As digital commerce becomes more prevalent, retailers are working hard to meet shifts in consumer behavior. At the same time, fraudsters are working hard too, developing new, more sophisticated fraud techniques.
Gartner’s recent report — How to Create a Payment Fraud Detection Strategy at the Organizational Level — gives solid advice on looking at your fraud initiatives through a different lens by assessing the complete financial impact of your fraud solutions across the business.
The report gives insights for retailers and their fraud teams, including:
- Implementing forward-thinking fraud detection strategies
- Aligning a total-cost-of-fraud model to understand tolerable fraud rates and their impact on your fraud controls
- Working with cross-functional stakeholders
Developing a total-cost-of-fraud model helps to optimize and understand the impact of your fraud investments. This strategy enables you to determine tolerable fraud rates. A fraud rate is defined as the direct cost of fraud, such as stolen account funds or chargeback costs — in order to properly implement the right fraud solutions throughout the consumer journey.
Let’s start by looking at how to identify your total cost of fraud.
How to calculate total cost of fraud
Using Gartner’s total cost of fraud (TCOF) model, you add up the three core pillars of fraud controls: 1) overall fraud rate, 2) the cost of your fraud tools and team and 3) the impact on customer lifetime value.
Assessing your overall fraud rate
This is the sum of your fraud losses, which can be any direct fraud costs, such as stolen account funds or chargeback costs.
Although it seems to make sense to aim for a zero fraud rate, in reality, that could do more harm than good because you won’t be generating business. For example, if your fraud rate is too low, your total cost of fraud increases due to false positives, lost customers and cost of fraud prevention systems. A fraud rate that is too high means that the total cost of fraud that increases alongside it, due to escalating fraud losses from high-cost frauds like identity fraud and account takeover (ATO). Strive for the right balance: Reduce fraud as low as possible without significantly impacting your customers or your team’s operational efficiencies.
How much are fraud resources and systems costing?
Next, consider what you’re investing in fraud prevention tools and understand how they impact your team. Look at the amount of work that can be done more efficiently due to your fraud controls.
How fraud impacts customer lifetime value
Do your fraud controls increase the latency of the customer interaction, or perhaps challenge them to verify their identity? Fraud controls have varying levels of consumer impacts and subsequent impact on retailers, which should be considered as they’re implemented.
Total cost of fraud at account login, onboarding and transactions
As you consider the total cost of fraud across the retail customer lifecycle, there are many different types of interactions you have with consumers. We’re going to focus on three: account login, onboarding and transactions.
Account login for customers
For a lot of retailers, logging in to customer accounts is problematic and causes customer friction. As you add in account access controls, think about how you can reduce friction like password resets or other processes that might create challenges for the customer. When your customers are able to easily access their account and execute transactions, you improve the customer experience and increase your overall revenue per customer.
From a cost perspective, focus on ATO, since your business bears the cost of much of the losses incurred. There are significant operational efficiencies due to account access points. As a result, call centers could experiences in spikes traffic or unnecessary step ups that are both a cost to your business, as well as impactful to the customer experience. Think about expediting requests from those customers, and finding better utilization of your contact center agents.
Onboarding new retail customers
Another major area in which fraud is common is during retail customer onboarding, but there are also great opportunities here to improve your business’ overall ROI based on the fraud controls you put in place.
Onboarding new customers comes with revenue impacts, since any kind of friction can result in abandonment and drop-offs. If you’re not precise about that identity proofing process, fraud controls can result in higher review costs when they’re flagged for risk, in this case, superior fraud controls and processes can result in higher pass rates, higher revenue per customer, more loyalty, better experiences and higher balances transferred to new accounts.
The cost of cart abandonment
Cart abandonment is a significant problem with transactions or payments, and according to the Baymard Institute, nearly 70% of online shopping carts are abandoned.1 If fraud controls create too much friction, shoppers will abandon their cart and move to your competitors — possibly never to return. And if you aren’t precise enough as you profile risk, you might decline or delay purchases from good customers, resulting in loss of revenue.
Using email and phone verification to profile risk has a significant impact on transactions. Email is almost always present with online purchases and it is an incredible correlation to the fraud rates and risk of a particular transaction.
Work with cross-functional stakeholders
Many people from various areas of your business need to be involved in your initiatives. It could be your identity and access-management team for account access; legal and compliance teams for regulatory environments and data protection; customer experience and marketing for promotions and conversions — and the list goes on. It’s good to involve each of those team members to truly understand the impact that your fraud solutions can have upon the overall success of your business.
You can uncover the challenges each group faces and understand the requirements for their success. Understanding these teams and including them early in the evaluation of tools will help ensure more successful results.
Use total cost of fraud model throughout the customer journey
Implementing the right solutions for optimizing TCOF is a balancing act of identifying how to balance the consumer experience with reducing risk. From TransUnion’s perspective, we provide solutions that help you establish the consumer identity. We also help you authenticate consumers as they come back to access their account, by validating that their claimed identity is in fact who they say they are. We do this with a friction-right approach, so that based on what they’re doing, authentication techniques are completely transparent, and others offer strong authentication when needed.
To prevent fraud, you need capabilities in place that can identify risk, both of origination access and payment activities throughout that customer journey, and investigate suspicious behavior to eliminate that from your business. But across the board, this is about optimizing those retail experiences for each consumer interaction.
For more information on creating and optimizing a fraud detection strategy using Gartner’s total cost of fraud model, download the latest Gartner report.
1 “41 Cart Abandonment Rate Statistics.” 41 Baymard Institute. Accessed October 19, 2020. https://baymard.com/lists/cart-abandonment-rate.