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DIY Fraud Prevention: Operating Under the Influence of a Bad Strategy

posted on: Thu Mar 24 2016

decline rateBy, Don Bush, VP of Marketing at Kount

A friend of mine has been a huge fan of the TV show “New Yankee Workshop” with Norm Abram for a long time. He started out as a viewer, and then eventually began trying his hand at Norm’s do-it-yourself furniture projects. And I must say, he has built a number of really nice pieces over the years, including a Shaker Bookcase that he is especially proud of (I won’t mention any of the failed projects that turned into expensive firewood).

In the process, he has also assembled quite a workshop, too. When he completed his latest project, I teased him that he’d only spent fifteen thousand dollars on power tools (“that’s some lathe you got there, Tom”) and hundreds of hours in order to build a chest of drawers. That’s an awful lot to spend on underwear storage.

And that relates to the main problem with DIY fraud prevention:

  • If you have the time and money to play amateur fraud prevention hobbyist, DIY can provide hours and hours of (costly) recreational activity
  • On the other hand, if your eCommerce goal is to sell the most product at the highest profit margin with the lowest fraud rate possible, your time and money is better spent on a best-in-class, professional fraud prevention solution like Kount Complete

That observation is proven out by current Kount customers. Many of them had been Do-It-Yourselfers before they adopted Kount Complete. And the difference between their operations now and prior to the switch is remarkable. What led them to abandon their DIY ways?

  1. Rising fraud prevention costs. Last year, nearly 1 in 3 merchants (29%) reported that the cost of fighting fraud was too high – a 45% increase over the previous year.1 Kount customers that migrated from doing-it-themselves felt these same pressures, too. Even when they pushed their homemade, stitched-together tools to the limit, they struggled to hold fraud to acceptable levels. As a result, they were forced to spend more on fraud prevention. Most resorted to hiring extra reviewers to try and plug holes. Others experimented with new standalone tools or ad hoc software applications, leading to expensive integration projects. The resulting higher fraud mitigation costs ultimately drove them to Kount.

    Today, those Kount customers are reporting reductions of 20%-90% in manual reviews. In fact, their overall fraud prevention costs are way down.
  2. Escalating fraud. Last year, merchant fraud losses skyrocketed nearly 100% as a percentage of revenue.2 And there’s no end in sight. Experts predict a further 80% increase in card-not-present (CNP) fraud over the next 48 months.3 Once again, Kount customers who previously relied on DIY tools reported feeling this trend keenly. For example, one online gaming site was hit with tens of thousands of fraud attempts in just a few minutes. Trying to deal with an attack of that scale was simply overwhelming to their DIY tools, internal resources, and IT budget. Other customers gambled on scaling back manual reviews during the holiday season to handle higher traffic volumes, only to be devastated by fraud, as that’s the time of year that fraudsters target most.

    But now as Kount customers, their chargeback rates are a fraction of what they were. What’s more, many were able to exit the Excessive Chargeback programs they were in…often within less than 60 days. And still others have reduced fraud losses by tens of thousands of dollars a month.
  3. Falling sales. On average, US merchants needlessly turn down about 1.7% of sales due to suspicion of fraud. It’s true: decline rates average 2.6% for US domestic orders, yet the actual incidence of U.S. fraud averages around 0.9%.2 But how can that be? Aren’t fraud rates increasing? Well, that paradox hit Kount customers who used to do-it-themselves especially hard. As fraud continued to rise in spite of their best efforts, they were forced to clamp down harder and harder on “questionable” sales. Some stopped selling certain products – like e-gift cards. Others stopped accepting referrals from affiliate channels. Many refused orders from certain geographies. And still others stopped shipping overnight or when the “Bill To” and “Ship To” addresses didn’t match. The upshot of this “whack-a-mole” approach? A few were able to get their chargeback rates to come down, but at a terrible cost. They were sacrificing tens of thousands of dollars (and in some cases, hundreds of thousands of dollars!) in revenue each and every month.

    On the other hand, now that they are using Kount, almost all report HIGHER SALES, as “questionable-but-valid” orders no longer get automatically (and incorrectly) tossed to the curb. Reductions of 60% in decline rates – and the resulting boost in sales -- are not uncommon.

If you’re taking a DIY fraud prevention approach, you’re like my friend who spent hundreds of hours and fifteen thousand dollars to build a chest of drawers he could have bought for $350. The costs and risks are just too high:

  • Incurring needless costs developing, buying, integrating, and supporting ad hoc software tools and expensive hardware
  • Wasted time that could be spent building your business instead of trying to keep pace with the accelerating fraud and fraudster techniques
  • Exposing your business to profit-reducing or even business-ending fraud attacks

Want to assess the true cost of doing-it-yourself? Try Kount’s WHAT’S THE “F” WORD COSTING YOU? Calculator. It will apply our proprietary algorithms to your current fraud prevention expense and show you how much lower those costs might be with Kount…as well as providing projections for reduced fraud and chargeback rates, plus expected sales increases!

60-Second Fraud Calculator

SOURCES: 1 ONLINE FRAUD MANAGEMENT BENCHMARKS, North America Edition, 2 2015 LexisNexis Risk Solutions True Cost of FraudSM Study, 3 The Fraud Practice, Payment Trends and Security, David Montague, 4 http://aitegroup.com/report/not-your-father%E2%80%99s-3-d-secure-addressing-rising-tide-cnp-fraud