The high cost of ecommerce fraud and how one shift delivers quick ROI
This content was paid for and produced by Riskified in partnership with the Commercial Department of the Financial Times.
What is the bottom-line impact of preventing card-not-present (CNP) fraud? Even the most responsible CFO may not have an accurate answer because the true costs of fraud aren’t just a matter of tallying chargebacks. Even the head of fraud may not have an answer at their fingertips – by its nature, fraud is unpredictable. Moreover, much of the “cost” is counterfactual. A CFO needs to ask: how many legitimate orders aren’t being approved because of a subpar approach to fraud prevention?
The problem is that thousands of merchants still combat CNP fraud with a legacy setup: paying for a fraud management system that allows the user to set rules that decide which orders are approved and which are declined. A key shortcoming of this rules-management model is that there’s no buffer between an explosive fraud event and the merchant’s revenue – if the rules fail, the merchant is on the hook for chargebacks. And if the rules are too aggressive, quality orders are then being tossed in the bin. This risk exposure, and what is likely a revenue sinkhole, should make any CFO very uncomfortable.
Forward-thinking ecommerce merchants are shifting to a different fraud-prevention model. An accountable fraud partner can take liability for fraud chargebacks, and contractually agree to maintain minimum approval rates. The only “cost of fraud” becomes the partner’s fixed fee, which will be more than offset by the guaranteed boost in revenue.
The high price of missing accountability
In March 2022, a Total Economic Impact™ (TEI) study was conducted by Forrester Research and, based on analyses of client investments, they examined the ROI that enterprises are able to realize from switching to an accountable fraud partner that offers both a chargeback guarantee and guaranteed approval rates. The report identifies the full array of cost burdens created by a setup that doesn’t involve an accountable partner. It’s these costs that decision-makers may overlook because the up-front fees they pay vendors of rules-based systems appear lower than guaranteed alternatives.
However, a rules-based digital fraud management solution takes no financial accountability for chargebacks or, just as significant, lost revenue caused by false declines. So any perceived savings are quickly erased by a range of negative impacts to the organization that include the following:
- Chargebacks. When managing fraud in-house or using a nonaccountable vendor, the merchant pays for chargebacks.
- Lost revenue from falsely declined transactions. With a typical rules-based solution, a reported 16 percent of ecommerce transactions declined are actually legitimate (resulting in $11bn lost), according to a 2022 study from Aite-Novarica1 that was published by Experian. Those false declines mean not only lost revenue but also frustrated customers and higher cart abandonment rates.
- Slow reaction to changing trends. Teams using rules-based prevention setups end up layering hundreds of rules upon each other, which makes it challenging and manual to assess performance. Shopping and fraud trends move faster than rules-based systems, which means chargebacks (and false declines) can quickly pile up as teams race to adapt to new threats.
The immediate payback of shifting to an accountable partner
The TEI report showed that shifting from a rules-based model to an accountable partnership delivered a 594 percent ROI – and it didn’t take long.
A strategy that offloads accountability for chargebacks to a partner through a chargeback guarantee and approval-rate SLA (setting an agreed-upon rate to approve, for instance, 98 percent of orders) has an immediate impact – a CFO can rely upon a certain level of revenue and removes the risk of a “hit” to the bottom line from a fraud event. This strategy typically involves a higher per-order fee, but the ultimate cost of fraud management is dramatically lower.