Shopify Fraud Analysis: How to Protect Your Online Store

Last updated March 27, 2020
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Sales conducted on Shopify stores exceeded $183 billion from 2016-2018, making it a great option for growing the more than 1 million businesses using the platform. But even with a powerhouse like Shopify behind them, merchants are still vulnerable to fraudsters. In fact, U.S. merchants and credit card issuers faced $9.1 billion in losses due to transaction fraud in 2018 alone.

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Smart Shopify merchants know that doing nothing about fraud can be catastrophic, but they also know that choosing the right fraud prevention tool is critical to the success of their business. Here’s how Shopify customers can leverage the tools available to them to defend their businesses from the increased risk of fraud.


How Shopify’s Fraud Protect Program Is Protecting Merchants

To ease the burden for e-commerce merchants who are struggling to identify and prevent fraud, Shopify began a limited rollout in 2018 of its Fraud Protect program. This program is designed to minimize the potentially catastrophic effects of e-commerce fraud on online retailers by using advanced algorithms to scan transactions for fraud indicators, accurately identifying fraudulent orders and providing fraud recommendations for select Shopify plans.

Shopify merchants must take these three steps to evaluate their Shopify transactions:

1. View the Fraud Analysis

Merchants should investigate orders they believe to be fraudulent — or that Shopify has flagged — by clicking on the Fraud Analysis link on their order page. Merchants will see one of three fraud indicators for each order:

  • Green indicators mean the marked information appears to be legitimate.
  • Red indicators mark order information that’s usually associated with fraudulent activity.
  • Grey indicators flag data that merchants can use to evaluate an order’s legitimacy.

While these indicators don’t tell merchants how likely it is that a flagged order is fraudulent, it does help alert shop owners as to the fraudulent activity Shopify noticed during its fraud analysis.

2. View the Fraud Recommendation

Merchants using Shopify Payments or subscribing to the Shopify Plan or higher will also see a fraud recommendation for each of their orders that classifies the order’s chargeback risk as low, medium or high. As part of this recommendation, Fraud Protect also flags medium- and high-risk orders to give merchants the insights they need to help them make the right transaction decisions.

Shopify develops these recommendations by applying always-updating machine learning algorithms to its historical database of transactions to identify fraud trends and patterns.

3. Analyze Third-Party App Recommendations

Merchants using third-party fraud solutions will see transaction indicators and recommendations in the Fraud Analysis section.

After a transaction goes through all three steps, online Shopify Payments orders are classified as either “protected” or “not protected.” If a merchant has a chargeback filed on a protected order, Shopify reimburses the merchant for the chargeback and manages the entire chargeback dispute process.

Gray-Area Orders

For many merchants, fraud isn’t always obvious. Not being able to confidently determine if an order is fraudulent or legitimate can have serious consequences on the health of a business. Fraudulent orders that are approved can result in chargebacks that cost merchants not only the value of the lost product and shipping charges, but also the financial and personnel costs of managing and representing chargebacks. But being too conservative is risky, too. Merchants that decline legitimate transactions risk losing the lifetime value of good customers.

To evaluate these gray-area transactions, Shopify Fraud Protect uses advanced fraud algorithms and fraud filters to determine the legitimacy of an order. Any gray-area orders are allowed to process and are marked as “Not Protected.”

Other Ineligibility Factors

The only online orders eligible for protection are those processed through Shopify Payments; point-of-sale orders and orders processed through PayPal are ineligible and will be processed the same way they were before a merchant activated Fraud Protect.

Even if an order is eligible for protection, Fraud Protect won’t protect merchants against chargebacks made because of:

  • Duplicate charges
  • Cancelled subscriptions
  • Items not received
  • Products not as described
  • Credits not issued

Additionally, Shopify Fraud Protect does not cover sales of digital goods.


Shopify Integrations That Can Protect Your Business

Although Shopify Fraud Protect offers some important protections, it isn’t the right solution for every merchant. Even with the algorithms, fraud filters and support the program offers, merchants protected through Fraud Protect may still need extra help in preventing chargebacks from happening or winning chargeback disputes. Merchants need to ensure they implement a robust fraud prevention solution that will protect all their transactions and revenue.

If you’re a retailer who’s looking to add more comprehensive fraud protection, here are some of the more popular Shopify-compatible vendors to consider.


Fraud Filter

The free Fraud Filter solution adds a layer of protection that lets you fight fraud and avoid chargebacks using simple rule-based functionality that integrates directly with your store.

To get started, you’ll first create one or more filters and rules based on order details you suspect could be suspicious and then set up Fraud Filter to either warn you about suspicious orders or block orders entirely. For example, you can configure Fraud Filter to flag orders from Spain that have an order value equal to or greater than $300, giving you the opportunity to review the transaction and decide whether to approve or cancel it.

After you set your filters, orders that match your criteria will be flagged and marked as medium risk (if you’ve asked to be warned) or be automatically cancelled (if you’ve set the system to block suspicious orders). Orders that have been flagged will show on the order page which filter triggered the warning, and it’s simple to block known fraudsters to prevent them from placing future orders.

While this is approach is a good start for smaller merchants, merchants should know that simple fraud filters often aren’t enough to protect merchants against fraud. One of the biggest challenges with using traditional fraud filters is ensuring that good transactions aren’t declined while bad ones are approved. A recent study by LexisNexis reported that fraud filters have a false positive rate of approximately 25%. Additionally, although you can layer fraud filter rules to help you catch more sophisticated fraudulent transactions, if rules are incorrectly ordered, they can unintentionally cause some rules to overrule others.


NoFraud Fraud Protection

For merchants who can’t afford the overhead costs associated with an in-house fraud prevention solution, the free NoFraud Fraud Protection app can help Shopify customers protect their business. Offering chargeback reimbursement and cardholder verification, NoFraud can increase your confidence in accepting orders that other solutions may flag as suspicious. Through real-time virtual identity verification and providing instant pass/fail decisions based on thousands of data points, NoFraud eliminates manual review and decreases customer friction.

This fully automated solution is wholly managed by in-house experts, so there are no filters to configure or fraud scores to analyze — letting you concentrate on running your business. Even high-risk transactions that other solutions might decline can be approved confidently once the NoFraud review is triggered. Should a chargeback occur on an order NoFraud passed, NoFraud will reimburse you for the full chargeback amount. And thanks to flexible integrations and phone and email support, you can get the solution up and running quickly and keep it protecting your business.

Adding a team of in-house experts helps to mitigate the risks that fraud filters alone expose to an e-commerce merchant, but having an in-house team may introduce new risks. For example, merchants may incur additional costs required to recruit, hire, train and retain fraud prevention personnel. And if sales volumes fluctuate, an in-house fraud management team may find themselves suddenly over- or under-staffed.


NS8 Protect

When merchants need an objective measure of a transaction’s fraud risk, NS8 Protect can help. This app tracks and analyzes more than 170 user attributes in real time and then assigns each user a single score that indicates their fraud risk. With more than 70 criteria for you to choose from, automated workflows simplify the process of escalating order investigation and automatically request additional verification for gray-area orders, while third-party extensions let you customize the solution to meet your business needs. NS8 is constantly updating its scoring engine and its analysis as each user interacts with your site, so you learn not only about your customers but also about how users arrive at your site and their behavior once they get there. Our algorithm continuously adapts to new behavior patterns so you can better assess fraud risk.

Starting at $29.95 monthly, NS8 lets you customize your approach based on the user and optional add-ons let you take advantage of supplemental data and scoring provided by industry-leading data partners. And because the integration is handled completely through the Shopify API, you just need to install the app and turn its features on — and your shop is immediately protected.

But with no specially trained personnel understanding the nuances of your business, solutions like these can actually put your business at an increased risk for fraud. Merchants must be able to stay on top of new fraud tactics and evolving compliance regulations and guidelines, and that means having a specialized team that can focus exclusively on fraud prevention.


ClearSale

Combining advanced statistical and artificial intelligence with the world’s largest team of specialized fraud analysts lets ClearSale deliver a balanced, real-world approach that’s unlike anything else available in the market. After running every transaction through a proprietary statistical model, the solution returns a fraud score nearly instantly. If the solution identifies the order as legitimate, ClearSale instantly approves it. But if it’s a potentially fraudulent order, their team of fraud analysts quickly analyzes it to determine if it can be safely approved.

ClearSale currently supports more than 3,000 businesses worldwide, including some of the biggest brands in e-commerce, with its expertise and innovation. And not only does their multilayered approach protect you against costly fraud, it also gives you the lowest decline rates and the highest approval rates in the industry.

ClearSale’s API library, client service team and integration guide make manual integration with the Shopify platform simple, and the extensive plugins and guides available mean clients on all major e-commerce platforms can integrate in just three steps:

  1. Retrieve your plugin.
  2. Enable the ClearSale module in your store.
  3. Keep track of your orders on the ClearSale dashboard.

ClearSale also offers custom integrations through their client service team for those customers who need extra help.

ClearSale features two pricing approaches. With the KPI pricing model, ClearSale works with you to identify a target chargeback percentage. If they exceed that KPI in a given quarter, they’ll offer a predetermined discount on your quarterly invoice. This approach also includes ClearSale’s Chargeback Protection.

The fixed percentage pricing uses a fixed-fee rate based on your sales volume, how you plan to use the solution, and your industry and risk profile and bills you a fixed fee on every approved transaction. This approach provides ClearSale Chargeback Insurance, which provides 100% guaranteed chargeback coverage. If ClearSale approves a transaction that turns out to be fraudulent and results in a chargeback, they will pay the entire amount of the chargeback.

With more than 16 years of proven experience and a client retention rate of 99%, ClearSale has the proven experience to let you confidently accept more transactions without the risk of business-damaging chargebacks.


The Importance of Choosing the Right Fraud Prevention Solution

Protecting a growing e-commerce business against fraud, chargebacks and false declines can be expensive and time-consuming. And as fraud levels continue to rise and high-risk orders become more common, merchants don’t have a moment to lose when it comes to selecting and implementing the right fraud prevention service for their business.

Even with the tools and support available through Shopify, merchants need to keep a watchful eye on their transactions’ risk indicators and look for ways to minimize their fraud exposure. Often, built-in solutions or free fraud apps just aren’t enough to protect their business against Shopify fraud.

With so many fraud prevention solutions on the market, it can be hard for merchants to evaluate their real value and determine if they will fit their business needs. That’s why it’s important to thoroughly research the benefits and risks of each solution — including the ease of implementation and the availability of post-integration support — to find the solution that will secure customer data, prevent fraudsters from slipping past Shopify’s defenses and protect your business 100% against expensive chargebacks.


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 an 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 http://clear.sale/.

giles thomas

Author:

Hi, I’m Giles Thomas. Founder of AcquireConvert, the place where ecommerce entrepreneurs & businesses go to learn how to increase conversions & profits. I’m also the founder of ecommerce growth agency Whole Design Studios. I’m a head marketing mentor at the Google Launchpad Accelerator & Google Marketing Expert. Ps. Check out my new blog RisePro.co

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