Are your chargebacks too low? - Manage your profits, not your fraud Akif Khan, PhD Manager, Solutions Architecture

Introduction “We have fraud under control. Our chargeback rate is less than 0.1%”  Is the goal of a business to have the lowest chargeback rate it possibly can?  Is it to maximise profits at all costs, irrespective of chargebacks?  Is there a way to do both?

Risk Management Pipeline Fraud Claim Management Accept Reject Automated Screening Manual Review Tuning & Management Fraud Claim Management 4 Automated Screening 1 Manual Review 2 Accept Reject 3 ORDER RETAINED REVENUE (PROFIT)

Pipeline Dynamics Fraud Claim Management 4 Automated Screening 1 Manual Review 2 Accept Reject 3 ORDER RETAINED REVENUE (PROFIT) Staffing & Scalability Lost Sales Fraud Loss & Administration Review Rate 2005: 35% 2004: 34% 2003: 26% 2002: 20% 2001: 19% 2000: 16% Reject Rate 2005: 3.9% 2004: 5.9% 2003: 4.6% Fraud Rate 2000: 3.6% 2001: 3.2% 2002: 2.9% 2003: 1.7% 2004: 1.8% 2005: 1.6%

Automated Screening Question: Which tool is the best to use?  AVS  CVN/CSC/CVV/CV2  Address checking  IP geolocation checking  Velocity checking  Hotlists  Neural network scoring  VbV/SecureCode Answer: All of them. Base decisions on a full suite of data across all sales channels.

Manual Review Best friend, worst enemy  Human judgement  Expensive  Not scalable  Customer experience issues

Accept/Reject rates Fraud Model Rejecte d Orders Rejected Fraud Reject Good Rejected Fraud # Detected Fraud Reject Good # Reject Good Not all rejected orders are attempted fraud  Can estimate ‘fraud detect rate’  Detected Fraud / (Incurred Fraud + Detected Fraud)  Can estimate ‘false positive ratio’  Reject Good / Detected Fraud  Can estimate ‘insult rate’  Rejected Good / Total Good

Fraud Claim Management Chargebacks tend to understate fraud  Chargebacks can account for less than 50% of all fraudulent orders.  Many companies issue direct credits to customers in response to fraud claims.  When examining fraud loss, must capture losses due to both chargebacks and credit issuance.

Calculate Costs How much is fraud actually costing you?

Build a Model Model different scenarios  Vary chargeback rates, false positive rates, review rates  Model the effect these have on profit

Profit Optimisation….. …not necessarily chargeback elimination.

Summary  Determine the profit and loss drivers at all stages of your risk management pipeline.  Focusing on chargebacks alone is inadequate.  Determine the profit optimisation point for your business, and let this drive your acceptable chargeback rate.