flexible pricing models and no-code integration options).
- It makes fraud prevention not only more effective but also more cost-efficient (with multiple fraud prevention background checks and KYC/KYB/AML solutions).
In general, you should calculate the cost of your fraud prevention software by comparing it against fraud losses and chargeback fees. Your goal is to minimize fraud losses, such as chargeback processing fees, and save time for your internal fraud and compliance teams that are responsible for tasks like user verification and ongoing compliance monitoring checks with high-risk, flagged cases.
Note: iDenfy has also recently introduced a Pay as You Go pricing plan option.
Which Businesses are Affected By E-Commerce Fraud?
Any business that has its business monetized, offering various digital payment options for its clients, is exposed to payment fraud. That means all e-commerce service providers are affected and can become targets.
For example:
- Subscription-based platforms that offer services like streaming, music, or e-books are vulnerable to unauthorized access or illegal and stolen content distribution.
- Luxury goods and high-value retailers that sell items like watches, jewelry, art, etc., are vulnerable to fraudulent chargebacks and even money laundering.
- Marketplace and auction sites that sell genuine items often deal with the issue of fake listings that showcase hidden counterfeit goods, where fraudulent sellers scam buyers.
- SaaS platforms that sell various online tools, from network security solutions to digital learning courses.
- Travel and real estate rental sites that offer apartments or houses for short-term stay can also experience losses when listings are fake, not as described, or booked using stolen credit card information.
In many countries, regulators classify industries such as luxury goods, finance, iGaming, or crypto as high-risk (due to risky financial transactions and money laundering opportunities), requiring businesses to implement Customer Due Diligence (CDD) and ongoing compliance measures. These obligations go beyond onboarding and extend throughout the whole customer lifecycle. That’s why reverification and periodic screening are vital.
Compliance and Fraud Prevention in High vs Low-Risk Sectors
In practice, fraud prevention means applying various security processes such as identity verification, AML screening, continuous monitoring of user behavior and transactions, and filing Suspicious Activity Reports (SARs) whenever potential fraud or money laundering is detected. AML screening itself often involves sanctions list checks to ensure a client is not listed, since most jurisdictions prohibit doing business with sanctioned individuals or entities. Adverse media screening is also useful for non-regulated platforms, helping detect negative news about a brand or its associated individuals to manage risks more effectively.
In e-commerce, additional compliance and stricter fraud prevention requirements also apply. A common example is age verification for platforms selling alcohol, tobacco, or adult-only content. Here, businesses verify a customer’s legal age either by reviewing their ID document or by using age estimation, which assesses whether the individual appears old enough to meet legal requirements.
For smaller e-commerce stores or platforms looking for a quick start, light integration options like Shopify or Zapier plug-and-play apps are ideal. For example, iDenfy’s Shopify identity verification app allows Shopify merchants to download the solution from the Shopify Store and implement automated KYC checks and age verification without any complex development on their part. This approach minimizes setup time.
Combined with ongoing monitoring fraud prevention software that flags anomalies, such as unusual purchase patterns or atypical user account logins from high-risk countries, this makes up an effective system against unauthorized transactions before they impact your business operations and revenue.
Related: E-commerce Fraud — A Guide to Preventing Money Laundering
How to Prevent E-Commerce Fraud?
There are at least a few layers to an e-commerce fraud prevention system. Businesses often implement software that then streamlines various security and fraud-related tasks, minimizing the chances of dealing with fraudulent customers and unwanted financial losses. For example, allowing users to sign up without any verification increases the chances of welcoming back actors. However, using only KYC at onboarding and then no monitoring is equally not sufficient.
So, the key ways to prevent fraud in e-commerce are to use:
KYC Verification Methods
This includes combining KYC checks with background verification tools, such as geolocation verification or device fingerprinting. Traditional KYC verification works by verifying IDs (passports, ID cards, or driver’s licenses), matching the faces with documents, and ensuring logins on e-commerce sites come from legitimate locations, reducing risks of account takeovers and fraudulent sign-ups.
Suggestions from iDenfy:
➡️ Identity verification (document/biometric/database)
➡️ Face authentication (reverification)
➡️ Address verification (via PoA or direct access to a utility service provider)
➡️ Age verification (for age-restricted shops and e-commerce merchants)
AI-Powered Fraud Detection Extras
Automated software backed by AI is capable of analyzing large volumes of data, better detecting discrepancies that internal teams might miss with manual checkups. AI analyzes user behavior and transaction patterns to detect anomalies that humans might miss.
AI-powered software can also identify red flags like:
- Transactions involving high-risk geolocations
- Rapid movement of funds through multiple accounts
- Attempts to use prepaid cards linked to sanctioned individuals.
Software can flag mismatched billing and shipping addresses, repeated failed login attempts, or multiple accounts linked to the same device. Sometimes, e-commerce firms also need to assess their vendors or potential partners, and not only current customers.
For example, it’s simply impossible to screen a potential new business partner, or another entity, such as a payment service provider, for Know Your Business (KYB) onboarding manually. You need to verify all Ultimate Beneficial Owners (UBOs) through a full KYC flow, then screen PEPs and sanctions lists, adverse media, and other relevant databases that would take up a lot of time and effort, especially when also running other compliance-related tasks simultaneously.
Suggestions from iDenfy:
➡️ Business verification (or KYB onboarding solutions)
➡️ AI Company Data Crossmatch (part of KYB software)
➡️ AML screening (PEPs/sanctions/watchlists and adverse media)
➡️ Proxy verification (fraudulent IP address detection)
➡️ Phone verification (assessment of phone number risks)
Payment Security and Alert Monitoring
Using fraud prevention software, e-commerce platforms can set up automated alerts, depending on their risk appetite, that are sent when suspicious activity is detected. Monitoring payments and verifying card, email, or phone information at registration or as an ongoing measure prevents fraudulent transactions and chargebacks.
In general, automation is an industry standard for this sort of task. Automated monitoring helps protect revenue and ensure compliance with KYC/KYB and AML regulations in cases when the e-commerce firm is under stricter scrutiny. This allows for keeping payments secure, helping compliance teams to intervene quickly when a suspicious transaction is detected.
Suggestions from iDenfy:
➡️ Risk assessment (automated user risk scoring and related risk identification)
➡️ Bank verification (IBAN validation, transaction history verification and other financial checks)
➡️ SMS verification (verifying phone number validity via OTPs)
➡️ Email verification (verifying email validity via OTPs)
How Can I Choose the Right Integration for My Store?
You should assess your business and factors like your growth stage, operating markets, regulatory compliance requirements, user volumes, and scalability needs. For example, if you plan to expand into new regions or industries, an API integration will handle changing regulatory complexities on a global level and heavy transaction volumes more effectively.
You should also consider your:
- Technical skills. Businesses without in-house developers often prefer plug-and-play apps, while those with bigger in-house IT teams can benefit from the control and customization of full, customizable API integrations, such as iDenfy’s Shopify API.
- End-user experience. Fraud prevention shouldn’t affect the overall user experience and checkout speed. Poorly optimized age verification at checkout, for example, can push the customer to abandon their cart.
Obviously, the standard rules you apply to any service provider matter, such as compliance with GDPR, ISO certifications, solid technical documentation, a proven history of case studies and known clients, as well as flexible integration options, such as no-code plugins. For example, with iDenfy’s API-first approach, a fraud prevention system can be integrated directly into Magento, WooCommerce, or your other custom e-commerce use case.
Want to scale your e-commerce business? We can adapt our fraud prevention software, helping you build a custom verification, screening, or monitoring workflow. Let’s talk, and we’ll help you set it up more easily.
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