Are your chargebacks too low?- Manage your profits, not your fraud

Akif Khan, PhDManager, Solutions Architecture

Introduction

“We have fraud under control. Our chargeback rate is less than 0.1%”

Is the goal of a business to have the lowest chargeback rate it possibly can?

Is it to maximise profits at all costs, irrespective of chargebacks?

Is there a way to do both?

Risk Management Pipeline

Fraud ClaimManagement

Accept

Reject

AutomatedScreening

ManualReview

Tuning & Management

Fraud ClaimManagement

4AutomatedScreening

1ManualReview

2AcceptReject

3 ORDERRETAINEDREVENUE(PROFIT)

Pipeline Dynamics

Fraud ClaimManagement

4AutomatedScreening

1ManualReview

2AcceptReject

3 ORDERRETAINEDREVENUE(PROFIT)

Staffing &Scalability

LostSales Fraud Loss &

Administration

Review Rate2005: 35%2004: 34%2003: 26%2002: 20%2001: 19%2000: 16%

Reject Rate2005: 3.9%2004: 5.9%2003: 4.6%

Fraud Rate2000: 3.6%2001: 3.2%2002: 2.9%2003: 1.7%2004: 1.8%2005: 1.6%

Automated Screening

Question: Which tool is the best to use? AVS CVN/CSC/CVV/CV2 Address checking IP geolocation checking Velocity checking Hotlists Neural network scoring VbV/SecureCode

Fraud ClaimManagement

AutomatedScreening

ManualReview

AcceptReject

Fraud ClaimManagement

AutomatedScreening

ManualReview

AcceptReject

Answer: All of them.Base decisions on a full suite of data across all sales channels.

Manual Review

Best friend, worst enemy

Human judgement

Expensive

Not scalable

Customer experience issues

Fraud ClaimManagement

AutomatedScreening

ManualReview

AcceptReject

Accept/Reject rates

FraudModel

Rejected

Orders

Rejected FraudReject

Good

Rejected Fraud#

Detected Fraud

Reject Good

#Reject GoodFraud Claim

Management

AutomatedScreening

ManualReview

AcceptReject

Not all rejected orders are attempted fraud Can estimate ‘fraud detect rate’

Detected Fraud / (Incurred Fraud + Detected Fraud)

Can estimate ‘false positive ratio’ Reject Good / Detected Fraud

Can estimate ‘insult rate’ Rejected Good / Total Good

Fraud Claim Management

Chargebacks tend to understate fraud

Chargebacks can account for less than 50% of all fraudulent orders.

Many companies issue direct credits to customers in response to fraud claims.

When examining fraud loss, must capture losses due to both chargebacks and credit issuance.

Fraud ClaimManagement

AutomatedScreening

ManualReview

AcceptReject

Calculate Costs

How much is fraud actually costing you?

Order Profile

Annual Online Sales £113,280,000Monthly Order Volume 80,000Average Ticket (Valid Order) £118Gross Margin Per Valid Order £45

Gross Margin % 38%

Fraudulent Order Profile & Review Metrics

Fraud Presentment Rate 3.00%

Fraudulent Transactions (#/mo) 2,400

% Fraud Orders Handled as Credits 56%

Average Ticket (Fraud Order) £177.00

+ Shipping £13

+ Chargeback Admin Cost £10

+ C/B Fee £5

Loss per Chargeback Order £138Loss per Credited Order £123Avg Loss/Fraud Order (weighted) £129Cost per Manual Review £2.80% of Flagged Orders Reviewed 100%

Build a Model

Model different scenarios Vary chargeback rates, false positive rates, review

rates Model the effect these have on profit

Profit Drivers Order Impact Negative Profit Impact3

AcceptedFraudRate

4

FlaggedOrderRate

5

Fraud Detect Rate

6

Valid Order Reject Rate

(aka Insult Rate)

7Valid Order Reject

Ratio(False Positive Ratio)(Reject:Fraud Detect)

8Total #Orders

Flagged for Review

9

AcceptedFraudulent

Orders

10

RejectedValid

Orders

11Sales

OpportunityCost (GM)

12

FraudLoss

13

ReviewCost

14

Adverse Profit

Impact

1.29% 1.79% 56.88% 0.14% 0.08 1428 1035 106 4,747£ 133,844£ 3,999£ 142,590£ 1.19% 1.94% 60.25% 0.19% 0.10 1550 954 151 6,755£ 123,382£ 4,341£ 134,477£ 1.10% 2.09% 63.40% 0.26% 0.13 1673 878 201 9,017£ 113,598£ 4,683£ 127,299£ 1.00% 2.26% 66.68% 0.34% 0.17 1811 800 265 11,878£ 103,442£ 5,071£ 120,391£ 0.91% 2.44% 69.66% 0.43% 0.20 1949 728 336 15,050£ 94,191£ 5,458£ 114,699£ 0.84% 2.58% 71.86% 0.51% 0.23 2061 675 398 17,826£ 87,336£ 5,770£ 110,932£ 0.78% 2.72% 73.90% 0.60% 0.26 2173 626 465 20,840£ 81,004£ 6,085£ 107,929£ 0.72% 2.87% 75.90% 0.70% 0.30 2296 578 543 24,329£ 74,802£ 6,427£ 105,559£ 0.69% 2.96% 77.03% 0.76% 0.32 2369 551 592 26,534£ 71,304£ 6,634£ 104,471£ 0.64% 3.10% 78.61% 0.86% 0.35 2481 513 669 29,978£ 66,388£ 6,946£ 103,312£ 0.62% 3.18% 79.46% 0.92% 0.37 2545 493 715 32,045£ 63,765£ 7,127£ 102,937£ 0.58% 3.32% 80.79% 1.03% 0.41 2655 461 796 35,695£ 59,633£ 7,435£ 102,762£ 0.55% 3.40% 81.55% 1.09% 0.43 2722 443 847 37,980£ 57,277£ 7,623£ 102,879£ 0.53% 3.49% 82.27% 1.16% 0.46 2790 425 899 40,307£ 55,032£ 7,811£ 103,149£ 0.51% 3.56% 82.89% 1.22% 0.48 2851 411 948 42,490£ 53,106£ 7,984£ 103,579£ 0.49% 3.68% 83.76% 1.32% 0.51 2944 390 1022 45,833£ 50,396£ 8,243£ 104,472£ 0.47% 3.76% 84.34% 1.39% 0.53 3010 376 1076 48,254£ 48,623£ 8,427£ 105,305£ 0.45% 3.86% 84.96% 1.47% 0.56 3085 361 1139 51,058£ 46,696£ 8,638£ 106,392£

Profit Optimisation…..

…not necessarily chargeback elimination.

Fraud LossRejected Orders

(Oppty Cost)

Accepted Fraud Rate

Point of Profit Optimization (least profit loss)

Adverse Profit Impact

Adverse Profit Impact

low

high

Summary

Determine the profit and loss drivers at all stages of your risk management pipeline.

Focusing on chargebacks alone is inadequate.

Determine the profit optimisation point for your business, and let this drive your acceptable chargeback rate.

Fraud ClaimManagement

4Fraud ClaimManagement

4AutomatedScreening

1AutomatedScreening

1ManualReview

2ManualReview

2AcceptReject

3AcceptReject

3