Merchants tend to concentrate on the number and the value of the fraudulent purchases from which they suffer. However the cost of on-line fraud is not limited to these two aspects, which constitute only the tip of the iceberg…
In its study of bankcard fraud, published at the end of July 2012, the European Central Bank (ECB) notes that 52% of the cases of such fraud occur at the time of remote payments (sale via the Internet, by mail, or by telephone). E-merchants must therefore find solutions that protect themselves from the risks of fraud while enabling them to preserve - even to increase - their margins. Furthermore, the cost of the installation of anti-fraud devices (electronic and/or human) must be lower than the cost of the fraud itself… Thus, they need to have a very precise idea of the total cost of fraud… which is not limited to the immediate loss of turnover.
One Cost Can Conceal Another: Direct and Indirect Costs of Fraud
Financial loss is the direct and immediate consequence of a fraudulent purchase. Indeed, the wronged consumer (cardholder) can dispute the transaction, and require his or her bank to reimburse the unlawful debit. However, in certain cases, depending on the clauses of the contract between the bank/purchaser and the merchant (and in particular on the rules relating to the implementation of 3D Secure), the amount of the rejected debit could be borne by the merchant. Whereas, at the same time, the ordered product or service has already been delivered to the fraudster. The gross value of the fraud, moreover, must include the costs associated with the acquisition and development of consumer loyalty: marketing, communication, referencing, customer service, and so on.
In parallel, the margin is also burdened by a number of indirect costs, to which the merchant is even more exposed when the fraud rate is high. Thus, certain bankcard suppliers oblige merchants to pay the administration expenses relating to the handling of contestations, even paying fines when their fraud rate is deemed excessive. As a result, others are quick to coerce them into taking drastic anti-fraud measures, on pain of seeing their licences withdrawn. Lastly, certain banks choose to increase their commission rate, before proceeding, in certain cases, with the pure and simple closure of a merchant’s account. These are indirect losses, less visible and harder to evaluate, but ones which negatively affect the merchant’s margins.
Paradox of the Fight Against Fraud
Faced with an entirely real risk, merchants have gradually set up fraud prevention policies combining automatic detection solutions, internal or external, with dedicated teams whose task is to manually examine the transactions identified as suspect, to manage possible contestations, and to develop the filtering tools and rules. As the number of false positives rise, there will be a relative increase in loss of turnover. As soon as any filtering rules are implemented - automatic or manual - it is inevitable that certain, legitimate transactions are blocked. In such cases, not only do the merchants deprive themselves of an immediate sale, but also of future sales, since those customers are discouraged and not inclined to return in the future.
At the end of the day, it is the quality of the processes that are put in place (automatic, manual, internal or external), as well as the budgets that are allocated, which will enable the right compromise to be found between a reduction of the level of fraud and the number of “false-positives”. However, the pay of the employees who manage those tools, develop the filtering parameters, and/or check the dubious transactions manually, has to be added to the costs associated with the installation of automatic fraud detection solutions, be they internal or external.
So the fight against fraud represents a cost in itself, and it is essential that this cost be quantified in order to determine the strategy to be adopted: to continue in-house tool development, to rely on market tools, to maintain an in-house team for the manual checks, or to outsource the entire process to a third-party expert? The cost of the anti-fraud solutions should obviously not exceed the gains achieved on the costs relating to the fraud and the false-positives. In the final reckoning, it is the overall cost relating to fraud, the sum of the fraud itself, the losses relating to false-positives, and the cost of the solutions put in place that must be taken into account, while increasing the turnover and margins.