A guide to fraud scores and scoring models

What is a fraud score?

A fraud score acts as a quick indicator of fraud. It’s a high-level interpretation of the level of risk associated with a particular order and helps merchants make a decision on whether to approve, decline, or further review the order. Fraud scores come from scoring models that identify traits and historical trends associated with suspicious behavior and past fraudulent orders to detect risk. Fraud scores can be applied to any industry that generates online transactions and is seeking a way to easily assess fraud concerns. Since fraud scores are indicators, they are not decisive. Instead, fraud scores can provide a risk estimation for the overall risk associated with an order,, but the merchant usually defines at what threshold to approve, decline, or review an order.

Which factors go into determining a fraud score?

As stated above, fraud scores are the output of a scoring model. The scoring model incorporates several variables that together can assess the riskiness of an online transaction – there is no minimal set of factors that goes into a score. Some of these factors may include: 

• Billing & shipping match: While fairly simple, orders where the billing and shipping addresses match are generally classified as safer than ones that don’t. 
• BIN match: Most cardholders have a billing address in the same country as their credit card’s issuing bank, so it’s a good indicator if the BIN (Bank Identification Number) and billing country match.
• IP & billing distance: Typically the greater the distance between the IP and billing addresses of the cardholder, the higher the risk of fraud.
• Proxy detection: The use of open or anonymous proxies is a red flag for fraud. Fraudsters are more likely to use proxies to hide their true locations or to bypass geolocation fraud detection tools. 
• Email age: The longer established an email address is, the more credible the transaction. An email address that’s been in use for 7 years is usually more legit than one that was created 3 days ago. 

How do you know if risk scores are for you? 

Merchants opt for scoring models because they give them full control over order decisions, usually with a range for which they could decide which orders to accept, decline, or review, and it can fit into a traditional manual fraud prevention operation, heavily relying on manual reviews.

For merchants seeking a potentially more precise solution, advanced fraud management models deliver definitive fraud decisions—either an accept or decline—while assuming full financial responsibility for any chargebacks incurred. In contrast, fraud scoring simply offers an indication of risk, leaving merchants to determine threshold levels for individual cases or segments. Since scoring models are not definitive and tend to be more simplistic, they are often cheaper on a per-transaction basis.

Let’s consider the pros and cons of risk scores: 

Considering both the advantages and disadvantages, merchants may find the drawbacks outweigh the benefits of using a fraud risk score. For example, too much control can lead to headaches for some merchants. Scoring models only provide a number within a range, which means that merchants will need an internal manual review team to evaluate borderline or ‘grey area’ transactions, and actively manage their thresholds. Managing a large internal review team in addition to paying fees to receive a fraud score per transaction could be costly and unscalable.

In addition, determining the right threshold for declining an order is tricky, and it could change over time as fraud evolves. If you decide that every transaction with a score lower than 12 will be declined, what should you do with a transaction that receives a 12.14? While this may be good for one segment of order volume, it may not be for another. Plus, how often should your team reevaluate it? As a result, thresholds are constantly being adjusted to compensate for new fraud trends and consumer behaviors. 

The other major concern is that scoring model incentives are misaligned with merchants. The scoring model provider will receive revenue per processed transaction regardless of how many orders are declined or approved, and regardless of the accuracy and consistency of the scores. In the end, the merchant pays the consequences for high chargeback rates and/or sub-optimal approval rates. Fraud scores may seem like silver bullets, but be careful before basing an entire fraud management strategy around them.

Instead, you may want to consider an accountable fraud partner who only benefits if their client sees successful business outcomes. An accountable partner is financially motivated to keep chargebacks (costs) low and approval rates (revenue) high. To learn more about how an accountable fraud partner can help your business unleash ecommerce growth, read this guide.

Frequently asked questions

Ecommerce fraud prevention: Best practices