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5 Aug, 2020

Is Your Fraud Protection Service Delivering?

E-commerce fraud can cost a business significant loss in both revenue and customers. A fraud protection service can drastically reduce these costs, but is it really worth the price? Before signing up for a fraud protection service or extending an existing contract, it’s a good idea to determine whether the service is delivering, by assessing its ROI, or return on investment.

The shocking cost of fraud

E-commerce fraud might be more expensive than you think. According to the LexisNexis True Cost of Fraud report for 2019, every dollar of merchant fraud this past year actually costs businesses $3.13! reports that friendly fraud will cost merchants more than $25 billion in 2020, or 1.47% of a merchant’s total revenue! This astronomical expense can be especially crippling now for all businesses that are struggling to remain afloat during COVID-19.

Fraud protection services step up to the plate

When merchants sign up for a fraud protection service, they are seeking solutions to the following problems, all of which are outgrowths of high rates of E-commerce fraud:

  • High rate of false declines. This translates into a large amount of legitimate but rejected customers, which can ultimately lead to lost sales and a loss in customer lifetime value (CLTV).
  • Increase in return fraud. A chargeback causes a steeper loss for a merchant than returns. When fraud increases, businesses tend to relax their return policies and neglect to challenge return frauds.
  • High chargeback costs. Chargebacks, or the cost of an accepted transaction that was ultimately fraudulent, are part of doing business, but when these costs grow to an unsustainable amount, they can cut into the company’s bottom line and affect its ability to grow and remain profitable.
  • Decline in merchant sustainability. High rates of chargebacks can bring merchants close to the chargeback thresholds established by credit card issuers. If the business passes that threshold, they may be forced to work with high-risk merchant processors who typically charge higher fees than popular processors. Working with high-risk processors will also directly impact sales and revenue.
  • Rising prices. Merchants are often forced to pass on the costs of fraud to their customers. This in turn can lead to a sizable loss in a company’s customer base.
  • Decline in brand approval. When a business is constantly fighting fraud, its reputation is damaged, occasionally to the point of no return.

A competent fraud protection service will significantly bring down these costs and losses, boost revenue, and allow a business to continue on a path of projected growth and expansion.

Calculating the ROI of a fraud protection service

Merchants generally need to walk a tight line between practicing aggressive caution which may decrease fraud but tends to alienate customers, and adapting a more relaxed approach which increases fraud but attracts customers. An effective fraud prevention strategy will allow a business to offer a friction-free checkout experience without increasing vulnerability for fraud.

When assessing the ROI of a fraud protection service, metrics like chargebacks and brand approval rates should be considered, along with the reversal of loss potential from factors like false declines, CLTV, and brand reputation. While these parameters can be difficult to quantify, they are crucial components of the ROI calculation.

To calculate the ROI of a fraud protection service, you will need access to the following numbers before deciding on a fraud protection service: Total online volume, approval rate, approval volume and chargeback costs. In addition, you must take into consideration additional staffing currently needed to clear any suspicious credit card payments.

For illustrative purposes if your business has $50,000,000 in total annual online volume with an approval rate of 87% that means that 13% of $50,000,000, or $6,500,000 in annual sales, are not being automatically approved, which can result in loss of those sales or additional manpower needed to approve those purchases. Thus additional payroll must also be taken into account when considering the ROI of a fraud protection service. Additionally, your chargeback costs represent an additional loss to your bottom line.

Next, recalculate these numbers as if you were to use a fraud protection service and measure the results against each other.

  • FraudFix empowers merchants to reach an approval rating of 98.5%.
  • This means only 1.5% of $50,000,000, or $750,000 in annual revenue would not be automatically approved by FraudFix.
  • In addition, FraudFix provides the tools and all the information you need to review the 1.5% of the manual reviews and determine whether you want to approve or reject those purchases, thus simplifying the process and eliminating the need for additional staff to handle this task.
  • Under the previous approval rate of 87%, an online annual volume of $50,000,000 would result in additional manpower to approve the $6,500,000 of manual reviews. With FraudFix, the task of manual reviews in minimal and can be handled by one part-time person.
  • Chargeback costs will also be lowered significantly with a robust fraud protection service.
  • Finally, additional sales which resulted from the increased approval rate should be factored in as a gain as well.

While the ROI of a fraud protection service will vary by merchant, it is not uncommon for businesses to see an ROI of upwards of 500%. You can calculate your ROI, using our ROI rate calculator.

FraudFix is committed to providing our clients with strong, dependable fraud protection that can strongly impact your bottom line. Your complete fraud protection is our only priority.