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A Comprehensive Strategy for Your Digital Fraud Program

In today’s ever-evolving retail loss landscape, fraud and financial crimes cast a long shadow over total loss concerns. Loss prevention teams are locked in an unending battle to safeguard their enterprise, customers, and brand reputation against a constantly evolving array of cross-functional risks and threats.

My career has spanned many years in physical retail loss prevention, followed by a dedicated focus on crafting digital fraud strategies for omnichannel, e-commerce, and online marketplaces. This article introduces loss prevention leaders to the fundamental components of digital fraud controls that complement the “Total Retail Loss” methodology.

Crafting a Secure Digital Retail Environment

Ensuring a secure and trustworthy online platform is paramount for retailers. While digital shopping offers immense opportunities, it also attracts opportunistic fraudsters. Therefore, creating a safe retail environment isn’t just a competitive advantage; protecting your profit and brand is necessary. Although trained network engineers typically direct this portion of fraud prevention, it is critically important that LP leadership understand how it complements enterprise fraud management.

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A robust site security framework involves multiple layers of protection. These layers act as barriers to deter and thwart fraudulent activities:

  • Network Security: Protect the platform’s perimeter with firewalls, intrusion detection, and encryption.
  • Application Security: Ensure software and applications are free from vulnerabilities.
  • User Authentication: Implement multi-factor authentication (MFA) to verify user identities.
  • Data Encryption: Encrypt sensitive customer data to prevent unauthorized access.
  • Behavioral Analytics: Use advanced analytics to detect unusual user behavior.
  • Real-Time Monitoring: Continuously monitor transactions for signs of fraud.
  • Incident Response: Establish a plan to address security breaches swiftly.
  • Employee Training: Educate employees about security best practices.
  • Customer-Centric Ownership: Ensure your customer has a stake in their own protection.

Coordination and communication among these layers are crucial—they should work together to create a cohesive and robust security posture. Retailers can significantly reduce digital fraud by investing in these multifaceted security measures. However, fraud prevention doesn’t stop here; it extends to other vital and complex strategy components.

Key Components of an Effective Fraud Prevention Strategy

To build a robust fraud prevention strategy, retailers should focus on three core areas:

1.  Detecting and Preventing Fraud

The primary objective is to identify and thwart fraudulent activities while minimizing their impact on the business, customers, and reputation using:

  • Rules-Based Transactional Screening: Involves tracking and analyzing customer transactions for any irregularities or suspicious activities. This includes monitoring factors such as transaction frequency, dollar amounts, and geographic locations. Any deviations from established patterns can trigger alerts for further investigation. Rules-based screening is an older technology and is considered antiquated, especially for larger volume retailers.
  • Machine Learning Transactional Screening: Incorporating advanced analytics and artificial intelligence (AI) into your fraud detection system can provide a substantial advantage. These technologies can analyze and correlate vast amounts of data in real-time, identifying patterns and anomalies that may go unnoticed by human fraud investigators.

2.  Brand and Compliance Integrity

Upholding brand integrity and adhering to industry regulations are crucial for earning and retaining customer trust:

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  • Establish stringent compliance measures to safeguard your customer data. Customers expect their data to be handled with the utmost care in an era of increasing data breaches and privacy concerns. Compliance measures should align with industry standards and regulations, such as the General Data Protection Regulation (GDPR) or the Payment Card Industry Data Security Standard (PCI DSS). These regulations set guidelines for data protection and security.
  • Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures are essential for retailers as part of the compliance process by following federal and, where applicable, global regulations regarding customer due diligence.
  • Demonstrating compliance with industry regulations signals trustworthiness. It’s not enough to comply with regulations; retailers should also communicate their commitment to data security and compliance to customers. This can be achieved through transparent privacy policies, security certifications, and regular audits to verify adherence to industry standards.

3.  Enhancing the Customer Experience

Prioritize secure customer accounts and payment processes to build trust and loyalty by:

  • Implementing robust authentication methods. Authentication is verifying users’ identity before granting them access to their accounts or allowing transactions. Robust authentication methods, such as MFA, biometrics, and one-time passwords (OTP), enhance security while ensuring a smooth customer experience.
  • Adding a ‘Fraud Help Center’ on your site provides an easy way for your customers to understand their role and how to detect and report suspicious activity. Nordstrom, for an omnichannel retailer, and eBay, for online marketplaces, are excellent examples of customer-focused fraud help centers.

Investing in Success

A retailer’s fraud prevention program aims to become the industry standard. This entails maximizing order acceptance rates while minimizing unnecessary risks, fraud chargeback expenses, and disruptions to the customer experience. To effectively implement a fraud prevention program, retailers should invest in five key areas:

1.  Innovation and Proactivity

Becoming an industry leader in fraud prevention requires continuous innovation and a commitment to staying ahead of emerging threats. Embrace cutting-edge technologies and strategies. Staying at the forefront of technology is essential. Consider implementing advanced solutions such as machine learning algorithms for fraud detection, predictive analytics, and real-time monitoring. These technologies can provide the agility needed to adapt to evolving fraud tactics. Foster a culture of proactive fraud prevention. Preventing fraud should not be a reactive process and should be ingrained in the company culture. Think of your fraud program like a football team. Is your fraud prevention program on the offensive (identifying fraud before the chargeback and analyzing trends before they become problematic) or on the defensive (reacting to fraud trends after loss incurred, mitigating fraud attacks after excessive loss is incurred)?

Encourage all team members, from customer support to IT, to actively participate in fraud prevention efforts. This includes reporting suspicious activities and sharing insights with loss prevention and fraud teams to enhance the overall strategy.

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By embracing innovation and proactivity, retailers can position themselves as leaders in the ongoing battle against digital fraud.

2.  Your People

Invest in training, development, and career growth opportunities for team members. Provide ongoing training on emerging threats. Cybersecurity threats are continually evolving, and keeping your team up-to-date is essential. Offer regular training sessions on the latest fraud tactics, social engineering methods, and cybersecurity best practices. This empowers your employees to recognize and respond to threats effectively.

Develop specialized skills in data analysis and cybersecurity. As fraud prevention relies heavily on data analysis, investing in developing specialized skills in this area is crucial. Encourage team members to become experts in data analysis, machine learning, and cybersecurity. These skills will be invaluable in identifying and mitigating fraud risks.

Offer clear paths for career growth within the fraud prevention department. To retain top talent, provide clear career progression opportunities within the fraud prevention department. Team members who see a future in the organization will likely remain committed to its success.

Encourage cross-functional collaboration to foster a holistic approach. Collaboration across departments is essential for a holistic fraud prevention strategy. Encourage IT, customer support, and finance teams to work together and share insights. Cross-functional collaboration can help identify vulnerabilities and threats from multiple angles.

3.  Proactive Analysis of Data

Continuously adapt fraud detection rules and scores. Group rules to identify specific types of fraud attacks; fraudsters often employ various tactics, and grouping rules to identify common attack patterns can help you stay one step ahead. For example, grouping rules related to identity theft or account takeover can improve detection.

Incorporate in-browser behavioral analytics. User behavior analysis within the web application can provide valuable insights. Typically, Java Script is inserted in select high-fraud sections of a site, such as login, wallet, account changes, and checkout. This can help identify unusual behavior patterns, such as mouse movements, typing speed, repetitive clicking, or navigation patterns indicative of fraud attempts, especially non-human bot behaviors.

Implement real-time monitoring. Real-time monitoring ensures immediate responses to suspicious activities; investing in tools that allow you to monitor transactions, user sessions, and system logs in real-time can be instrumental in preventing fraud.

Transition to transaction-based machine learning models. Machine learning models can adapt to changing fraud patterns, and transitioning to transaction-based models allows the system to learn from new data and adapt to emerging threats continuously.

4.  Reactive Analysis of Data

Establish threshold alerting for real-time monitoring. Setting thresholds for specific metrics can trigger alerts when unusual activities occur. For example, if the number of login failures exceeds a predefined threshold, it can signal a potential attack.

Analyze historical data to identify cases where the system missed detecting fraud. This analysis helps refine detection rules and improve accuracy.

5.  Your Technology

Embrace cutting-edge technology, automation, and machine learning to enhance fraud prevention. Investing in these critical areas—your people, data analysis capabilities, and technology—will lay the groundwork for a robust fraud prevention strategy.

Improve internal tools through automation and data visualization. Automation can streamline routine tasks, allowing your team to focus on more critical aspects of fraud prevention. Invest in tools that automate data collection, link analysis, and reporting. Data visualization tools can help you understand complex data and identify trends.

Leverage third-party solution providers to reduce fraud and streamline workflows. Consider partnering with trusted third-party providers that offer specialized fraud prevention solutions. These providers often have access to extensive databases of known fraud indicators and can help identify threats more effectively.

Develop a structured process for transactions requiring human review. Not all transactions can be automated, so ensure they are handled efficiently and effectively.

Building a Comprehensive Company Strategy

A comprehensive strategy should encompass the following five objectives:

1.  Reduce Your Fraud Loss

Retailers must prioritize minimizing financial losses due to fraudulent activities. This includes:

  • Detecting fraud early with real-time monitoring. The ability to detect fraud in real time can significantly mitigate financial losses. By continuously monitoring transactions as they occur, suspicious activities can be identified and addressed promptly, preventing fraudulent transactions from being completed.
  • Responding rapidly to mitigate and remediate fraud events. Efficient and swift responses to fraud events are This involves not only stopping fraudulent transactions but also taking actions to prevent further losses and recover any assets that may have been compromised.
  • Strengthening account security measures. Enhancing the security of user accounts is a fundamental aspect of fraud prevention. Retailers should implement robust authentication methods, access controls, and password policies to safeguard customer accounts.

Continuously updating anti-fraud tools. Fraud prevention tools should be dynamic and regularly updated to adapt to emerging threats. This includes updating fraud detection algorithms, rule sets, and machine learning models to stay ahead of evolving fraud tactics.

2. Create an Investigative Atmosphere

Developing a team that investigates suspicious behaviors and patterns is crucial for staying ahead of sophisticated fraud schemes. This includes:

  • Investigating buyer and seller account behaviors indicative of major fraud. Retailers should proactively monitor and investigate accounts displaying behaviors commonly associated with major fraud schemes. Identifying these behaviors early on can prevent significant losses.
  • Organized retail crime rings can significantly threaten e-commerce businesses. Retailers should work closely with law enforcement agencies to identify and dismantle these criminal networks.
  • Collaborating with law enforcement and financial crime investigators. Establishing strong partnerships with law enforcement and financial crime investigators can aid in prosecuting fraudsters and recovering assets. Effective collaboration can deter fraudsters and disrupt their operations. The following organizations are great support: International Association of Financial Crimes Investigators (IAFCI), Merchant Risk Council (MRC), and Merchant Advisory Group (MAG).
  • Maintaining partnerships with industry consortia. Participating in industry consortia and sharing threat intelligence with other retailers can strengthen fraud prevention efforts. Retailers can learn from each other’s experiences and adapt their strategies accordingly.

3.  Improve Your Agent Experience

Efficiency and effectiveness in the fraud operations team are crucial for minimizing fraud-related costs. This includes:

  • Scaling operations by reducing the review of low-risk transactions. Not all transactions carry the same level of risk. Retailers can optimize their fraud prevention efforts by focusing on high-risk transactions, allowing low-risk transactions to proceed without extensive review.
  • Minimizing false positives to protect legitimate transactions. False positives occur when legitimate transactions are mistakenly flagged as fraudulent. Retailers should fine-tune their fraud prevention systems to reduce false positives, ensuring genuine transactions are not disrupted.
  • Auto-declining exceptionally high-risk Some transactions exhibit high-risk indicators that warrant automatic rejection to prevent potential losses. Retailers should establish clear criteria for auto-declining transactions that pose an imminent threat.
  • Focusing on complex and high-dollar transactions. These transactions typically carry more significant risks, so retailers should allocate additional resources and scrutiny to ensure their legitimacy.
  • Market your fraud operations team. Internal and external stakeholders should be aware of the vital role played.

4.  Reduce Customer Friction

While security is paramount, retailers must also minimize negative customer friction:

  • Understand the differences between negative and positive customer friction. Balancing security measures and customer convenience is essential. Retailers should differentiate between necessary security measures and those that may inconvenience legitimate customers.
  • Implement safeguards without inconveniencing legitimate customers. Retailers can achieve this by employing user-friendly authentication methods and conducting risk-based assessments to determine the level of security required for each transaction.
  • Marketing to your customers on security measures. Proactive communication with customers about security measures can enhance their confidence in the retailer. Educate customers on steps they can take to protect their accounts and transactions.

5.  Control Your Business Outcomes

Retailers should utilize fraud Key Performance Indicators (KPIs) to monitor signals and establish risk models aligned with their goals:

  • Monitor fraud KPIs continuously. Key metrics such as fraud rate, chargeback rate, and false positive rate should be constantly monitored. Any significant deviations from baseline values should trigger a review of fraud prevention strategies.
  • Build adaptive fraud risk models. Fraud risk models should be agile and capable of adapting to changing circumstances. Retailers should employ machine learning and predictive analytics to refine their models continuously.
  • Implement visual analytics and dashboarding. Visual analytics tools and dashboards provide real-time insights into fraud-related metrics. Retailers can visualize trends, anomalies, and patterns, facilitating quicker decision-making.
  • Establish a fraud monitoring program. A formalized fraud monitoring program ensures that all aspects of fraud prevention are systematically addressed. It involves regular reviews, audits, and adjustments to the fraud prevention strategy.

What Is Machine Learning Transactional Fraud Screening?

The transition from original and antiquated rules-based to machine learning-based fraud screening includes the implementation of controlled transaction learning to reduce human review for legitimate transactions. Machine learning- based fraud screening represents a paradigm shift in fraud prevention. Rather than relying on predefined rules, machine learning algorithms can adapt to evolving fraud tactics.

Controlled transaction learning involves teaching the algorithm based on historical data, helping it understand what constitutes a legitimate transaction. This enables the system to automatically approve transactions that align with these learned patterns, reducing the need for human review and minimizing friction for genuine customers.

Machine learning algorithms can also be employed in anti-money laundering efforts (AML). They can analyze transaction data to detect suspicious financial activities, potentially indicating money laundering schemes. Holistic AML approaches encompass comprehensive financial transaction monitoring and identifying unusual patterns that require further investigation.

For high-risk transactions such as guest checkout, virtual gift cards, and highly fencible items, machine learning can provide real-time risk assessments. This allows retailers to decide whether to approve, reject, or review these transactions.

Understanding user behavior is essential for fraud prevention. In-browser analytics tools can capture data such as mouse movements, clicks, and navigation patterns. These insights can be used to create user profiles and detect anomalies that may suggest fraudulent activity.

Companies evolving their programs should use a structured process for transactions requiring human review. Even with advanced technology, some transactions may still warrant human intervention. Retailers should establish a structured process for reviewing these transactions, ensuring they are promptly and thoroughly assessed.

By embracing these technologies, retailers can significantly enhance their fraud prevention capabilities. These initiatives empower retailers to stay ahead of fraudsters by using cutting-edge tools and techniques to detect and prevent fraudulent activities.

Chargeback Defense: Alerting vs. Disputes

Chargebacks are a common challenge in the e-commerce industry. They occur when a customer disputes a transaction and requests a refund from their credit card issuer. Managing chargebacks effectively is crucial for maintaining a healthy financial ecosystem.

There are two primary components of a chargeback defense program:

1.  Alerting System

An alerting system is proactive and aims to prevent chargebacks before they occur. It identifies transactions that may lead to disputes and takes action to resolve issues promptly:

  • Early Warning: When an alerting system detects a potentially problematic transaction, it triggers an early warning and allows the retailer to investigate the issue, communicate with the customer, and address concerns before initiating a formal chargeback. By identifying potential problems early in the process, retailers can proactively address customer concerns, offer resolutions, and prevent disputes from escalating.
  • Customer Engagement: The retailer can proactively engage with the customer to resolve issues, offer refunds or replacements, and provide a satisfactory resolution. The goal is to prevent chargebacks and enhance customer trust and loyalty. By addressing customer concerns promptly and effectively, retailers can resolve issues to the customer’s satisfaction, reducing the likelihood of chargebacks and fostering long-term customer loyalty.
  • Transaction Documentation: Comprehensive documentation of transactions, including receipts, shipping records, and communication with customers, is crucial. Retailers should maintain detailed records as this information is invaluable and serves as evidence in disputes.

2.  Dispute Management

Despite proactive efforts, some disputes may still escalate to chargebacks. In such cases, efficient dispute management becomes essential:

  • Evidence Submission: Retailers should gather and submit all relevant evidence to the payment processor to support their case. Retailers must present a compelling case to their payment processors when disputes progress to chargebacks. Collecting and providing all relevant evidence, such as transaction records, tracking information, and proof of delivery, to demonstrate the transaction’s validity will bolster their case.
  • Chargeback Response: Respond to chargebacks promptly and accurately. Provide clear and compelling evidence to demonstrate the legitimacy of the transaction. Timely responses are critical and increase the likelihood of a successful dispute resolution. A well-crafted response increases the chances of a favorable resolution.
  • Resolution Tracking: Maintaining a tracking system to monitor the status of chargebacks will ensure that each dispute is followed up on and resolved Effective tracking of chargebacks is essential to prevent disputes from falling through the cracks. Retailers should establish a system to monitor the status of each chargeback, from the initial response to the final resolution.
  • Continuous Improvement: Analyze chargeback data to identify trends and root causes. Use this information to implement proactive measures that reduce the likelihood of future disputes. Chargeback data provides valuable insights into the reasons behind disputes. Retailers should analyze this data to identify recurring issues or trends. This analysis can inform proactive measures to address underlying problems and minimize chargeback rates.

An effective chargeback program involves both proactive alerting systems and efficient dispute management. By identifying potential issues early and responding promptly to disputes, retailers can minimize the financial impact of chargebacks and maintain a positive customer experience.


This article provides a comprehensive overview of fraud prevention strategies for retailers, addressing the needs of both the C-suite and staff-level investigators and agents. It emphasizes the importance of continuous adaptation, collaboration, and innovation in the ever-evolving landscape of e-commerce fraud prevention.

John Matas

John Matas CFE, CFCI, is a retail industry consultant with 30-plus years of experience in omni-commerce fraud, financial crimes, asset protection, and investigations. John was the VP of investigations, fraud, and ORC for Macy’s for over 25 years. Most recently, John served as the global head of risk and fraud for Etsy Inc. where he was responsible for the organization’s fraud strategy and framework. John is on the Editorial Board for Loss Prevention Magazine and is a regular speaker for the NRF, RILA, International Association of Financial Crimes Investigators Merchant Risk Council, and Association of Certified Fraud Examiners. John graduated from Kean University with a BA in both Political Science and Criminal Justice and is currently studying Applied Machine Learning at Columbia University.

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