6 Fraud Risks in Ecommerce: How to Respond and What to Do

financial risks in ecommerce

Online sellers face a number of ecommerce fraud risks.

Common risks like chargeback fraud, identity theft, and faulty authentication services can disrupt your business operations. In the worst cases, you may be denied services, if acquiring banks classify you as a high-risk merchant.

Ultimately, prevention is the best solution. Understand the various fraud risks in ecommerce can help you protect your business, and ensure that you can continue to operate without disruption to payment processing through a bank. This problem isn’t new. In fact, in 2022, e-commerce losses due to online payment fraud were estimated at $41 billion.

This guide shows you exactly the risks in ecommerce that businesses face, as well as how they can contribute to being label a high-risk merchant and what you can do to protect yourself.

Top Fraud Risks in Ecommerce

Ecommerce fraud is a significant concern for online businesses. Today, online fraud has become more sophisticated. Hackers can now steal credit card information or make fraudlent purchases online, resulting in sigificant lost revenue for businesses.

Here are some of the most common types:

  1. Identity Theft: Identity theft and fraud occurs when fraudsters use stolen personal information to make unauthorized purchases or create synthetic identities. For example, a fraudster might use a stolen credit card number to buy goods online. (Note: Methods are becoming more sophisticated. Criminals can now use deep fake identity theft to break into secure systems.)
  2. Friendly Fraud: Also known as chargeback fraud, this happens when a customer makes a purchase and then disputes the charge with their credit card company, often claiming they never received the item or the transaction was unauthorized. For instance, a customer might buy an expensive item, receive it, but then claim to their credit card company that they never made the purchase.
  3. Phishing: This involves tricking customers into providing sensitive information, such as credit card details, by pretending to be a legitimate business. For example, a fraudster might send an email posing as a well-known ecommerce site, asking the recipient to update their payment details via a link that leads to a fake website.
  4. Account Takeover: This happens when a fraudster gains access to a customer’s account and makes unauthorized purchases. For instance, a hacker might use a password stolen from another site to access a customer’s ecommerce account, then make purchases using the stored payment information.
  5. Card Testing: Fraudsters use this method to test the validity of stolen card details by making small purchases. If successful, they then proceed to make larger fraudulent purchases. For example, a fraudster might make a small purchase to see if a stolen card number works before buying more expensive items.
  6. Poor Customer Service: Poor customer service can harm your eCommerce business, including incorrect deliveries, lengthy turnaround times, and the inability to address a problem right away. 60% of consumers claim to have abandoned a brand and switched to a competing business due to poor customer service.

Ecommerce is still considered the future of retail, despite the numerous problems it poses. According to Statista, retail eCommerce sales amounted to approximately $5.2 trillion in 2021. This amount is expected to increase by 56%, totaling roughly 8.1 trillion dollars by 2026. With these figures in mind, businesses must adapt to online security processes. These risks in ecommerce highlight the importance of robust security measures for ecommerce businesses, including secure payment systems, fraud detection software, and customer education.

Ultimately, if your ecommerce store experiences a lot of fraud, you can be labeled a high-risk business. This can make it more difficult to find payment processing help and more.

What Is a High-Risk Business?

In the financial services industry, a high-risk business describes businesses that pose a higher level of risk to financial institutions due to the nature of their operations. This risk can be associated with a variety of factors, including the industry in which the business operates, its financial stability, its history of chargebacks or fraud, the legality of its products or services in different jurisdictions, and more.

High-risk businesses often face challenges such as:

  • Higher processing fees from payment processors
  • Not eligible for convention payment processing
  • Monthly transaction limits
  • Stricter contract terms
  • Difficulties in securing loans or other forms of financing
  • May be subject to more frequent financial audits and regulatory scrutiny
  • More substantive Know-Your-Customer (KYC) procedures

Ecommerce fraud can play a significant role in your status as a high-risk business. You may operate in a high-risk industry, like an online pharmacy, which may get you labeled as a high-risk business. However, if your business has a history of fraud, finding a payment processor may be more difficult.

Top Factors Affecting Your Business Risk Status

There are numerous factors that can get you labeled as a high-risk online business. Some of these factors are out of your control – for example, the industry you operate in. But there are factors like your online identification process that you can change.

These are some indicators of high-risk businesses:

  1. Your Industry 

Whether you are classified as a high-risk merchant or low-risk merchant may depend on your sector or if you website must check age to sell alcohol or other age-restricted products online. There are greater risks in some businesses than others.

The following are just a few of these industries:

  • Cigarette
  • Drug stores
  • Electronics
  • Financial services
  • Gambling
  • Gaming
  • Legal services
  • Pharmacy
  • Travel and hospitality
  1. Online Fraud Vulnerabilities 

Online fraud is a possibility if your ecommerce business lacks a high-security infrastructure. Working with ecommerce merchants at risk of rising online fraud events is something that many merchant service providers are reluctant to do.

  1. Chargeback History

You will be held responsible for the losses if chargebacks are made. Acquiring banks may classify you as a high-risk merchant if your eCommerce business has a history of receiving many chargebacks. Due to the possibility of fraud, you must determine the source of these chargebacks. It can also indicate that you need to improve your customer service.

  1. Years in Business

The age of your eCommerce company may also affect your reputation as a high-risk merchant. It is clear that new companies in the sector could have to establish themselves before getting the best status designations and rates from merchant service providers.

  1. Volume of Transactions

Your company faces a greater financial risk if it conducts hundreds or thousands of transactions every day through its online store. This increases the likelihood that criminals may attempt to steal data and credit card details.

  1. Lengthy Delivery Times

Long delivery periods may lead to mistakes. On the road, anything might go wrong and cause harm to your products. This then increases the likelihood that your company may suffer losses. Your eCommerce business consequently becomes a risk for the merchant service provider.

High-Risk Merchant Account: Saving Your Business

if your payment processing account is prone to losses, it’s considered a high-risk merchant account.

This can result in paying higher prices for merchant services. Additionally, your merchant account may have a rolling reserve added by the acquiring bank. The rolling reserve ensures your account will always have enough available cash or liquidity in the event that one of your customers or the credit card holders requests a significant chargeback amount.

In other words, being labeled a high-risk account typically results in financial consequences.

Fortunately, there are many ways to avoid the label of a high-risk merchant account. The most common steps involve:

  1. Maintain a Low Chargeback Ratio: High chargeback ratios are a red flag to payment processors. Implement clear refund policies, provide excellent customer service, and ensure product descriptions are accurate to prevent misunderstandings.
  2. Compliance with Regulations: Ensure your business is compliant with all relevant laws and regulations. This includes PCI DSS compliance for handling cardholder data.
  3. Secure Transactions: Implement robust security measures to protect customer data and prevent fraud. This includes using secure payment gateways, encryption, and possibly two-factor authentication.
  4. Transparent Business Practices: Be clear and transparent about your business practices. This includes providing clear terms and conditions, pricing, and delivery information.
  5. Financial Stability: Maintain good financial health. Regular, consistent revenue and a strong balance sheet can help demonstrate your business is low risk.
  6. Good Credit History: A strong credit history can help convince payment processors that your business is reliable and low risk.
  7. Choose the Right Industry: Some industries are inherently considered high risk due to factors like high chargeback rates, legal considerations, or high-value transactions. If possible, consider operating in a lower-risk industry.

Even if your business is labeled as high-risk, it’s not the end of the world. There are payment processors who specialize in high-risk businesses, and with careful management, you can mitigate the challenges associated with this label.

High-Risk Merchant Account Benefits

Higher processing costs are a drawback of having a merchant account for a high-risk business, but there are also some benefits. Due to the advantages that typical payment processors lack, some ecommerce business owners actually favor high-risk payment processors. Some of the benefits include: 1) A boost in sales volume allowances, 2) multi-currency options, and 3) recurring billing.

Additional benefits include:

PCI compliance

The Payment Card Industry Data Security Standard (PCI) is adhered to by high-risk merchant accounts. In order to safeguard the data created during each processing transaction, the supplier complies with operational and technical standards.

Business support

Your high-risk merchant account might offer your company a ton of help that might even exceed the level of your future needs if you happen to find a reputable provider. The company might even offer technical assistance to ensure that your business runs smoothly. Also, they might help with the technicalities of payment transactions.

Advanced security standards

Of course, if your ecommerce company falls under the category of a high-risk industry, providers won’t readily agree to collaborate with you.

To ensure that every card used for payments is genuine, these providers will utilize higher security and privacy requirements. Using these security precautions is essential if you have a high-risk merchant account and want to prevent substantial losses. The owner of the card is likewise shielded against fraud by this sophisticated security system.

Prior to using a high-risk merchant account, make sure you only partner with reputable service providers. The secret to safeguarding your eCommerce business is partnering with a trusted provider. The majority of these service providers possess the needed expertise in the field and are aware of the significance of maintaining compliance with all laws and regulations.

How to Avoid Chargebacks in Ecommerce

Chargeback fraud is one of the most dreaded forms of fraud in ecommerce.

Even though it’s referred to as “friendly fraud,” it can result in huge losses for online retailers. In fact, for every $1 in chargeback revenue, ecommerce companies lose $3.94.

Statistics show that, because it’s simpler, 80% of customers choose to file a chargeback rather than request a refund from the merchant directly. When cardholders challenge charges on their credit cards, the acquiring bank is then forced to process a refund since they believe the online retailer made a mistake.

This may help to explain why so many disputes are unnecessary. Almost 78.6% of chargeback processing problems were unintentional. Chargebacks are a growing issue for the ecommerce sector; therefore, you should learn how to handle them so you can save money over time.

To avoid them in the future, you can take the following actions:

  • Provide Accurate Product Descriptions: Ensure that all product descriptions are accurate and detailed. This can help avoid misunderstandings about what the customer is purchasing.
  • Offer Excellent Customer Service: Prompt and effective customer service can resolve issues before they escalate to a chargeback. Make it easy for customers to contact you and respond to inquiries quickly.
  • Use Fraud Detection Tools: Use tools that can help detect and prevent fraudulent transactions. This can include services that verify the cardholder’s address or require the card’s security code.
  • Clear Refund Policy: Have a clear and easily accessible refund policy. If customers understand your policy, they may be more likely to request a refund directly from you instead of initiating a chargeback.
  • Fast Shipping and Delivery Confirmation: Ship items quickly and provide tracking information. Use delivery confirmation for high-value items.
  • Communicate with Customers: Keep customers informed about their order status. If there’s a delay, let them know.
  • Secure Payment Processing: Use secure payment processing systems and follow all PCI DSS guidelines for handling cardholder data.
  • Train Staff: Ensure your staff understands how to correctly process payments and handle disputes.

Fraud Monitoring Processes for Ecommerce

As an online retailer, you would be making a serious error if you assumed that every transaction on your eCommerce platform was legitimate. Always use caution, and if necessary, implement fraud detection methods.

The following actions can be taken to prevent fraudulent transactions:

  • Have your payment gateway require Card Code Verification (CVV) and Address Verification (AVS)
  • Always update your shopping cart software
  • Verify that your customers’ billing addresses correspond to their IP addresses
  • To prevent future fraud attempts, compile a list of past ones
  • Provide training for staff on recognizing common fraud risks in ecommerce

Need some help? See our tips for preventing digital fraud in 2023.


Although there are a number of financial risks in ecommerce, don’t let that stop you from launching your online business. There are risks in running a business, but that’s part of forging your own path. You’ll be able to prevent fraud whenever it arises if the proper security measures are put in place and you have the top payment processors on your side.

Read to explore the FTx Identity identity verification software platform? Set up a consultation with one of our specialists and take a demo to discover its untapped potential and the beneficial improvements it can bring.

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