Eliminate Your Store's Fraudulent Transactions

24-Jun-2008

The article below is from Integrated Solutions for Retailers and can be referenced at: http://www.ismretail.com/index.php?option=com_jambozine&layout=article&view=page&aid=7394

(ismretail.com) — With the cost of credit card fraud reaching into billions of dollars annually, retailers are challenged to garner savvy anti-fraud solutions. Fraudulent transactions cause retailers to lose sold merchandise or the consumer's payment and can incur a chargeback penalty (the fee banks and credit card companies charge retailers for reversal of payments). Retailers also run the risk of losing their best customers if unfortunate counterfeit transactions are not rectified efficiently. Bob King, CEO of ClickBank, was faced with this very situation and was forced to revamp his online store's fraud detection software to alleviate shifty transactions.

Founded in 1999 in Boise, ID, ClickBank is an Internet retailer that allows individuals and small business owners to buy, sell, or promote digital products in its marketplace. The retailer operates strictly online, and so all products are delivered via download. ClickBank's product categories include software in the form of desktop applications, antispyware, registry cleaners, and e-books, just to name a few. "ClickBank offers an outlet for people to gain access to Internet commerce," explains King. "ClickBank differs from other online retailers in that we have a huge affiliate network for advertising." The affiliates' advertising program generates sales by driving customer traffic directly to the products. For example, if someone wants to sell a digitized PDF version of a book or e-book about starting a dog walking business, they would contact ClickBank for product approval. If the e-book meets ClickBank's criteria (the retailer rejects lewd content) and the product is approved, the retailer charges $49.95 to list the product in its online marketplace. Once the e-book is live in the retailer's marketplace, an affiliate network promotes the book on its own Web site, with Google Adwords and Yahoo Adwords. If a consumer clicks the e-book's advertisement link in any of these locations, ClickBank is able to track the activity all the way through to transaction. Finally, ClickBank collects its portion of the transaction, pays commission to the affiliate, and pays the remainder to the owner of the product.

Overhaul Homegrown Apps To See Results

Despite growing business, the retailer was having a serious problem with its homegrown fraud detection technology. "We suspected that not only were fraudulent transactions getting through the system, it was also actually declining good transactions," explains King. The retailer looked to its sister company, Kount, for an integrated solution. Kount's self-titled solution is a hosted, or a SaaS (Software as a Service), application. "Kount includes a decision management console (DMC), which includes two screens that allow us to set strict limitation parameters on transactions," explains King. "The system is a dashboard or a console that provides management and option settings on each transaction." When a questionable transaction is found, the retailer is able to send an inquiry for a risk opinion directly to Kount. Suppose a customer is trying to purchase a product through ClickBank with a stolen credit card. Between the times it takes to press the ‘buy' button and receive confirmation, Kount determines the risk associated with the customer's credit card. To do this, the retailer's DMC simply posts an online order form via a secure Internet post, which is sent electronically to Kount's back end system at its headquarters. The order form is another function of the DMC, and it includes basic elements, including the transaction amount, the customer's e-mail address, and product name. Kount receives the order form in real time and determines the risk involved with this transaction. The vendor sends a subsecond reply back to the retailer's console with its risk opinion of that particular transaction. The risk scale ranges from 0 to 100. High-risk transactions — those that score 75 or higher — are automatically declined.

Because Kount is a service for online transactions, the retailer's technology team had to be trained on the DMC's interfaces. The vendor installed the DMC and conducted on-site training at the retailer's headquarters. Kount has been fully operational since March 2008.

Avoid Unnecessary Chargeback Penalties

The retailer's decision to overhaul its homegrown solution with Kount has proven to be beneficial. Since implementation, fraudulent charges have been reduced by 1/3. The retailer has seen 3/10 of a point reduction in bank and credit card company chargeback penalties. This is significant since retailers with more than 1% chargeback rates are penalized. ClickBank has always remained under that figure, but since implementing Kount, they are well under it. "Avoiding penalties allows you to not draw the ire of banks or credit card companies and avoid fines that can be hundreds of thousands of dollars," explains King. Also, the retailer has seen a slight increase in sales because legitimate transactions are no longer declined.

Going forward, ClickBank plans to do even more analysis on the vendor's system. "We will do another analysis in six months to determine the rate of fraudulent charges," explains King. The retailer plans to work with Kount to determine if adjustments should be made to the DMC. "If Kount hadn't developed its solution, we probably would have tried to rewrite and improve our homegrown solution," King states.