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What Type of Fraud Prevention Does Your E-Commerce Business Need?

Summer Nguyen | 05-22-2020

What Type of Fraud Prevention Does Your E-Commerce Business Need?

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E-commerce merchants may think they’re too small or too niche or too unknown to be the victim of fraud. But today, fraudsters prey on businesses of all sizes and in all verticals, and they’re becoming increasingly sophisticated about the way they design and launch their attacks. Fraud prevention is the first step in being proactive with an e-commerce business.

Whether fraudsters are using phishing and pharming techniques to gather sensitive personal information or using that information to take over victims’ banking and brokerage accounts, it’s often difficult to distinguish between fraudulent and legitimate transactions. The solution is a robust fraud prevention program, right? It’s natural to think this will protect the business, and leave it at that. But fraud solutions can range from simple tools, such as address verification services, to comprehensive, multilayered, managed services partners. That’s why it’s important to select the right fraud solution before making any investment.

Here are the five categories of fraud prevention solutions available to merchants, including how and why they work and what their potential risks to an e-commerce business are.

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Fraud Preventation and Protection tools
Fraud Preventation and Protection tools

1. Individual Fraud Prevention and Protection Tools

Simple fraud prevention and protection tools (frequently referred to as “fraud filters”) are designed to help automate the process of identifying fraudulent transactions. They often come built into an e-commerce platform.

Dozens of types of these tools are available, including:

  • Velocity filters that control how many transactions can be submitted to the merchant’s website over a certain period of time.
  • Address verification services (AVS), which lets merchants decline or require review for orders where the numerical portions of the billing and shipping addresses don’t match.
  • Card verification value (CVV) filters, which looks for mismatches between a credit card’s CVV number and the one entered during checkout.
  • Purchase amount filters that have merchants review transactions that are higher or lower than a predetermined range.

Are Fraud Filters Effective?

One advantage of fraud filters is that they are typically inexpensive to implement. Unfortunately, these tools are typically not meant to be a comprehensive solution; merchants usually have to combine tools together to build a more complete approach. Moreover, these quickly become outdated and may require consistent patches and updates to remain effective – which may require some level of IT savviness.

Fraud filters
Fraud Filters

2. Case Management Without Decision

Merchants using this approach can configure and layer multiple fraud filters, view consolidated information about each transaction, and more. However, these tools only score the risk of each transaction and assist in viewing information for further analysis — they don’t make any decisions about orders.

Instead, the layered fraud filters present data to the manual review team. It’s then up to the reviewer to verify the legitimacy of the transaction and decide whether to accept, decline, or challenge the order.

Is case management without decision effective?

While this approach provides better information than the tools-only approach, it still requires substantial involvement with a real human being.

If a business has a well-staffed, experienced team of reviewers, this may not be a problem. But for smaller companies, fast-growing companies, or companies in high-risk industries, this may strain resources and distract employees from their core roles and functions. Additionally, these fraud tools require constant input of data to be most effective. If an unskilled in-house team struggles to correctly tag fraudulent and legitimate orders, the tools can “learn” to identify similar transactions in the same way – which can result in even more legitimate orders being falsely declined and fraudulent chargebacks being incurred. And that could be as damaging to a merchant as not having a solution in place at all.

Fraud filters
Fraud filters

3. Case Management With Decision

This next-level fraud prevention platform does more than just classify transactions and help consolidate information — it also makes decisions on whether to approve or decline a transaction.

This case management tool may also use predetermined rules to challenge an order. This routes the challenged order to either an in-house manual review team or an outsourced team for further verification.

Is case management with decision effective?

Not only does this approach have the same flaws as the previous two, but a new one is also thrown into the mix. Because the vast majority of high-risk orders are actually legitimate, having a case management tool that auto-declines orders can often lead to a high number of false positives. These incorrectly declined orders damage existing customer relationships and cause the merchant to lose revenue. Plus, it returns bad data back into the system, which can further degrade performance.

If human analysts don’t have the opportunity to consider company- and industry-specific product knowledge when reviewing and approving orders, the business risks higher chargeback fees and penalties, a poorer customer experience, and a decline in revenue.

Case management with decision
Case management with decision

4. Fully Outsourced Solution (Automatic Decisions Only)

With a fully outsourced solution making automated decisions, this approach handles the entire fraud review process. An outsourced case management tool provides all approve/decline decisions, while an in-house fraud manager manages the day-to-day operations with the third-party service provider.

Is a fully outsourced solution with automatic decisions effective?

As with the case management approach, the biggest risk here is that the outsourced case management tool will automatically decline a significant number of legitimate transactions, which can cause the merchant to lose sales and harm their customer relationships. It’s also important to note that this also means bad data is fed back into the system, which in turn impacts the quality of future order decisions.

Without close oversight on and correction to the way these outsourced systems make decisions, merchants risk leaving money on the table – either through lost sales or fraudulent chargebacks.

Outsourced solution with automatic decisions
Outsourced solution with automatic decisions

5. Fully Outsourced Solution (Automatic and Manual Decisions)

A fraud managed services solution provider proactively delivers services and manages the results of those services to each of its clients. When orders initially come in, the system uses always-updated technology to automatically review and approve as many orders as possible. Any orders that aren’t black or white – i.e., orders where it’s not immediately clear whether the order is fraudulent or legitimate – are sent to a manual review team.

This approach provides the advantage of fast decisions where possible (thanks to smart use of technology), but also accurate decisions in all cases (thanks to smart use of manual reviewers).

Notably, by not declining orders automatically, merchants reduce the risk of false declines that cost them sales and customer relationships.

Is a fully outsourced solution with automatic and manual decision making effective?

With this approach, merchants shift the responsibility for managing a fraud protection solution — including the associated risks and complexities — to an experienced third party. The result to merchants is a comprehensive, multilayered approach that offers better protection and fewer false declines. Because a managed services solution has access to extensive, insightful data, fraudulent patterns and suspicious transactions are spotted quickly and identified before they’re processed. And because the review process is managed by an expert team of fraud analysts, merchants and their employees can get back to concentrating on key components of their business.

Whether merchants are considering a managed services solution as a complement to their existing fraud protection team or as a standalone team, it can offer the comprehensive services that keep them on top of changing fraud patterns, remove the liability for updating solutions and help manage main KPIs.

Choosing the right fraud prevention services provider for an e-commerce business isn’t simple, but the payoff is significant. Merchants see reduced fraud; no fraud-related chargeback costs; fewer false declines; and assurance for customers, investors and employees that the business is dedicated to defending itself against the latest developments in fraud.

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Author bio: Rafael Lourenco is Executive Vice President and Partner at ClearSale, a card-not-present fraud prevention operation that helps retailers increase sales and eliminate chargebacks before they happen. The company’s proprietary technology and in-house staff of seasoned analysts provide an end-to-end outsourced fraud detection solution for online retailers to achieve industry-high approval rates while virtually eliminating false positives. Follow on Twitter at @ClearSaleUS or visit

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    A data-driven marketing leader with over 10 years of experience in the ecommerce industry. Summer leverages her deep understanding of customer behavior and market trends to develop strategic marketing campaigns that drive brand awareness, customer acquisition, and ultimately, sales growth for our company.

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