Search results:

November 7, 2016

What are the benefits of doing proactive fraud detection?

What are the benefits of doing proactive fraud detection?

TL;DR: Proactive fraud detection offers macro- and micro-benefits. Macro-benefits relate to your business as a whole, e.g., staying away from payment fraud, chargebacks, and card networks with high-fraud-rate procedures. On the other hand, micro-benefits relate to your ability to prevent repeat fraud offenses (RFOs) and detect fraudulent transactions at their onset, when they are less complex to deal with and require less expertise.

We review the benefits of proactive fraud detection.

Macro-benefits. Without screening in place, fraud attempts get through and end up as chargebacks. One way to protect yourself is to enable 3DSecure [1]. This mechanism requires cardholders to know their card details and a security challenge, e.g., a code sent by SMS or e-mail, a password, or an additional knowledge factor such as their birthdate. When cardholders pass that challenge, the 3DSecure ruling shifts the liability of the loss to the issuing bank, thereby protecting merchants against chargeback.

3DSecure is a sort of insurance, which implies that limits apply. One of those limits, which are set by credit card networks like Visa or MasterCard, could be to have less than 2% of your sales volume be fraudulent, although other dimensions are also checked. In normal operating conditions, most merchants fall below those limits, but if your fraud rate goes above the limit, the card network will trigger an emergency procedure and watch your merchant account closely. If your fraud problem does not improve rapidly, your account may lose the protection conferred by the liability shift, thereby exposing you to chargebacks.

Therefore, the first obvious benefit of detecting fraud proactively is that you won’t have to dedicate extra resources to fighting fraud in an emergency or abruptly limit the range of payments you accept in an attempt to bring your fraud rate down. This way you will stay under the limits defined by the different card networks, thereby preventing over 2% of your revenue from being charged back from one day, when you were still protected, to the other, when you were not protected anymore. I refer to these benefits as macro-benefits because they relate to your merchant account as a whole.

Micro-benefits also exist. For instance, fraud attempts are often repeated multiple times with a similar modus operandi; such frauds are called RFOs. The challenge is to detect them rapidly and adapt your detection system. This way, new fraud attempts of the same type are detected and stopped at their onset without the perpetrator knowing. Hence, proactive fraud detection helps you prevent RFOs and decrease your total number of fraudulent transactions.

Another point to consider is that trying to detect fraudulent transactions in an emergency is generally more complex than properly planning your fraud detection efforts before you experience fraud. This complexity may arise because of technical issues, e.g., your fraud detection system does not measure what’s needed to screen the fraud out. It will take time before you can add this new measure. Furthermore, the limited design of your IT may also hinder your ability to detect fraud efficiently and rapidly. Finally, more expertise is necessary to deal with emergencies than is needed in properly planned situations. In sum, the additional complexity and the need for expertise are likely to lead to cost overruns that could be prevented if fraud detection is proactively managed.

Fabrice ´


[1] 3-D Secure - Wikipedia

[2] EMV - Wikipedia (cf. liability shift)