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The most advanced approach when choosing a fraud prevention tool is to integrate more than one solution within your company and then compare results between providers. Read more about this construction and learn how to set it up to your benefit.

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What is card not present fraud?

Let's start with the basics. Card not present fraud is the phenomenon of somebody using a stolen credit card number to purchase goods or services online. This ends up hurting merchants in the form of chargebacks and chargeback fees. It is the chargebacks and their fees which have triggered the obsession with fraud rates in fraud prevention communities.

Introduction to fraud prevention solutions

Online merchants with more than 10,000 orders a month will face issues with fraud. The first instinct of these companies is to find hacks to solve this problem; small rules here and there which limit both their good customers (false positives) and the level of fraud in their platform. It is at this point that players start to look around at different SaaS solutions for fraud prevention. They find a couple, conduct demos with them and choose one. And that is when the show begins.

How can you know if your fraud prevention solution is doing a good job?

Every merchant I talk to (I talk to dozens a week) asks me, what levels of (1) acceptance rate, (2) manual review rate, (3) fraud rates do you accomplish with your clients? They are trying to bench themselves against their peers in order to know if switching fraud prevention partners makes sense. Unfortunately, it's not possible to answer those questions. Every merchant's traffic is different, that means that you can't compare these rates from one merchant to another. Their concern is very legitimate; they are paying a lot of money for a solution and they don't know if they are getting a good service. It's like buying a Honda and not knowing if everyone else is driving a Bentley for the same price!

Working with more than one fraud prevention solution

A few very fast-moving and innovative companies have introduced what we believe to be the most sophisticated fraud prevention setups in the world. Their systems allow them to compare results from more than one solution quickly and continuously - that means that you send transactions only to providers who give you the best results in each geography, product category, price point etc. It allows them to conduct continuous A/B testing. Companies like Despegar and FarFetch are improving their rates following strategies similar to this.

These players get the benefits of:

  1. Testing new fraud prevention solutions quickly and cheaply
  2. Get better pricing agreements with their partners due to the competitive pressure they are under
  3. Ensure that they are getting the best results they could possibly be getting with the traffic they are acquiring

Constructing a setup like that is a lot of work, is it worth it?

Well, let's calculate!

For a merchant selling 100,000 pairs of shoes worth $100 each, let's imagine the following scenarios:

Current fraud prevention solution Potentially better solution
Acceptance rate 93% 95.6%
Manual Review 5% 3%
Rejection rate 2% 1.2%
Fraud Rate 0.3% 0.28%

Here we see the importance of fraud prevention solutions and their performance. In this case, the benefits would be:

  • 260,000 USD increase in revenues
  • 40% decrease in manual review costs or burden
  • 20,000 USD decrease in chargebacks

Here we see that chargebacks are not all that important, something we have written about at length before. We also see that the effect on revenues is sizable - do you know of any other initiatives in your company which would increase conversion rates by 2.6%?!

I'm not arguing that all of the solutions you can try will improve results in this way. The point is that you should have an efficient system which allows you to test whether that is the case or not!

Makes sense, how do I set this up?

The easiest way to start a setup of this kind is to have a streamlined way to conduct what we call: "micro-scale POCs". This means that you integrate a new solution but only follow their recommendations on the smallest possible statistically significant piece of your traffic while providing all traffic to all fraud prevention solutions. This will ensure that you minimize your risk but still get meaningful results. Most fraud prevention solutions in the market will give you preferential contract terms to get the opportunity to integrate their solution to your flow (unless they don't believe in their solution - don't work with those!).

An added benefit is that as a fraud prevention solution provider, if you acquired the account in that way you know that you could just as easily lose the account to a competitor. This will keep your fraud prevention solution from becoming complacent and provide you with the best results they can achieve.

Would you like to see more ideas about testing and comparing fraud prevention solutions for your business? Check out this article by fraud prevention expert Adam Forma.


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