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Education

2018 fraud-budget Measure your fraud rate

The average revenue lost to fraud is 1.9 percent, but it
planning varies greatly between different industries and even
from merchant to merchant. Digital goods merchants,
for example, tend to have higher fraud rates than
those that sell physical goods, and subscription-based
merchants typically have the highest chargeback rates
– though there are always exceptions.
Measuring your fraud rate is essential for proper
allocation of resources. If your fraud rate is above
average for a business like yours, it indicates a need
for fraud prevention resources. On the flip side, if your
rate is significantly below the going rate, your security
By Suresh Dakshina measures may actually be too aggressive, creating
Chargeback Gurus unnecessary friction for your customers and hurting
your conversion.
n 2017, the average business lost 1.9 percent of its
revenue from fraud, up from 1.47 percent in 2016, Analyze your chargebacks
according to LexisNexis. This cost has grown year- To further refine your resource allocation, crunch
I over-year for the last five years, becoming a signifi- your credit card chargeback data. Every chargeback
cant burden to merchants. Vesta Corp. reported that when comes with a "reason code"; these codes – properly
expenses associated with fraud prevention, screening and understood – can reveal how effective your fraud
chargeback management are included, the cost of fraud as prevention methods are. By identifying the main causes
a share of revenue rises to 7.5 percent. It's time to update of chargebacks, you can prioritize the biggest problem
your budget to account for this growing concern. areas within your budget.
If, while looking at your year-end profits, you've ever been Calculate expenses
surprised to find a large number in your "losses" column,
you may not be properly accounting for fraud, which is a Next, calculate your expenses, including fraud cost,
pervasive problem due to the rapid rise in fraud. So here training and development, and third-party services.
is a simplified guide for calculating your fraud budget; it Fraud costs
explains the common cost contributors and variables and
how to account for them. Now it's time to calculate some numbers. The first is
Gather data the actual cost of fraud. You've already identified your
fraud rate as a percentage of your revenue, so begin by
The first step in calculating your fraud budget is gathering taking your projected revenue for 2018 and multiplying
data. by that number:

Do a ballpark estimate (2018 revenue projection) x (fraud rate) =
(base fraud cost)
Start with a ballpark estimate of what to expect this Now you have your estimated base fraud cost.
year. In 2015, Javelin Strategy & Research estimated Unfortunately, your actual fraud cost will be higher
that combined fraud prevention and chargeback – after factoring in banking fees, administrative costs
management costs accounted for between 13 and 20 and other related expenses, total fraud costs average
percent of a merchant's total operating budget. Plan for about $240 for every $100 lost to fraud. For digital goods
your fraud budget to land somewhere in this range. retailers, this figure is even higher, averaging $348 per
$100.
Many fraud teams are forced to work with much less.
In the 2017 Fraud Benchmark Report, CyberSource found (base fraud cost) x (2.4–3.48) = (total fraud cost)
that more than half of businesses surveyed spent less
than 1 percent of their ecommerce earnings on fraud Training and development
prevention. The downside of this almost goes without The other major component of your budget will be
saying: though these businesses saved money upfront training and development. The Javelin study found that
on fraud prevention, their fraud losses were much hiring and training staff to manage fraud prevention
higher. Prevention can be expensive, but it's not as and chargebacks typically accounts for between 36 and
expensive as being an easy target for fraudsters. So 41 percent of a company's fraud budget.
allow up to 20 percent of your operational expenses to
go toward fraud management.
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