Fraud Prevention: An Overview

January 30, 2008

Fraudulent business transactions are something that none of us ever enjoy dealing with. It can hurt business, destroy profits, degenerate relationships, and ruin reputations. Fortunately, there are ways to reduce the risk of fraud and keep your business on the cutting edge of legitimacy. The following steps are just some of the ways you can protect your business from potential risk.


There are essentially two different types of fraud in the world of e-commerce: transaction fraud, and website operation fraud. Transaction fraud is possibly the most detrimental to your business; this happens when stolen credit cards and illegitimate bank accounts are used to make purchases. These fraudulent transactions tend to result in high chargeback rates, which can seriously hinder, or cripple, your profit margin. Perhaps the most frustrating part of transaction fraud is that it is almost entirely outside the webmaster’s control. You rely on the customer to be honest and make purchases legitimately. You must also rely on the banking and transaction services to monitor and filter suspicious activity.

Website operations fraud is largely in control of the webmaster. This type of fraud is related directly to internal business practices and delivering what is promised on the website. Prevention of fraudulent website operations will be discussed later in this article.

Finding the source of transaction fraud can be tricky, but there are some good places to start looking. Affiliates typically have the most to gain from sending fraudulent transactions through your program, because they still get to keep their cut, while you get stuck with chargeback fees, refunds and lost revenue. Not to mention, if refund and chargeback ratios become too high, your business can be stripped of its ability to process transactions.

Preventing Transaction Fraud

While completely eliminating all risk is next to impossible, there are several steps that can be taken to minimize exposure to transaction fraud:

Know Your Business Partners

Pre-screen affiliates. Many webmasters will create an affiliate sign-up process that is quick and easy. This is great for attracting new affiliates, but it can also open up doors to potential fraud. If the sign-up process is that easy, fraudulent affiliates have an easy avenue with which to commit fraud; however, any serious affiliate should be willing to take a little extra time to get in with a solid program that they know will make them the most money.

In this regard, using a two-step authentication process works very well. The first step is to ask for references – if you can get in touch with other websites the affiliate has promoted, you will get an inside look at how well this affiliate will perform for you. Any transgressions will be out in the open, and an affiliate’s past actions are the best indicator of how they will act in the future.

The second step is to validate the affiliate’s information. Doing a “Whois” lookup will reveal a lot of information about the affiliate. You can check to see the date the domain was registered, or trace the IP address of the affiliate’s login to see if it matches the correct postal address or bank wire receiving location.

In addition, countries with a low gross domestic product (GDP) have been historically at a higher risk of committing fraud than more industrialized nations.

Monitor the Transaction Flow
Watching the statistics for refunds and chargebacks for an affiliate is a good indicator of whether or not fraud is being committed. Statistics should be tracked at weekly, monthly, quarterly, bi-yearly and yearly intervals.

However, while this data is good to keep track of, if it is your only metric of determining fraud, it may be too late by the time the fraud is discovered. Historically, six percent of chargebacks occur within the first two weeks of a transaction being processed; 25 percent after a month; 66 percent after two months; and 85-90 percent after three months. Chargebacks in general can take anywhere from a few days to several months to come through on a transaction, so extra preliminary caution must be taken to prevent this.

Remove Fraudulent Affiliates From Your Program.
Once a fraudulent affiliate has been identified, it is crucial that they be suspended with no redirection, so all traffic going to them through your program is stopped. You will also want to cancel any recurring transactions sent from that affiliate; you may even consider refunding the customers’ subscriptions, for the sake of customer retention.

Preventing Website Operations Fraud

One of the leading causes of chargebacks for online businesses is customers feeling unsatisfied with the content of a website, whatever the reason may be. Typically, the best way to prevent this from happening is to make sure the customer experience on your Web site as good as it can be. The following items must be taken into account and provided for:

Accessibility and Support
Is the content on your site accessible and available? Do all the links work, and when videos and images are placed, do they show up properly to the user? Can the website accommodate different browsers and configurations? If users run into problems on your site, they will need a place to voice their concerns and receive support – this section of your website should be clearly defined and available.

When working with affiliates, you place the responsibility of advertising in their hands. It is up to them to advertise your site correctly and ensure that nothing is being offered that can’t be delivered; misleading advertising can leave a sour taste in the mouths of users. A good general practice is to have a clearly visible Contact page, where users can get in touch with you should they have any questions about your site or what it is they are purchasing. This will enhance your relationships with customers and is likely to improve retention.

Cancellation Process
It is worth examining your account cancellation procedure to ensure it is fair and easy to do. Are the links easy to get to, and do they point to the right place? Potential customers are often hesitant to sign up for recurring billing subscriptions because they have been burned in the past by programs looking only to make cash quickly. Retaining members, and thus reducing chargebacks, is best accomplished not by discouraging cancellations, but by ensuring that the customer will have the experience they desire on your Web site.

Understanding and monitoring fraud is key to the success of any online business. Not only will it keep your reputation high, it will increase your profit margin by minimizing chargeback fees and fraudulent transactions.


Mark Greenspan is the Vice President of Policy Review for EC Suite; a leading provider of complete e-commerce solutions, affiliate management, wholesale bandwidth, and content protection. Learn more about fraud prevention measures at

Timothy Sears, Fraud Manager for EC Suite, also contributed to this article.