Every 1 USD of fraud costs the merchant 3 USD in the form of chargebacks, chargeback fees, and potential penalties. There are also the costs of lost merchandise, harm to the investor’s confidence, and other indirect costs, all of which mean that the impact of fraud on margins in any given quarter can be enormous and hard to predict. Compounding the threat to profitability is the fact that ecommerce merchants may over-decline legitimate orders in the name of preventing fraud. And declining too many good orders not only costs you in revenue but can also cost you good customers. However, by working with an accountable fraud partner, merchants can reduce the costs of fraud and its impact on revenue and margins.
With an accountable partner, clients receive a chargeback guarantee that shifts the costs of fraud chargebacks from the merchant to the fraud partner. The success of the partner’s business model depends on their ability to accurately differentiate between good and bad customers, which requires heavy-duty AI and ongoing investment in R&D. Anon-accountable fraud vendor, on the other hand, doesn’t provide chargeback liability, and their business model incentivises them to under invest in R&D. They make the same revenue whether they catch half of the fraud or all of it, and it would even be irresponsible for the CEO of such a vendor to heavily invest in R&D, since it delivers no ROI for them. Most merchants think that non-accountable platforms cost less because their pre-transaction fees appear lower. However, businesses should consider the cost of chargebacks (and associated costs) they will have to pay with a non-accountable vendor, as well as the disparity in performance, potentially resulting in lower approval rates and revenue.
An accountable fraud partner takes on financial responsibility – ensuring that fraud can’t hurt their partners’ revenue or profits through three mechanisms.
First, an approval rate SLA sets a floor on the share of orders that the partner will approve. For instance, the partner commits to approving 98% of the merchant’s orders over the next two years, which allows the CFO to eliminate this variable from revenue forecasts.
Second, an accountable fraud partner offers a chargeback guarantee that shifts the costs of chargebacks with a fraud reason code from the merchant to the partner. When the partner approves an order that is reported as fraud by the cardholder, the partner reimburses the merchant for the chargeback cost. This incentivises the partner to keep chargebacks low and make accurate order decisions.
Finally, an accountable partner’s performance-based fee structure rewards the fraud partner only for approved transactions and provides a disincentive to over-decline orders. As essential as the chargeback guarantee, this fee setup compels the partner to actively bolster revenues and profitability by maximising valid approvals even beyond what the SLA requires. Combined, these elements keep the partner’s goals fully aligned with the merchant’s objectives.
This arrangement also drives accountable partners to make highly accurate decisions. As a result, the partner is motivated to innovate and invest heavily in data science and risk modelling, allowing the merchant to benefit from the latest technologies, methodologies, and AI, without making investments to build this technology from scratch.
Minimising risk exposure is a core responsibility of a CFO in any organisation. In ecommerce, the danger of a major fraud attack is always lurking, creating not only a constant threat of losses but also an ongoing forecasting nightmare – an acute concern for public companies. An isolated fraud attack can spiral into a seven-figure event if it’s not dealt with immediately. Chargebacks and associated costs are a forecasting wildcard, especially with legacy anti-fraud strategies. Having an accountable fraud partner eliminates the unpredictability of fraud costs from the forecasting equation and sets a floor on the total order volume the business can approve. The CFO knows exactly what their minimum approval rate will be, as the liability of paying chargebacks belongs to the accountable fraud partner. In fact, the CFO can predict precisely how much this partnership will increase profits and margins.
Non-accountable vendors that provide non-guaranteed recommendations typically try to steer merchants toward ‘uncovered decisions’ or ‘scores’ because it’s cheaper and safer for them. They have minimal incentive to identify emerging fraud trends quickly since they are not liable. On the flip side, their performance guarantees are meaningless. it’s trivial for them to offer an approval rate SLA–it’s easy to ‘approve’ 100% of orders when you have no liability if you make a mistake.
Similarly, their machine learning models tend to be relatively lightweight and serve better to just screen out egregious fraud. On the other hand, an accountable partner will invest extensively in expensive data science architecture, like models that monitor data drift and detect anomalies. Overall, an accountable partner offers clear decisions and guaranteed financial outcomes. A non-accountable vendor offers suggestions and bears no cost for subpar tech.
This editorial piece was first published in The Paypers' Fraud Prevention in Ecommerce Report 2024-2025, the ultimate source of knowledge that taps into the ever-evolving fraud realm and helps ecommerce specialists protect their businesses with the latest fraud prevention strategies.
As a senior member of the product marketing team at Riskified, Ephy Rinsky drives GTM strategy for Riskified's portfolio solutions. He plays a pivotal role in crafting Riskified's product messaging, competitive differentiation, and market positioning. Formerly a statistics professor at the City University of New York, Ephy is also the author of the award-winning mystery novels Palindrome and The Binding, both published by Harper Collins.
Riskified (NYSE:RSKD) empowers businesses to unleash ecommerce growth by outsmarting risk. Many of the world’s biggest brands and publicly traded companies selling online rely on Riskified for guaranteed protection against chargebacks, to fight fraud and policy abuse at scale, and to improve customer retention. Developed and managed by the largest team of ecommerce risk analysts, data scientists and researchers, Riskified’s AI-powered fraud and risk intelligence platform analyses the individual behind each interaction to provide real-time decisions and robust identity-based insights. Learn more at riskified.com.
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