Fraud in the forecast? How CFOs take unpredictability off the table
This content was paid for and produced by Riskified in partnership with the Commercial Department of the Financial Times.
Minimizing risk exposure is a core responsibility for CFOs in any organization. In ecommerce, the danger of a major fraud attack is always lurking, creating not only a constant threat of catastrophic losses, but also an ongoing forecasting nightmare – a concern especially acute for public companies.
Chargebacks, in particular, are a forecasting wildcard. With legacy anti-fraud strategies, chargebacks represent a huge unknown: will a company lose nothing next quarter to chargebacks, or will they lose millions?
Some organizations, however, are taking a different approach that eliminates the unpredictability of chargeback costs from the forecasting equation and sets a floor on the share of total order volume the business is able to approve. The strategy involves shifting the burden of fraud to an accountable third-party partner.
What does true accountability look like?
Accountability in this context means financial skin in the game. The accountable fraud partner takes on financial responsibility for both chargeback costs and, crucially, for maintaining revenue service-level agreements (SLAs). Three mechanisms make this possible:
- An approval-rate SLA sets a floor on the share of orders that the partner will approve. For instance, the partner commits to approving 98 percent of the merchant’s orders over the next two years. This is a huge step toward giving a CFO the ability to forecast revenue.
- A chargeback guarantee shifts the costs of fraud chargebacks from the merchant to the fraud partner. When the partner approves an order that ends up being reported as fraud by the cardholder, the partner reimburses the merchant for the chargeback cost. This incentivises the partner to keep chargebacks low and make accurate order decisions.
- A performance-based fee structure rewards the fraud partner only for approved transactions and provides a disincentive to over-decline orders. As essential as the chargeback guarantee, this fee setup compels the partner to actively bolster revenues and profitability by maximizing valid approvals.
Combined, these elements keep the partner’s goals fully aligned with the merchant’s objectives. This arrangement also drives accountable partners to make highly accurate decisions. As a result, the partner is motivated to innovate and invest heavily in data science and risk modelling, which means the merchant benefits from the latest technologies, methodologies and AI without making investments to build this technology from scratch.
Putting it all together, the CFO knows exactly what the minimum approval rate will be and precisely how much to budget for fraud, because the liability of paying chargebacks belongs to the accountable fraud partner. In fact, the CFO can predict precisely how much this partnership will increase profits and margins.
How third-party accountability creates predictability
For the typical fraud team reporting to the finance organization, unpredictability is the norm. At any time, a merchant can be hit with a sophisticated fraud attack. During attack periods, merchants tend to get overly conservative. One 2022 study from Aite-Novarica1 that was published by Experian shares that ecommerce merchants rejected an estimated 16 percent of all good orders, unnecessarily costing businesses roughly $11bn in sales annually. Either way, a fraud attack can be a nightmare scenario for the forecasting team.
An accountable fraud management model offers an opportunity for vital revenue predictability in the face of economic headwinds. Accountable fraud partners provide a clear and calculable ROI, making them a natural fit for CFOs looking to minimize uncertainty, maintain profitability and firmly control risk.