Are High-Security Checks Worth It?

by Florian Tanant
Key Risk Indicators are powerful metrics, but they are harder to understand than KPIs. Should you use KPIs or KRIs to measure your risk team’s success?
The short answer is that you need both. But because there still seems to be confusion between the two types of metrics and their usage, we wanted to break them down in an in-depth post.
So without further ado, let’s start by looking at what Key Risk Indicators are, and how they can help your RiskOps, or risk operations.
A Key Risk Indicator, or KRI, is a measure that indicates how damaging an activity might be. It’s a key feature of RiskOps analysis and risk monitoring, whose goal is to predict how likely an action is to hurt the company, either financially or because of a bad reputation.
This is especially useful for upcoming projects, whether it’s to take on more transactions, attend a public event, or launch a new product.
The key difference between a risk management KPI and a KRI is that key performance indicators are designed to measure how well (or badly) things are going using historical data. Key Risk Indicators, on the other hand, point to future adverse impact.
In other words, KRIs can be used to measure risk that hasn’t happened yet, which is useful for unveiling new growth opportunities, or assessing which processes need to be optimized.
A good way to know if you’re dealing with a KPI is to ask if it measure how well your risk team doing. A KPI example would be to log and monitor the chargeback dispute success rate per agent.
If the data you use measure helps anticipate a risk factor, then it’s a KRI. An example would be to estimate how many more cybersecurity attacks you would risk by launching a new product.
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As mentioned above, KRIs help us see where risk could potentially exist. Using them can help with a multitude of scenarios when working with unknowns:
A KRI should help you answer questions in the following scenarios:
As you can imagine, there are two things you need to deploy them: a strategy and access to the right data. The strategy part has to do with the selection of the right KRI, but also understanding if you will be able to measure it.
Access to the right data comes from your tools. Is your data accurate? Can you quantify doubts with numbers? And which monitoring, tracking and reporting tools do you use?
An interesting point is that you can actually use these large-scale metrics to focus on more granular KPIs. Following our key characteristics of KRI, you could use the cost of an attack against your business to:
Interesting (and very useful questions you could answer include):
And crucially, you could estimate the value of hidden or invisible risk.
Once you have found a satisfactory way to calculate the metrics, it’s up to you to decide how transparent you are with them. They can be useful to bring up to upper management, especially if you foresee a drastic increase in risk.
If they touch upon more personal performance (for instance those looking at cost saved per agent), you might have to mask the agent’s identity by using IDs. Too much open data may make people uneasy and actually disincentivise the worst performing team members.
However, sharing enough data with the team may help them self-regulate and help each other without requiring additional push from management.
You can also use KRIs to justify promotions, bonuses, or internal training if needed. It’s also useful to know if you should invest in specific software or improved infrastructure, as you can measure ROI against concrete numbers (hours saved, P&L, employee performance, etc…).
Now we’ve established the difference between KPIs and KRIs, let’s see how this applies to fraud prevention.
In the context of risk management, KRIs help managers with their balancing act. On the one hand, they want to block as many fraudulent transactions as possible. On the other, they want to accept as many transactions as possible. If you were to block all transactions, the fraud rates would drop down to 0%.
So a standard KPI for measuring fraud rates would look like:
Fraud = chargebacks + refunds / total accepted transactions in a given time period.
But these results also need to weigh in your acceptance rate (ratio of approved vs declined transactions).
Moreover, factoring false positives into the equation can be tricky, because you may lose more than the value of a transaction. A false positive could turn a loyal customer towards competitors, which means your customer lifetime value (CLV) and customer acquisition costs (CAC) are also wasted.
So we’re now already looking at a much more complex equation:
Cost of fraud = transaction value + chargeback fees vs. false decline = transaction value + CLV + CAC
As you can see, the cost of fraud can be a very strong KRI because it gives us a better view of how fraud affects various business areas.
More importantly, you can use that number to spot when something goes wrong. If, say, a payment service goes down, you should immediately see a change in the numbers.
For this example, we’ll look at KPIs that are relevant for online stores and e-commerce, but many of them can be adapted to any kind of transaction, be it a SaaS or a B2B business.
The key question many businesses fail to answer is: how do you measure something that isn’t there?
More specifically, how can you fight fraud if you’re not even certain that you are a target?
Let’s not forget that the ultimate goal of fraudsters is to not get caught. If they are successful, you’ll have an excellent fraud rate – but that won’t mean you’re not under attack. Conversely, if your fraud prevention system is too rigid and treats every customer as a fraudster, you’ll lose out on business.
The solution is to take a holistic approach to risk management and RiskOps, and to measure potential threats as well as existing ones. This is precisely where KRIs or Key Risk Indicators can help.
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Key risk indicators are a form of measurement used by a business / organization to manage and analyse potential exposure to risk whether financial, reputational, or compliance-related.
Some examples could be the turnover in staff, the number of processing errors or the number of viruses, phishing attempts, and other cyber attacks the company has faced.
KRIs allow companies to better identify and predict any potential exposure to risk, before anything serious takes place. Companies that understand where they need to strengthen can be more proactive in protecting their business.
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Communication Specialist | Florian helps tech startups and global leaders organise their thoughts, find their voices, and connect with customers worldwide.
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