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Are your chargebacks too low? - Manage your profits, not your fraud

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?

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Are your chargebacks too low? - Manage your profits, not your fraud

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

  2. 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?

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

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

  5. 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.

  6. Manual Review Best friend, worst enemy • Human judgement • Expensive • Not scalable • Customer experience issues

  7. Accept/Reject rates 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 Rejected Orders Fraud Model Rejected Fraud Reject Good Rejected Fraud Reject Good # Detected Fraud # Reject Good

  8. 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.

  9. Calculate Costs How much is fraud actually costing you?

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

  11. Profit Optimisation….. …not necessarily chargeback elimination.

  12. 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.

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