How an End-to-End Fraud Solution Can Help your Bottom Line
Learn about the relationship between efficient fraud prevention and revenue
Businesses are often under the impression that moving operations online will be a cheap and easy way to increase profit margins. There are of course many benefits to selling online, however there are also huge costs involved in running an eCommerce store. A recent study suggests that between order management, SEO, and other expenses invisible to the shopper, margins are often even thinner online than they are in-store. And the truth is, this study likely overestimates eCommerce merchant’s margins because it doesn’t account for losses incurred due to CNP fraud.
To this end, partnering with a fraud solution that offers a chargeback guarantee can achieve much more than operational streamlining: it can seriously impact margins and ROI. But a chargeback guarantee is not the only benefit a fraud management solution can offer. Online merchants can reduce overhead, improve the shopping journey and facilitate expansion into new markets.
No more chargebacks
When a cardholder sees an unauthorized purchase on their credit card statement, they notify their card issuer. The retailer usually ends up having to reimburse the cardholder the value of the transaction. But a fraudulent chargeback results not only in an item being stolen from you – it’s also an effective waste of all the variable costs associated with the purchase.
In other words, incurring chargeback fraud in an online fashion store is like having a dress stolen off the rack in a physical store. You lose the dress, but also the marketing costs of drawing a customer into the store, the cost of paying an employee to hang it, plus the portion of rent it took to display the dress on your floor. For eCommerce the variable costs are less visible, but no less real: order fulfillment expenses including item storage, receiving, and packing are quite significant, as are credit card processing fees.
The effect of this is that a 0.5% chargeback rate wipes out the profits of far more than 0.5% of your legitimate orders: if your operating margin is 30%, the loss you incur on a single chargeback will offset the profits of more than three good orders.
A fraud solution that offers chargeback reimbursement effectively makes your chargeback fraud rate zero. It’s the equivalent of your physical store having a security guard who not only works to prevent theft, but will also reimburse you if he misses a thief. Having this guarantee is a safety net that will fatten margins and bolster revenue.
In-house review costs eliminated
Apart from having to pay for your own chargebacks, maintaining an in-house fraud review team is a costly operation in and of itself. When the holidays hit, and order volume spikes, fraud can be particularly expensive–many companies hire temp workers to handle the surge.
This is to say nothing of the expenses incurred by equipping these teams to actually do their job. Third-party data sources – which many fraud teams rely on to enrich the order data they receive and learn more about their shoppers – often come with hefty price tags. And gateway prevention systems, designed to lighten the load on review teams by filtering out certain types of orders, also collect processing fees, which eat into margins.
Merchants who outsource fraud management to third-party solutions are free to assign these resources and manpower toward operations that are more central to their core business. An automobile parts retailer recently told us that they saved 10% on hiring costs by integrating with Riskified.
Long term benefits
Generate revenue from higher approval rates
Getting a customer all the way through the sales funnel is time-consuming and expensive. Most eCommerce merchants expend considerable resources driving relevant traffic to their sites, and of these clicks only a tiny fraction actually end up converting and making a purchase. So it’s painful to think that legitimate customers who are finally ready to buy will be turned away due to fear of fraud.
Part of the issue is specialization. It’s simply unrealistic to expect that a single retailer – for whom fraud detection is one of many daily operational concerns – could process orders as efficiently as a company who focuses only on CNP fraud. Fraud prevention has enormous economies of scale – the more orders you process, the more accurate your models become.
The results of these economies of scale are significant: Riskified typically approves 30% – 70% of orders that merchants had planned to decline.
When fraud is managed in-house, approval rates in verticals like fashion, sporting equipment, flight tickets and electronics are typically between 80-90%. Riskified usually can raise these approval rates to above 95%, frequently topping 99% for merchants over time. An approval rate boost of even a few percent can easily translate to hundreds of thousands of dollars of annual revenue for a mid-size eCommerce store.