When verifying CNP transactions for possible fraud, when should a merchant make the decision to decline a credit card transaction or consider outsourcing the risk by purchasing insurance from a third-party verification company that offers an insurance guarantee?

While there are many factors to consider, we will focus on four core, basic risk factors, to compute and include in your assessment. These factors resemble the computations which smaller insurance liability companies consider when setting their “maximum coverage” amounts.

1. What is your current “fraud-missed rate”? – This is the average rate of fraud that “slips through the cracks”. These may be unsuspected transactions that are being approved with automation or via your “manual reviews” that turn into fraudulent chargebacks.
2. What is your “typical” transaction amount that can cover itself in the event of fraud? – Unlike your “average” ticket amount, the typical amounts are the amounts that pass through your system regularly. For example, your average ticket size may only be $800 while you regularly/typically receive CNP transactions in the $2000 range.
3. What is your profit margin? – To make a proper risk assessment to decide when to approve/decline a transaction, it is imperative that you factor in your profit margin on the particular transaction. The higher the margin, the greater risk amount you can afford to cover in the event of fraud.
4. What is your “maximum allowable CNP amount” – This amount can be predetermined roughly after you know your figures for the first three factors and will be demonstrated below.

Remember, that the cost of online advertising is on the rise and your company’s customer acquisition costs come at a great expense. You want to be sure you are maximizing and approving every risky transaction that is within your means. Those transactions that are beyond your means should be outsourced to a third-party insurance company and not be systematically declined by your approval software or analytic team.

Case in point, if you get 10,000 transactions per month, with a computed average of $800 per ticket, with at least 100 transactions being $2000 or more, with a current fraud rate of half percent/50 basis points, your profit margins are 20%, resulting in $40k profit for your 2k orders, you can probably afford to take some minimal risk on your own. If you currently receive less than 4 orders above  the $2k range in an average month, you should probably consider outsourcing the liability or insist that the customer make payment via wire transfer. Third-party insurance companies, compute their risk based on statistics spread out over many merchants, enabling them to afford greater risk. 

Happy Selling and Verifying!