How to Identify Your Total Cost of Fraud and Optimise Your Fraud Prevention Strategy

How to Identify Your Total Cost of Fraud and Optimise Your Fraud Prevention Strategy

As businesses work hard to continue meeting evolving shifts in consumer behaviour, it’s increasingly important to understand and assess overall costs. Perhaps one of the most critical focuses should be around the comprehensive financial impact of fraud solutions.

Gartner’s recent report — How to Create a Payment Fraud Detection Strategy at the Organisational Level — sheds light on how to develop your fraud prevention strategy by identifying the total cost of fraud to your organisation. While the report features a payment fraud detection strategy, the insights presented are actually very applicable to any fraud detection team’s goals:

  • Applying forward-thinking fraud detection strategies
  • Aligning your organisation with a total cost of fraud model in order to understand tolerable fraud rates and their impact on your fraud controls
  • Exploring how to work with cross-functional teams that are also stakeholders

If you’re looking to optimise and understand the impact of your fraud investments, a total cost of fraud model can enable you to determine tolerable fraud rates — defined as the direct cost of fraud, such as stolen account funds or chargeback costs — in order to properly implement the right solutions throughout the consumer journey.

Let’s start at the beginning with learning how to identify your total cost of fraud.

Calculating your total cost of fraud

Gartner’s total cost of fraud (TCOF) model is a fairly straightforward formula in which you add the three core pillars of fraud controls: overall fraud rate, the cost of your fraud tools and team members, and the customer lifetime value impact.

Overall fraud rate
This is simply the sum of your fraud losses which can be any direct fraud costs to your business, such as stolen account funds or chargeback costs.

You might be expecting to aim for a fraud rate of zero, but then you won’t be generating any business. If your fraud rate is too low, your total cost of fraud actually goes up due to false positives, the cost of tools, lost customers, etc. And of course, a fraud rate that’s too high will result in a total cost of fraud that increases alongside it due to escalating fraud losses from high cost frauds like identity fraud and account takeover (ATO). What you’re looking for is the right balance — reducing fraud as much as possible without significantly impacting your customers or team’s operational efficiencies.

The cost of your fraud tools and personnel
Now you need to consider your investments in fraud prevention tools, and understand how effective and efficient they make your team. Have you calculated the amount of work your team can do based on the efficiencies introduced by your fraud controls?

Customer lifetime value impact
Do your fraud controls increase latency on customer interaction or make it challenging for them to verify their identity? Fraud controls have varying consumer impacts and subsequent business impacts — all of which should be considered as they’re implemented.

Total cost of fraud at account login, onboarding and transactions

As you consider the total cost of fraud across the customer lifecycle, there are many different types of consumer interactions. For our intents and purposes, we’re going to focus on three: account login, onboarding and transactions.

Account login
For many businesses, logging in to customer accounts is a significant area of fraud and customer friction. As you add in account access controls, think about how you can reduce friction like password resets, or anything that might create obstacles for the customer. This allows them to easily access their account and execute transactions, thereby improving the customer experience and increasing your overall revenue per customer.

From a cost perspective, you’ll want to focus on account take over since your business bears much of the losses occurring in those channels. There are substantial operational processes due to account access points which can result in spikes in call centre traffic or unnecessary steps that can cost your business and negatively impact the customer experience. Finally, you want higher throughput for consumers: Think about expediting requests from those customers and finding better utilisation of your contact centre agents.

Another major area for potential fraud is customer onboarding — but there are great opportunities here to improve your business’ overall ROI based on the fraud controls you put in place.

Onboarding new customers comes with revenue impacts since any kind of friction can result in abandonment and drop-offs. Additionally, if your identity verification process isn’t precise, fraud controls can result in higher review costs if they’re flagged as a risk. In this case, superior fraud controls and processes can result in higher pass rates, higher revenue per customer, more loyalty, better experiences and higher balances transferred to new accounts.

Basket abandonment is a significant problem with transactions or payments; according to Statista, 88.05% of online shopping orders were abandoned, in March 20201. If your fraud controls create too much friction, individuals will abandon their basket and go elsewhere. And if you aren’t precise enough as you profile risk, you might actually decline or delay purchases from genuine customers, resulting in loss of revenue.

One method we’ve seen directly impact transactions is using Email and Mobile Verification to profile risk. Email addresses are a commonly present artefact in digital transactions which TransUnion can often link to an established identity, to build trust, or conversely identifying certain attributes of an email address which can be highly indicative of risk.

Involving cross-functional stakeholders in your fraud strategy

As a fraud leader, there are many different people you’ll need to engage. It could be your identity and security management team for account access, legal and compliance teams for regulatory environments and data protection, customer experience and marketing for promotions and conversions… the list goes on. As you’re putting a fraud strategy in place, it’s smart to involve each of these departments to truly understand the impact your fraud solutions can have on the overall success of your business.

Ask yourself: What are the challenges of each of these departments and the requirements for success? How does that map to the tools you’re exploring? Understanding everyone’s requirements and including them early in the evaluation of tools is going to improve your path to success.

Solutions for optimising TCOF throughout the customer journey

Implementing the right solutions to optimise TCOF requires understanding how to balance the consumer experience with reducing risk. TransUnion solutions first help you establish the consumer identity. Are they who they say they are? Are they the possessor of that identity, and is there any risk associated with that identity?

We also help you authenticate consumers when they come back to access their account by validating their claimed identity is genuine. Our friction-right approach takes into account what they’re doing — so we have some authentication techniques

Finally, we help you prevent fraud. You need capabilities in place that can identify risk during origination and payment, and investigate and eliminate suspicious behaviour. Still, at the core, the goal is optimising each consumer interaction while protecting them and your business.

Learn more about creating and optimising your fraud detection strategy using Gartner’s total cost of fraud model in the latest Gartner report.

1Statista. 2020. Shopping Cart Abandonment Rate By Industry 2020 | Available at:

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