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CFO Challenge: Balancing the 3 Areas Impacted By Fighting Fraud

posted on: Thu May 25 2017

In the early 2000’s, an eCommerce strategist for a large supermarket chain was making an appeal to the CFO. He was seeking a substantial investment to build out an early version of an online grocery shopping system. The CFO asked for a breakdown on the expected ROI.

For a moment, the strategist appeared stumped. He was an IT engineer, not an accountant. A blizzard of numbers swarmed in his head. Then, he posed this simple question back to the CFO.ROI

“Respectfully, sir, what would be the impact of RONI?”

“RONI?” asked the CFO with a quizzical look on his face.

“Yes. What would be our Return On No Investment?”

It might be helpful to keep that question in mind when weighing an investment in enhanced fraud prevention for your eCommerce operations. Fraud prevention is typically not top-of-mind for a CFO, but when losses and chargebacks begin to rise, there is no doubt that improving fraud prevention can deliver strong returns by cutting direct loss.

However, to maximize ROI, it’s necessary to optimize the balance among all three areas impacted by fraud prevention:

  1. Direct loss results from lost merchandise, chargeback fees, non-recouped shipping expenses, etc. These are the obvious and high-profile costs that many organizations focus on. However, it’s important to avoid the instinctive impulse to simply clamp down harder. By considering the other two areas that fraud impacts, CFOs can prevent a scenario where a company spends $75,000 on increased fraud prevention that reduces sales by $100,000…all in order to eliminate $65,000 in fraud loss.
  2. Direct cost results from spending on payroll, benefits, IT, software, and more. As direct loss from fraud accelerates, many organizations default to adding more manual reviewers and boosting the rate of manual reviews. CFOs are right to be concerned about this approach. After all, headcount comes with the burden of salaries, healthcare, benefits, training, taxes, etc. Manual processes do not scale efficiently as transaction volume grows. Even spending on improved IT systems that promise to reduce manual reviews must be carefully evaluated. CFOs should consider whether or not to make capital investments in systems and infrastructure that are not central to the core business. 
  3. Revenue loss (Opportunity cost) occurs when legitimate orders are turned down due to suspicion of fraud. These are known as false positives or sales insults, and they don’t show up as line items on your income statement. However, they can have a substantial impact on the bottom line. Javelin reports that fear of fraud causes merchants to mistakenly turn down $118 billion a year in valid orders. To put it another way, for every $1 dollar in fraud successfully detected, merchants turn down $13 in good orders. 

How Do Fraud Prevention Improvements Deliver ROI? Reductions in direct loss deliver a near one-to-one improvement in the bottom line. If a company reduces fraud losses by $50,000 in a year — all else remaining equal — profit will increase by the same $50,000 amount. Further, achieving this reduction efficiently (to minimize direct cost) while maintaining or improving order approval rates (to avoid revenue loss) can multiply this impact. Thus, investments in optimizing fraud prevention often deliver much higher returns than spending in other areas, such as advertising, SEO, IT, and training. 

What’s The Answer? More and more eCommerce operations are adopting SaaS solutions that are easily scalable and provide automated decisioning that leverages the power of Big Data, artificial intelligence (AI) and machine learning capabilities. Here’s why: costs actually drop as volume increases, no capital investment is required, and staff is not diverted from core business functions.  

For a more detailed look at how investments in improving fraud protection can deliver optimum ROI, download the eBook “CFO Perspective: The Impact of Fraud."

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