TL;DR: It seems that Etsy has a Risk Operation team with agents that make manual payment verifications. Their fraud prevention system is likely Worldpay but since they process payments worldwide, payments from third-party processors may have required an in-house solution.
The longer answer is outlined as follows. First we focus on payment processing and the five stages a payment goes through. Then, we’ll talk about how Etsy may configure its fraud prevention system and how it reviews payments. Finally, we come back on the specifics of Etsy’s business; we will review its main figures
Five stages of fulfilling an order. In general, processing an order goes through five stages:
- The buyer pays with a credit card, debit card, or another payment method.
- The payment is checked against business rules that evaluate the risk of fraud.
- The payment may undergo manual review if there is a suspicion of fraud.
- The order is validated, and delivery occurs.
- If the payment is declared fraudulent after delivery, a chargeback may occur.
How does Etsy prevent credit card fraud?
— Using Worldpay’s fraud management system and (probably) some in-house solution
Fraud prevention at Etsy. With upwards of 5.6M transactions per year and an average per-transaction revenue of $0.42 to $0.67, Etsy cannot review all payments manually. It requires automation, which Worldpay likely provides. However, because Etsy offers many payment methods in different countries, not all transactions go through Worldpay, which means that some additional business rules to prevent fraud may have been developed in-house.
Worldpay’s fraud prevention system seems to test payments against 200+ business rules, which are based on order information such as the buyer’s IP, payment method, and address. For example, one rule may check whether the buyer’s address matches the country in which the buyer’s IP originates. If so, Etsy may decide to:
- accept the payment;
- review the payment manually; or
- automatically reject the transaction.
Usually, those rules also add points to a sum-score that reflects the level of risk for that payment. If the score is high, the transaction may require manual verification or be rejected automatically.
Challenges faced by Etsy. With 5.6M transactions, it is critical for Etsy to limit friction in the payment flow; Amazon and its “One Click” payment system is the reference in that domain. The goal here is to max out the throughput of the pipeline in terms of speed and capacity while maintaining the level of trust buyers and sellers require in transactions. As part of this goal, the fraud prevention system needs to be configured to:
- limit payment fraud;
- automatically accept as many true clients as possible; and
- limit the number of manual verifications.
How Etsy configures the rules. In general, a company may decide to fully outsource the rule configuration, seek external assistance while configuring them in-house, or configure the rules fully in-house. Because conversion is central to e-commerce, it’s very unlikely that Etsy fully outsources this task.
Like any other major company, Etsy has a team of data scientists. The skills these data scientists provide are key to optimizing the fraud prevention system’s rules. Not having their expertise in-house yields a sub-optimal system configuration that, in turn, could rapidly amount to $1M per year in losses. Moreover, delays in communicating and re-configuring the system may also cost the company money.
How Etsy verifies payments. Companies may outsource 100% of their manual verifications, often by offshoring; review some transactions and outsource the rest; or review everything in-house. Fully offshoring the payment reviews means the company loses some control over the quality of the reviews.
It appears that Etsy has set up two teams of risk operation agents, engineers, and managers across NYC and Ireland, for a total of around 20 people as of 2016. Part of this taskforce is likely dedicated to payment verifications but, as a marketplace, Etsy must also manage disputes between buyers and sellers and prevent sellers from abusing the service, e.g., putting improper items up for sale. The team is likely in charge of these additional risks.
Given Etsy’s volume of transactions, reviewing 1% of its transactions every day would result in a workload of 220 reviews per workday (assuming that there are 260 workdays per year). This means that a team of three to six agents could manage to review 1% of the company’s transactions. This amount would vary depending on the performance of the information system that reviews and manages cases.
I hope this information helps. As usual, feel free to reach out with questions or comments.
Fabrice | Book
About Etsy. Founded in 2005 in New York, Etsy is a global marketplace that facilitates shop setup for those selling handmade or vintage items and supplies as well as unique factory-manufactured items. Etsy’s revenue comes from marketplace transaction fees assessed when sellers list items and when buyers pay (3.5–4%) and from seller services, such as advertisements to promote sellers’ listings. Each segment represents about one-half  of Etsy’s total revenue, which was $273.5M in 2015, i.e. about $140M .
Etsy partners with Worldpay, PayPal, and other processors . The average amount of each Etsy purchase is $24 , which means that Etsy processed 5.6M payments in 2015. Taking 3.5–4% on each transaction, Etsy’s average gross revenue per transaction is $0.84–0.96, whereas Worldpay’s fee per transaction is between 0.75% (for debit cards) and 2.75% (for credit cards) plus $0.25 per transaction (£0.20) . Since we do not know their break-down per payment method (and the costs), let’s assume that 30–50% of Etsy’s revenue (i.e., 1–2% of $24) is spent on payment processing fees. Thus, Etsy is left with $0.42–0.67 per transaction to operate the marketplace and manage its risk.
 About Etsy’s Financials: Finro | Boutique Financial Consulting And Analysis Firm
 Etsy’s Direct Checkout Policy
 Quora Answer: What is the average sale amount on Etsy?