Escalating Costs

Cracking Down on Internet Fraud

Amazon warehouse-AP
Fraud has becom a pressing issue for many online retailers in Germany.
  • Why it matters

    Why it matters

    Organized criminals are launching more and more attacks on online retailers, requiring new measures to curb the criminal activity.

  • Facts


    • Losses to online fraud are around €2.4 billion ($2.73 billion) per year.
    • Internet criminals like to use payment by invoice.
    • Criminal groups often buy stolen credit card details on the dark net, using them for online spending sprees.
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It’s the dark side of a success story. Booming online sales are attracting more and more criminals.

Gebhard Hafer, professor of logistics at Berlin’s BBW university of applied sciences, estimates that this year alone, online fraud will cost German businesses around €2.4 billion, or $2.7 billion – more than double the figure for 2010.

In a recent survey by the consultancy Ibi Research, 84 percent of German online traders who were interviewed under the condition that they could remain anonymous, admitted to recently being the victims of fraud. And 57 percent of them claimed that the number of cases has risen in the last five years.

Only a few cases ever make it into the public eye. “Internet retailers are not happy to speak about their experiences with fraudsters,” Mr. Hafer said. “There is a wall of silence there.”

One reason for this is a fear of attracting more scam artists by reporting attacks.

Their tricks are often not particularly sophisticated, but usually highly effective. Take for example the group of fraudsters who over the course of a year ordered more than 950 products worth nearly €200,000 from online fashion retailer Zalando, but fled the country without paying their bills before the company could take them to court. Many of the big online retailers often don’t even bother authorities with their smaller cases of online fraud.

“Software alone is not enough to uncover these cases.”

Viola Brandt, Head of Fraud Detection at Otto

Well-organized groups tend to target perfumes, smart phones, notebooks and other expensive consumer goods they can easily sell. They use credit-card details stolen from the Internet for their online spending spree.

Several large German retailers are now going on the offensive. Among them is the Otto group, the second largest e-commerce company in Germany after Amazon. The group has set up a dedicated online-fraud department, headed by Viola Brandt with a team of a 24 people, who uncover a wide variety of fraudulent purchases.

“Software alone is not enough to uncover these cases,” Ms. Bandt told Handelsblatt. Her staffers often run manual checks, especially if they pick up on irregularities, by making phone calls.

Organized criminals, she pointed out, often order in several different places at once, causing spikes in the sales of certain items.


The Most Common Online Shop Fraud Methods 2-01


A common form of online fraud is misusing addresses for purchases. Politicians are popular victims because their birth dates and addresses are often published on websites. Fraudsters use this information to order products to be paid later by invoice, and have them delivered to a parcel shop, where identification documents frequently are glanced over.

But effective fraud prevention also has a flip-side. Honest customers can be frightened off by too many hurdles in the ordering process, according to Nelson Holzner, head of the online payment service Bill-Pay, who observes this dilemma on a daily basis.

“The more customer data a retailer requires, the better protection consumers have from online fraud,” he said. “But as the amount of sensitive data required from customera increases, so too does the risk canceling the transaction. It’s a balancing act.”

A point of contention is delivery and payment by invoice. In a survey by Ibi Research, 78 percent of respondents said that they had been defrauded at least once on transactions to be paid by invoice. This form of payment is popular in Germany, where many people remain suspicious of credit cards, and retailers feel obliged to provide it despite the risks.

The most secure form of online payment, for buyer and seller alike, is a credit card that can be verified by 3D-Secure. Under this scheme, the bank asks for a PIN that is sent by a mobile phone text message. In this case, the seller definitely receives his or her money. But the procedure is too cumbersome for many customers.

“Businesses can very quickly uncover many cases of fraud, but they would also risk losing some legitimate sales,” said Sebastian Schulz of the BEVH. “The question is, how much risk a company willing to take, and how much are they prepared to lose.”

It’s often the smaller companies that shy away from the high costs of fighting online criminality, according to Mr. Hafer at the BBW university. Studies in the United States, he said,  show that investigating fraud costs $2.23 for every $1.00 lost. But simply writing off losses to fraud, he argued, is not a viable solution.

“When companies save on security, it will lead to more and more cases in the long term,” he said. He recommended that retailers work more closely with the banks, because they have come a long way in fighting online fraud.

And while international firms like Otto and Amazon can absorb some losses due to online fraud, smaller companies can be in real danger from online criminal activities, even to the point of insolvency.


Christoph Kapalschinski, Florian Kolf and George Weishaupt cover consumer goods and the retail market for Handelsblatt. To contact the authors:, and

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