Fraud score metrics are necessary because all eCommerce merchants run the risk of transaction fraud. And the problem is growing, as global losses due to payment fraud reached an estimated $20 billion worldwide in 2021. Online payment acceptance methods are convenient for consumers, but they certainly allow fraudsters to enact identity theft, account takeovers, and card testing scams.
To help defend against bad actors, merchants use a fraud score. The scoring service assesses online transactions processed through your store. If you can flag fraudulent orders as they occur, you can take action to mitigate your risk (and any potential losses). Let’s look into fraud scoring and list the pros and cons of the fraud prevention service.
What Is a Fraud Score?
A Fraud score is an assigned risk value to an online transaction. Preset rules help determine the risk level of the customer payment interaction. Machine learning examines and compares user activity against previous behavior data to catch suspicious activity and provide fraud alerts.
For example, all users must provide several data points (e.i identification information) before they make a payment. Whether that involves account logins, an IP address, or device biometrics, the payments industry demands identity markers for the safety of all consumers and their data. A Fraud scoring service will measure each data point against a host of stored inputs to determine the authenticity of a transaction.
By comparing positive identification signals against negative ones, the automated fraud prevention engine can create a risk assessment. Even consumer behavior metrics such as pre-transaction history play a role in the evaluation. Transactions deemed risky are then alerted to the merchant, who can then take further preventative action.
How Is Your Fraud Score Calculated?
Specific indicators in a transaction are weighted differently for fraud activity. For example, a payment that does not include card verification values (CVV) security codes or fails the address verification system (two consumer protection methods included in credit cards) is far less secure and involves a high level of risk. Most fraud-scoring software will flag a transaction that does not list such expected security compliance requirements.
Other fraud indicators include:
- Value of sale
- Device configuration
- Shipment method
- Identification markers
- Domain registration data
- IP addresses
- Location
Any business can include or exclude indicator rules as desired. Different industries need different elements to determine transaction risk. The preset rules are never a guess but a set of mathematical algorithms that can accurately assess possible threats.
Benefits of Using a Fraud Score
A fraud scoring service offers several benefits for merchants who want to better defend against payment fraud:
Identify legitimate users
Transactions made by honest users become simple to authenticate. Commonalities among priority customers make it easy to assess the security levels of any transactions. A holistic view of each user who attempts to make a purchase can help with overall store security and data protection.
Reduce chargebacks
The better you defend fraud pre-transaction, the less headache post-transaction. For example, a customer who reports a stolen credit card will initiate legitimate chargebacks for all fraudulent card use, a costly event for merchants. But with fraud scoring, the service can catch suspicious transactions made by a bad actor before they authorize, helping avoid the whole dispute process. Lower the financial burden of chargebacks while creating a safer payment environment for your customers.
Automate and scale
A manual review of each transaction is time-consuming and expensive. But with a system preset and automated for the correct fraud score values, your protection improves and requires less effort. As a result, it is far easier to scale your business—without compromising security.
Reduce friction
A secure payment process instills consumer confidence. Automation also allows for a smooth login process that supports the purchase journey. Machine learning and extended order history can even allow you to reduce needed data points for long-term priority clients, once again giving opportunities that limit friction. The easier the checkout process, the higher reported customer satisfaction and the likelihood of revenues.
Drawbacks of a Fraud Score
While fraud scoring offers plenty of benefits, there are a few cons you should remain aware of.
Bad data (false positives)
Fraud scoring uses rule sets that outline the risk exposure of each transaction indicator. If you calibrate those rule sets incorrectly, the entire system can fail or provide incorrect results. Such situations can also lead to false positives, where the detection system wrongfully accuses authentic transactions. Not only does that prevent a legitimate sale from occurring, but it harms customer satisfaction levels.
Rule creep
To help solve the problem of bad data, many merchants or IT support workers introduce new rules or build complex rule models. Over time, the system grows to such complexity that it becomes wholly unmanageable. You can spend too much time tweaking and adjusting rulesets without catching any fraudulent activity.
Upkeep costs
The economic landscape of the payment industry continues to change. And bad actors will adjust their schemes as market conditions remain fluid. As a result, your fraud scoring will require constant updating. Such repeated and continual upkeep introduces extended costs.
Lack of human nuance
Algorithms and machine learning are adept at flagging transactions, but they can never supply the nuance inherent to a human. Many honest transactions might be odd and appear fraudulent, yet remain authentic. At some level, manual assessment is required. Such additional labor will deter some merchants who want a comprehensive, hands-off solution. While useful, fraud scoring is never 100% reliable, and that remains a drawback.
Fraud Scoring Is Required
Fraud scoring is a helpful preventative service that helps merchants assess transaction risk. When set with accurate rules and data points, the technology can prevent possible fraud, limit chargebacks, and create a low-friction buyer’s journey.
Still, fraud scoring it is not a perfect system. Rule complexity, false positives, and upkeep costs can all hamper merchants and hurt margins. The service works best as a supplement to other fraud prevention software.