E-commerce has never been more prosperous or more vulnerable. Global retail losses are escalating, projected to cost the industry billions annually. Merchants today face evolving breeds of sophisticated attacks, moving far beyond simple stolen credit cards to target vulnerabilities like fast checkouts, digital goods, and user accounts.
The four biggest threats driving the surge of fraud are the rise of AI-enhanced attacks, coordinated card testing attacks, digital goods fraud, and the unsuspecting problem, chargebacks.
For merchants, particularly those selling digital goods or high-value items, the cost of inaction can be devastating, especially since fraud affects not only profit margins but, customer trust and even the longevity of a business.
For a deeper understanding of e-commerce fraud, this guide breaks down these emerging e-commerce fraud threats and provides an actionable strategy for e-commerce merchants to fortify their business and protect their bottom line.
The New Reality of E-Commerce Fraud
Digital fraud operates like agile businesses, constantly seeking and capitalizing on the weakest links. Therefore, merchants must understand these specific attack vectors to defend against them effectively.
1. AI Is Reshaping Fraud at Scale
The dark side of AI usage can be downright terrifying. Powered by AI and machine learning, bots that used to be simple scripts can now mimic human behavior, bypass CAPTCHA, and execute sophisticated attacks at scale.
For instance, AI-enhanced bots can be designed to test thousands of usernames and passwords, and when compromised, affect whole accounts, including shipping addresses, loyalty points, or make purchases using saved payment methods. Even worse, AI allows a single attacker to orchestrate thousands of fraudulent transactions concurrently, overwhelming a merchant’s manual review team.
2. Card Testing Attacks Are Quietly Draining Merchants
Card testing, or carding, involves criminals making small, low-value purchases on merchant sites. The goal is not the product, but simply to validate stolen credit card numbers. When automated, the process can be run at scale and across multiple merchant sites.
Although the initial purchase is small, the merchant incurs payment gateway fees for every attempt, regardless of its success, and additional costs for disputes and infrastructure strain.
3. Why Digital Goods Attract Instant Fraud
Digital goods are the most vulnerable products in e-commerce. Because they are delivered instantly via email or download, there is no physical shipping delay that allows time for manual review or the cardholder to notice the charge, allowing fraudsters to profit immediately and anonymously. This instantaneous delivery is a huge advantage for fraudsters.
4. Chargebacks Are Now a Revenue Threat
Recent chargeback data shows a troubling pattern of rising first-party fraud, where customers dispute legitimate purchases, which now accounts for an estimated 60% to 80% of all chargeback volume.
Most buyers file chargebacks instead of requesting a refund, often because they believe it’s easier or guaranteed. For every $1 lost to chargebacks, merchants lose an estimated $2–$4 in fees, labor, and lost products. High chargeback rates also threaten a merchant’s ability to keep their payment-processing privileges.
How Merchants Can Defend Against Modern Fraud
Fraud is multi-dimensional, and no single security approach can stop every threat. Merchants must adopt a layered, risk-based approach that combines technology, smart operational practices, and policies.
1. Strengthen Authentication Without Hurting Conversions
The most robust defense should start with customer verification
- Implement risk-based authentication (RBA) where software analyzes the user’s risk profile in real-time. If a customer logs in from a new device, a suspicious IP location, or after a long period of inactivity, only then trigger an extra security step, such as a one-time passcode (OTP) sent to their verified phone number.
- Leverage device fingerprinting technology, which creates a unique identifier for the device used based on factors such as OS, browser, screen resolution, etc. If an attempted purchase is made from a device previously linked to a fraudulent account or chargeback, the transaction is immediately flagged or blocked.
- Employ the selective use of 3-D Secure (3DS). 3-D Secure is a service that shifts the liability for fraudulent chargebacks from the merchant to the card-issuing bank. Use this for high-value orders, first-time customers, or orders from high-risk countries. This adds some level of friction, and it should be used with discretion, but it provides financial protection where you need it most.
2. Use Real-Time Intelligence to Stop Automated Abuse
Fighting against automated attacks requires automated intelligence and strategies.
- Employ the use of machine learning (ML) fraud detection systems that evaluate risks in real-time. These systems analyze suspicious velocity patterns, high-risk IP addresses or VPN usage, mismatched billing and shipping information, disposable or temporary email accounts, abnormal device fingerprinting, and AI-driven synthetic profiles to calculate a dynamic risk score for other security systems to act upon.
- To specifically fight carding, set smart velocity limits or rules that block or flag any user, IP address, or device that attempts more than 3-5 transactions, especially small ones, within a small time window, such as 3-5 minutes.
- If your business has no legitimate customers in known high-risk regions, block transactions originating from IPs in those areas, or automatically send those orders to manual review.
3. Dedicate Time and Resources to Operational Excellence
Regardless of how robust you make it, no system is perfect. How well you manage flagged issues is the key to troubleshooting and improving fraud security deficits in your system.
- Establish clear thresholds for manual review and streamline your manual review policy. Train your teams to look for red flags like rushed shipping, use of webmail/temporary emails, and inconsistent data, and maintain meticulous records. Establishing clear, accessible refund and cancellation terms can help reduce friendly fraud.
- Establishing this small window can be enough time for the fraud system or cardholder to flag the transaction, allowing you to cancel the delivery before the digital item is consumed. For instance, implement a 30-minute delay on delivery for any transaction flagged as medium-to-high risk for gift cards or digital goods.
- When a chargeback occurs, detailed documentation is your only defense. Always keep proof of delivery/shipping confirmation, AVS match results, and any authentication steps taken.
Why Fraud Prevention Is Now a Core Business Strategy
In the face of rising global fraud, complacency is the e-commerce merchant’s greatest enemy. Fraud is rising and will continue to rise, but it doesn’t have to define the future of online business.
By proactively implementing a layered defense that prioritizes machine learning, data-driven monitoring, smart authentication protocols, and targeted rules against both prevalence and emerging threats, merchants can reduce the risk.
