Calculating the cost of fraud isn’t pleasant or easy. Let’s do it anyway
Fraud is increasing on a global scale and at a worrying rate. Security Magazine calculated it cost $57.8B to businesses in 2018, with an alarming 45% increase due to account takeovers.
Online credit card fraud rose 76% in Australia between 2017 and 2018. The travel industry lost $21B due to fraudsters last year. And that’s before we even delve into bot attacks, account farming and friendly fraud, which now affects everyone, from the iGaming to the dating and adult industry.
This is costing a ton of time, effort and lost resources in Risk Ops. And it shows no signs of slowing down.
A Sneak Peek into the Future – Where is Fraud Headed?
By all accounts, it’s not going to get better any time soon. The problem is compounded by the fact that fraudsters utilize increasingly sophisticated methods, and target a growing number of industries and markets, both using identity and transaction fraud.
Moreover, mCommerce complicates things. The increase in card-not-present payments puts businesses more at risk than ever, so does targeting international markets.
Identity Vs Transaction fraud
While there are crossovers between identity and transaction fraud, it is useful to understand which one is targeting your vertical.
Essentially, managing identity fraud is about controlling which customers you allow in. It is the area of focus for loan providers and financial institutions, for instance. Account takeovers are also the bane of the gambling industry.
Meanwhile, chargebacks and disputed payment fraud are crippling eCommerce retailers, who must therefore focus on transaction fraud, or filtering out bad customer before they pay.
Direct and Indirect Losses
“It is estimated that every dollar lost to fraud ends up losing the organization up to three dollars in indirect cost.”
So how do you measure the true cost of the impact of fraud? Firstly, of course, is the monetary value. It can be calculated by taking a number of factors into account, such as:
- Lost goods, services and products.
- Chargeback costs: depending on the card scheme, acquirer and processor, it can reach $50 per chargeback for retailers.
- Defaulting clients: money that lenders will never see back after it’s been borrowed.
- Wasted marketing costs: the price associated with attempting to attract new clients, who end up damaging your business rather than growing it.
- Regulatory fines: adding insult to injury, many organizations have to pay the price of allowing fraudsters in through government fines – especially in the financial sector.
And of course, you have to take into account the cost of your fraud prevention team.
But there’s more. Indirect losses might not be as easy to measure, but they are just as costly:
- Hacks and security issues put a strain on your IT team
- Support is overwhelmed by customer requests who need to reclaim their accounts
- The finance department must fight chargebacks
- Loss of reputation and brand trust
All the above may lead to lower employee morale, which may even affect the HR department in the long term.
In fact, it is estimated that every dollar lost to fraud ends up losing the organization up to three dollars in indirect costs.
Make a Simple Calculation to See How Much you Lose Directly
Third-Party Fraud Prevention and ROI
For many organization leaders and executives, the first instinct in reducing fraud direct and indirect costs is to look internally. How can we:
- Reduce our fraud rate?
- Increase conversion?
- And solve the bottlenecks faced by our fraud prevention team?
One option is to look at a third-party fraud prevention solution. Of course, it adds another cost layer to your budget. There is also a risk factor when trying new solutions.
But it should essentially be easy enough to calculate your ROI and quickly see if it is worth it for your organization.
For one-time costs, you will only have to take into account:
- Tool research and feature comparison
- IT department time for consultation
- Product customization
- Integration costs
Then, there are a few recurring costs:
- Monthly fees or micro fees (or percentage-based transaction, which can be harder to monitor)
- Accounting costs
- Fraud manager time to adjust the solution
- Potential conversion loss if friction is too high
Fraud Prevention with True SaaS Pricing
As fraud prevention becomes an increasingly important part of business plans, leaders and organization executives cannot ignore the numerous tools at their disposal.
In some cases, they may have to look externally to assist their own fraud team or outsource the whole prevention. And it may be hugely beneficial if the tool meets the following requirements:
- Can it actually reduce my fraud and chargeback rates?
- Will it increase my conversions and ROI on marketing costs?
- Will it cut down manual review time / improve team efficiency?
- Can it be implemented fast, and without hidden costs?
- Can it measure key risk indicators?
- And can it scale without creating bottlenecks?
And perhaps even more granularly, you should look at the fraud prevention pricing model. Does the company offer:
- a clear pricing table and scale on the website?
- transparency about integration costs ASAP?
- Free trial?
- ROI projection before you sign a contract?
- Option to avoid multi-year contracts!
Quite simply, you should have a realistic idea of what our fraud prevention service is like. If it’s not for your company, you should know straight away as to not waste anyone’s time. If you think it’s for you, you should be able to try before you buy.
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Tamas is the founder and CEO of SEON and an expert in all the technological aspects of fraud prevention.