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Shopify merchants can stay in front of the spike in first-party fraud
Shopify merchants are increasingly battling an accelerating ecommerce scourge: fraudulent activity that slips through safeguards by looking to all the world like legitimate customers making reasonable requests.
Once called friendly fraud, the more aptly named first-party fraud has been topping the list of ecommerce merchants’ biggest fraud problems. When the Merchant Risk Council (MRC) asked online brands what their biggest fraud threats were, their top two responses were refund and policy abuse and first-party misuse, yet another term for first-party fraud.
In fact, 48% of respondents named refund and policy abuse as the biggest threat, while 45% answered first-party misuse, according to the MRC’s 2024 Global Ecommerce Payments & Fraud Report. And 63% of the 1,100 merchants surveyed said they were seeing more first-party fraud than they had a year ago.
“Increasing ecommerce sales and rising inflation are seen as the fundamental drivers of this trend,” the MRC report said, “although several merchants also cite increasing customer awareness of this form of fraud, exacerbated by a proliferation of online ‘tools and tips’ for how to successfully perpetrate it.”
First-party fraud is on the rise on Shopify
Consumer abuse has increased significantly among Shopify merchants over the last two years, according to Signifyd data. Signifyd’s consumer abuse index is up 15% for Shopify merchants over the past year. The index, which measures the rise and fall of first-party chargebacks deemed illegitimate by Signifyd, was up 35% in July for Shopify merchants compared to July 2022 — with triple-digit-percentage annual increases during the 2022 and 2023 holiday seasons.
Of course, the rise in first-party fraud threatens online brands on all platforms. But the challenge is arguably especially nettlesome for small and medium-sized merchants — a group that makes up a significant segment of the Shopify merchant base.
Smaller operations often mean fewer resources to manage fraud and risk — and that can be particularly true for new operations that need to focus on establishing a business and acquiring new customers.
Why fraud attacks are particularly hard on small- and medium-sized merchants
Tim Potvin, IPQS director of customer sucess, dives into what drives fraudsters to do what they do and why small and medium-sized business are at a disadvantage in shrinking the ROI for bad actors.
What is first-party fraud on Shopify?
Given the different terms for this rising trend — friendly fraud, first-party fraud, first-party misuse — it’s helpful to take a moment to define what we’re talking about. First-party fraud is generally agreed to be fraud committed by the rightful credit card holder who seeks to land a refund for a product or service they’ve actually received in satisfactory order.
These scams take the form of false item not received claims or false claims that an item that did arrive was incomplete, defective or did not live up to the description and photos on a merchant’s website. In some cases, a customer denies that they had ever ordered an item, even though they did.
But the standard definition of first-party fraud includes some wiggle room. Depending on who you talk to, other scams are increasingly included in the discussion — things like promotion abuse, unauthorized reselling and return abuse and fraud.
In fact, the first-party fraud challenge that Shopify merchants face is following a familiar pattern in the world of online fraud in general. As ecommerce grows and the potential rewards for fraudsters grow, strategies and tactics become industrialized and the targets become more diversified. The growth in fraud can be explained by the quip from the gangster John Dillinger when he was asked why he always robbed banks. “Because,” he said, “that’s where the money is.”
How is return fraud affecting Shopify merchants?
Historically, first-party fraud was committed by wayward customers looking to take advantage and get an item for free. More recently, criminal fraud rings, seeing an opportunity and meeting greater resistance when attempting payment fraud at checkout, are getting into the game. It could be they offer their services by agreeing to file a false claim on behalf of a consumer or return a counterfeit product or box of rocks in exchange for a cut of the profits. Or maybe they run the fraud schemes themselves, opening up another revenue stream.
Meanwhile, as more everyday customers have become more comfortable shopping online and more familiar with return policies and practices, more have become tempted to take advantage of online merchants’ customer-friendly return posture.
Nearly 11% of online returns were fraudulent in 2022, the most recent year that the National Retail Federation reported on the online return fraud rate. Those fraudulent returns alone represented $22.8 billion in sales, according to the NRF.
What does first-party abuse cost Shopify merchants?
The initial costs of first-party abuse for Shopify merchants are plain to see. Merchants in the MRC survey said that each incident of friendly fraud cost them $74 on average. But the total cost of friendly fraud and abuse can go well beyond that — particularly if we zoom out and look at abuse that doesn’t result in a formal chargeback.
Consider promo abuse, for instance. A key reason merchants offer promotions is to attract new customers. You’ve seen the deals:
- First time shopping with us? Use this coupon code for 40% off.
- Thanks for shopping with us, refer a friend and receive 30% off on your next purchase. Oh, your friend will get 30% off, too.
But what happens when that first-time customer is actually a first-party fraudster returning to buy again and again after creating multiple accounts and/or using multiple devices with masked IP addresses? Or what about the fraud ring that relies on bots and scripts to create hundreds of accounts for “friends” that they then refer to a merchant in return for a discount? Not to mention all the friends those newly created fake friends can refer to merchants offering referral incentives.
In the face of those scams, the cost of acquiring customers skyrockets — and in the end, these are not customers any merchant actually wants to acquire.
How much does reseller abuse cost Shopify merchants?
And what about reseller abuse on the Shopify platform where a significant number of merchants offer rare and limited-edition products? On the surface, reseller abuse might appear to be more of an annoyance than a margin-crushing challenge. After all, a merchant makes a sale whether the goods go to a loyal customer or a professional reseller.
But things are not always as they seem. First, some unauthorized resellers are affiliated with criminal rings. They might use stolen financials to buy significant portions of a merchant’s inventory. Or they might combine abuse scams, such as abusing promotions to get a deal on the products they’re clearing from a merchant’s digital shelves with designs on selling them at a hefty premium on a marketplace.
However an unauthorized reseller acquires their goods, their operations damage the buying experience for loyal customers in search of products in high demand. Imagine the frustration and disappointment for customers who are unable to buy a much-anticipated product because a reseller has gone on a bot-enabled shopping spree and cleaned out the inventory.
Now imagine that same frustrated shopper finding that the item they wanted is available but only at a price one and a half times or twice the suggested list price.
Beyond the damage to brand reputation from the initial disappointment, the merchant loses the ability to begin a relationship or build on a relationship with the consumer who ends up purchasing from the reseller.
The situation can be especially damaging for brands selling directly to consumers. If the reseller’s fulfillment is flawed or if the reseller provides no customer support, the consumer might well associate all those problems with the brand itself.
How can Shopify merchants overcome first-party fraud?
A good first step in combating first-party fraud is to take steps to prevent the subset of illegitimate claims that can be prevented. Poor customer experience is the cause of a significant portion of abusive claims. Some customers turn to chargebacks out of frustration or when they feel that they haven’t been treated fairly.
Merchants can avoid that bucket of chargebacks by taking a good look at the customer experience they are providing. In short, if you’re a merchant make sure:
- The descriptions and photographs on your digital sites are complete and accurate so customers know what they’re getting and don’t end up disappointed upon delivery.
- Your return policies and procedures are clear and prominent on your website.
- You over-index on communication. If an order is delayed let the customer know as soon as possible and provide estimated delivery times. Send regular updates.
- You consider offering a discount or other perk in instances where promised shipping times are not met. It’s a good way to ensure the customer gives you a second chance.
Of course, that still leaves a substantial number of chargebacks and abusive claims that are launched by bad actors who set out from the beginning to take advantage of a merchant’s procedures and policies. Those cases have been on the rise. Just this summer the Merchant Risk Council issued a warning to all its 700-plus members that a significant wave of such attacks was underway. The warning indicated that an organized fraud ring was behind the attacks.
While completely stopping a determined adversary can be difficult, merchants can reduce their risk in the face of such attacks. If you’re a merchant, here are some steps you can take:
- Look to your data. Merchants should analyze device and IP information and look for anomalies and patterns. Create velocity checks to provide a tip-off should refund requests or returns spike.
- Go beyond simply monitoring email addresses, as fraud rings can create them easily and quickly. Instead, monitor whether devices are being spoofed or if geo-location is being masked through a VPN.
- Build an understanding of who’s behind each request or transaction and whether they’ve shown a proclivity for making illegitimate claims or questionable returns.
- Monitor the time between a purchase and a refund request. If the timing is atypical take a closer look.
- Consider solutions that rely on innovative technology. Machine-learning fraud protection solutions provide the kind of scale and speed that is needed to stay ahead of determined fraud rings bent on committing first-party fraud and abuse.
Signifyd’s commerce protection is available in Shopify’s app store. When it comes to payment security and fraud prevention, Signifyd is the top solution provider to the Digital Commerce 360 Top 1000 Retailers. And Shopify merchants that turn to Signifyd for commerce protection reduce their chargebacks by an average of 71% and increase their revenue by an average of 2.9% compared to their pre-Signifyd performance.
How the power of a network crushes policy abuse
Signifyd Senior Manager, Risk Intelligence Xavier Sheikrojan takes a minute to explain how networks give merchants an advantage in combating policy abuse — particularly when an organized criminal ring is behind it.
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Signifyd’s Sheikrojan said such solutions operate on the principle that tackling first-party fraud can be aided by making the connections evident in transaction and behavioral data. In other words, merchants who have access to a pool of data from a large network of online retailers can better see patterns that warn against bad actors doing bad things.
“It all boils down to link analysis,” Sheikrojan said. “It’s really the power of connection. You know, data sharing, collecting insights from across channels and using intelligence from global networks.”
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