An Executive’s Guide to the Top Five Fraud KPIs

Key performance indicators (KPIs) are a commonly used term across many industries. For KPIs to be a valuable way to measure success, they need to be properly defined, capable of being adjusted and connected to one another. When it comes to use of KPIs in fraud management, this is particularly important. With this in mind, let’s take a closer look at the different fraud KPIs, along with how they should ideally interact.

What are the most important fraud KPIs?

There are a number of commonly used fraud KPIs and it’s important to use all of them to get a full picture of fraud management performance. The KPIs are expressed as percentage rates of the following:

Acceptance: The volume of transactions that are accepted after authorization and screening

Challenges: Potentially fraudulent transactions that are flagged for manual review

Denials: The payment requests that an acquirer rejects, plus those your fraud solution identifies as fraud and denies before processing

Chargebacks: What your acquirer discovers as fraud or the customer challenges (for many reasons)

False positives: Genuine customer transactions that are incorrectly blocked as fraud

What can these KPIs tell you?

Acceptance versus denial rates are your most important high-level indicator of success. Unless you are in a high-risk category, your acceptance rates should be at least 75 percent.

Challenges are where to tweak your model to get an optimal acceptance rate that doesn’t compromise fraud rates. Of course, you could challenge everything, but it is not only costly to manually review every transaction, but also creates a bottleneck in your sales process. Having a fraud management solution that can evaluate the transaction and decide how to process it will avoid challenging almost all of your sales.

Chargeback rates are a key measure to monitor, because this is where substantial costs can hit. Not only do you lose the sale, you also lose the merchandise and associated operational costs, plus you potentially risk scheme fines and reputational damage. Keeping a close handle on chargebacks is vital.

False positive rates are also an extremely important KPI for merchants. When you have a high fraud rate, the instinct is often to tighten fraud rules to be more restrictive. However, it is important to do this in the right way to avoid genuine customers getting inadvertently blocked. False positives mean lost sales and frustrated — or even lost — customers. The financial impacts are difficult to fully measure, but monitoring against past and expected sales performance can help. Review your denials; if you notice sales have gone down, it’s time to adjust your fraud solution.

What should my KPI stats look like?

It is valuable to standardize KPIs and view them as a percentage, so you can compare against your own benchmarks as well as industry averages.

According to a recent Merchant Risk Council (MRC) Global Fraud study, the average rates across these KPIs for the general retail segment are as follows:

• Accept: 73-79%
• Challenge: 13-20%
• Deny: 2-4%
• Chargebacks: 0.9%

However, it’s critical to compare your results against standards in your specific industry and in each individual geography you serve. For instance, some sectors and countries are more prone to fraud or have other factors that influence acceptance rates. It’s important that those factors are understood and factored into your fraud KPI measurements.

If you cannot find the relevant average rates for your sector, look for a few industries that have similar characteristics in type, price, quantity, quality and/or seasonality to give you an appropriate benchmark.

Getting the balance right

Just as every industry has different buyer and fraud trends, every business will have a different appetite for risk and certain performance standards they want to meet. It’s important to work closely with your fraud prevention partner to define what those performance standards should be and how your current KPIs compare.

If some of your KPIs are showing off-target performance, it’s valuable to dig into your transaction data to find out why. Then you can make informed decisions about how best to tweak your fraud strategies and tools to find the right balance. Having a fraud solution that is closely tied to your gateway will easily allow for this.

In conclusion, it’s vital to remember that both buyer and fraudster habits are constantly evolving, being affected by season, channel, payment method, sales peaks and the introduction of new technologies — plus many other external and industry factors. This is why it’s vital to constantly monitor KPIs and be prepared to adapt your fraud solution to keep your fraud performance optimal.

 

For more information, check out ACI Secure eCommerce and Why multi-layered fraud prevention is essential. If you need a starting place for industry-specific KPIs, contact us and we will see what rates we currently see for your industry.