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The Hidden Tax of Opportunity Cost in Fraud Prevention

posted on: Tue May 16 2017

There are 118 billion reasons for CFOs of eCommerce businesses to grapple with the opportunity cost of declining suspicious – but legitimate – online orders.

At least 15% of all cardholders have had at least one transaction incorrectly declined
recently, which represents an annual revenue loss totaling nearly $118 billion, according to Javelin Strategy and Research.

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The reasons for false positives are numerous:

  • Suspicious billing or ship-to address
  • High or low value of the purchase
  • Mistaken identity (“James Jones,” legitimate customer confused with “Jim Jones,” known fraudster on negative list)
  • Unusual geo-location or IP address due to cardholder travel

But the upshot is that eCommerce merchants suffer the opportunity cost (revenue loss) from 100% of the false positive transactions they turn away for fear of fraud. "The True Cost of Fraud Study" for 2016 by LexisNexis shows that false positives continue to increase for large eCommerce and mCommerce merchants. More than 1 in 3 declined transactions are false positives today, up from 25% in 2015.

To put this into concrete terms, a merchant with $25 million in annual revenues and processing 2,000 orders per day will wrongly turn down 7,700 transactions a year. This creates both short-term and long-term revenue loss.

  • Short-term. Immediate loss of nearly $270,000 in revenue from those 7,700 transactions (average ~$35/order).
  • Long-term. Loss of lifetime value of customer. Lifetime value varies by business and there are different estimates as to the percentage of shoppers that never return to a website after having their card wrongly rejected, but a conservative value for the lifetime revenue loss for this example would be in excess of $3 million.

To add insult to injury, those customers and revenues are not only lost, but acquiring them was costly. An eCommerce Benchmark Study by MarketingSherpa concluded that online merchants spend between $14 and $109 to acquire a single customer. If we use $61 as an average acquisition cost (half way between $14 and $109) and apply it to the example merchant case above, there would be a total of over $469,000 in wasted customer acquisition dollars.

Here are more disturbing facts about revenue loss from Kount's eBook "CFO Perspective: The Impact of Fraud":

  • Decline rates typically average 2.6% for domestic orders, yet the actual incidence of U.S. fraud averages around 0.9%.
  • Online merchants cancel approximately 2x more orders than they should following manual reviews.
  • 4 in 10 shoppers limit their orders after their cards are declined.

How do you avoid the opportunity cost (revenue loss) of mistakenly turning down legitimate orders? Financial executives should look for these six enterprise-class attributes when seeking fraud prevention solutions and partners:

  1. Advanced Fraud Screening Technologies. Device Fingerprinting and other technologies are essential for fighting CNP fraud while recognizing legitimate orders.
  2. Artificial Intelligence (AI) + Rules Engine. Automating the fraud prevention process improves fraud prevention efficacy and reduces false positives.
  3. Mobile-Optimized Screening and Rules. As mobile commerce continues to soar, it’s critical to integrate mobile fraud prevention into anti-fraud systems to prevent checkout delays that reduce mobile conversion rates.
  4. Chargeback Data Fee. Responding rapidly to chargeback and fraud alerts can cut product borderline losses as much as 50%, which allows you to err on the “approve” side when processing orders, leading to higher sales.
  5. Statistical Fraud Scoring. Precisely quantifying the risk associated with a transaction is an essential component of automation and the optimal way of safely evaluating and approving borderline orders.
  6. Business Intelligence (BI) Reporting. Cohesive, relevant data about transactions helps you perform fast, efficient analysis and use transaction data to improve revenue.

Discover how an enterprise-class fraud prevention solution can actually help boost topline revenue. Download the eBook "CFO Perspective: The Impact of Fraud" to learn how to optimize the three areas of financial impact due to fraud: revenue loss, direct loss and direct cost.

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