The factors that make e-commerce so appealing to founders can also make fledgling businesses easy targets for fraud once they start to grow. The ease of access to worldwide markets, the ability to connect quickly with target customers and the potential to solve real-world problems like sustainability can act like rocket fuel for new businesses, putting them in the spotlight and drawing the attention of new customers, as well as organized fraudsters.

The problem is that new retailers may not realize that they need advanced fraud protection until there’s a crisis, such as a spate of chargebacks, being cut off from their payment processing services or developing a reputation among customers as a brand that’s difficult to shop with. Because digital fraud, including e-commerce fraud, increased by more than 52% from 2019 through 2021, even small retailers need to ensure that their fraud-prevention practices can protect their revenue, customer relationships and business continuity as they grow.

Consider a new retailer that makes the fashion world more sustainable, founded in response to news that designers were destroying unsold products to prevent them from being sold at a deep discount. By purchasing the overstocks and selling them directly and through marketplaces in multiple regions, the company reduces waste, helps premium brands maintain their pricing and reaches a worldwide consumer base.

Sought-after products attract customers (and criminals)

The luxury retail startup’s big PR efforts are rewarded with positive media coverage and an increase in orders from new customers around the world. However, the company also sees a rash of fraud attempts that they aren’t prepared to fend off. Fraud is a perennial problem in the luxury space because organized criminals know they can buy items with stolen payment data and then resell them online.

Preparation and scalability are key

To benefit from media buzz without suffering more chargebacks, it’s important for growing businesses to have strong, scalable fraud-prevention processes in place before launching campaigns. The fashion startup example used basic fraud-prevention apps that it found in its e-commerce platform’s marketplace, which worked well enough when sales volumes were low and there was time for in-house secondary review of transactions.

However, as order volume grew, the stakes rose quickly. Because of the company’s high average cart values — from a few hundred to two thousand dollars — even one chargeback could have a severe financial impact. With a small staff with limited expertise in analyzing orders for signs of fraud, what should have been a positive development quickly became an unmanageable process.

With more orders flooding in and fraud attacks coming in waves, the company’s basic order screening apps and internal order review processes were overwhelmed. As a result, the retailer experienced so many chargebacks that their e-commerce platform provider stopped processing payments for them. The company had to find a new payment service quickly.

Good customers expect excellent experiences

The company also had to deal with a new problem. Because they were experiencing such high levels of fraud, the internal team started to err on the side of caution and ended up rejecting good orders. These mistaken rejections, known as false positives or false declines, can have multiple negative impacts on a business.

First, there’s the immediate loss of revenue. Second, many customers won’t return after a website rejects their order. Forty percent of online shoppers in a five-country survey by ClearSale said they would never go back after a false decline. Another 34% said they would say something negative about the site on social media, so brand damage is the third negative impact of false declines. Fourth, if the business doesn’t track false declines and learn how to avoid them, the problem can go unnoticed and unfixed.

Prevention is the solution

To be prepared for rapid growth, it’s best to treat fraud prevention as a foundational part of business planning, rather than an issue to address once there’s a problem. Businesses of any size that intend to scale up can build a plan based on these best practices:

• Research the fraud risks in your space. As a company plans products and services, it’s important to find out how often similar companies are targeted by criminals and learn the techniques used most often. That might be card-not-present fraud, account-takeover fraud, card testing or another tactic. This information can help identify the areas where a business needs the strongest protection.
• Build layers of fraud prevention. Organized criminals are always looking for ways to bypass fraud controls, so it’s better to have multiple fraud-control solutions and practices instead of a single tool or process, in case that one element is defeated by a new fraud strategy. For example, most e-commerce platforms offer basic screening tools that can catch obvious fraud attempts, but they may not be able to detect more sophisticated methods like account takeovers.
• Adopt a strategy to prevent false declines. Because false declines can hinder growth, at least one layer of an anti-fraud strategy should focus on preventing them. For example, expert review of flagged orders by an in-house or external team can separate actual fraud attempts from orders that raise flags based on a benign change in the customer’s location, device or shipping address.
• Identify resources to help you scale. Getting a wave of new orders can be the start of a company’s rapid growth, as long as it can prevent fraud and deliver a good customer experience. Be prepared to expand the internal review team or to hand over some of the workload to an external partner during sales peaks so the review and decision processes remain fast and accurate.
• Monitor fraud and order approval metrics closely. KPIs, including blocked fraud, completed fraud, order approval and false declines, can help identify areas that need improvement over time. These KPIs can also demonstrate when new fraud trends emerge that may require an adjustment to anti-fraud strategies.

Taking these steps early on can make the path to growth safer for a retail business and smoother for its employees and good customers.