3 Solutions for Ecommerce Merchants Fighting Fraud Fraud is a costly problem, but clumsy fraud prevention that rejects legitimate purchasers are not cheap, either.

One of the lesser known challenges of running an ecommerce store is preventing fraud chargebacks. When a consumer doesn't recognize a charge on their credit card statement they will dispute the charge with their credit card company, which will result in a fraud chargeback to the ecommerce store owner. The full transaction amount is deducted from their merchant account as well as a chargeback fee typically between $15 and $25.

Stolen credit card numbers are available on the black market for mere pennies. Businesses that sell online must stay vigilant to ensure the credit card used to make a transaction belongs to the customer receiving the goods to protect their reputation and avoid costly chargebacks. These facts and statistics from the LexisNexis True Cost of Fraud studies for 2015 and 2016 hint at the scope of the problem:

• US retailers lost $32 billion to fraud in 2014.
• Overzealous fraud prevention results in rejection of 1.5 percent of legitimate transactions.
• Fraud attempts are up 33 percent with nearly half (46 percent) defeating existing fraud mitigation efforts.
• Ecommerce fraud soared 50 percent in the UK and 79 percent in Australia when EMV chip technology was widely adopted, as it is just beginning to be in the U.S.
• Merchants lose on average of $2.40 to fraud per transaction.

Here are three fraud prevention techniques ecommerce merchants can implement to reduce or eliminate credit card chargebacks.

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1. Turn on gateway fraud filters.

Most payment gateways allow ecommerce merchants to set up some basic fraud prevention rules to block or flag transactions that may be fraudulent. Typical examples are to decline all transactions when the billing address does not match what the credit card company has on file (an AVS mismatch) or excluding all transactions from specified countries.

Pros: No cost to merchants.

Cons: The selection of available rules is inadequate for merchants facing a moderate to high amount of fraud. There is also a high risk of false declines as the rules are not very flexible.

This step is recommended for merchants in low-risk fraud categories and merchants that have not experienced much fraud.

Related: Looking for a New Payment Company? You're 'Due' for Some Good News.

2. Manual review.

Most ecommerce merchants have employees assigned to review purchases that fall into specific risk categories, such transactions above a specified dollar amount and/or transactions where the billing and shipping addresses don't match. Common manual review techniques include using Google to find verifiable data on the purchaser, checking social media accounts and using Google maps to see if the shipping address appears legitimate. The average merchant reviews 26 percent of all transactions, of which 80 percent are eventually submitted for processing.

Pros: This is more accurate than simple Gateway filters, since a veteran employee becomes quite effective over time in preventing fraud.

Cons: Time consuming, results vary greatly according to employee skill, potential bottleneck during high season, risk of experienced employee leaving the company and limited tools available for research

This is recommended for merchants in low to moderate risk fraud categories.

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3. Fraud prevention solutions.

There is a multitude of third-party fraud prevention companies (full disclosure: including my company, NoFraud) that leverage sophisticated fraud prevention technologies such as IP Proxy Piercing, Geolocation, Device ID and Global Fraud Blacklists to reduce or eliminate fraud liability. The solutions range from the very basic, providing a risk score and tools to build a fraud prevention algorithm, to full service solutions that leverage machine learning to give you a yes/no response and will even reimburse you for any fraud chargebacks that resulted from their decision.

Pros: Very effective against fighting fraud. Most solutions eliminate the need for manual review, providing expert service that is not tied to employee skill. Companies can accept more orders that would have normally been declined due to fraud concerns, allowing you to pre-determine fraud costs.

Cons: Score and tool models still require fraud expertise to set up and maintain. Solutions can be pricey, although they generally pay for themselves when calculating decreased chargebacks. You can accept more orders with less employee overhead.

This is recommended for businesses that have been targeted by fraud, businesses in high risk categories, and smaller businesses that want to free up resources devoted to fraud prevention to concentrate on sales and expanding their enterprises.

Whatever solution you choose, ecommerce merchants need to recognize the threat of fraud is real and be prepared.