The Impact of Credit Card Fraud From a CFO’s Perspective

As businesses see online credit card fraud increasing, they’re also experiencing its negative effect on their finances, profitability and reputation. And they’re learning that investing in a fraud protection solution is not just an option – it’s essential.

Although a company’s marketing and sales teams are often focused on growing sales at any cost, CFOs have a very specific focus to protect the company’s profits and bottom line. Any e-commerce growth strategy – as well as a fraud management strategy – needs to be weighed against the financial impact to the company’s balance sheets and cash flow statements.

But will this investment contribute to an improved ROI, or will it be just another expense against that merchant’s bottom line?

How Credit Card Fraud Impacts a Business’s Finances

There are three primary ways fraud impacts an e-commerce business’s finances:

• Direct loss: Businesses must mitigate losses like chargeback fees, shipping expenses and lost merchandise.
• Direct cost: Fraud prevention solutions affect operating costs, like IT spending and payroll, and these costs can frequently fluctuate considerably.
• Revenue loss: False declines are a significant opportunity cost that don't display on profit/loss statements, but they can dramatically affect financial performance.

The losses a merchant experiences due to fraud aren’t insignificant. With a chargeback, for example, not only is the merchant out chargeback fees and penalties, they’re also out the product itself, the associated shipping costs and the personnel time spent handling the dispute.

This can have a substantial impact on a business’s financial performance. Consider these numbers:

• 78% of businesses have been the target of a credit card fraud attempt.
• Retailers lose an estimated $118 billion each year due to false declines.
• More than 33% of shoppers permanently abandon a merchant after just one false decline.

In the case of a declined order, the entire investment a merchant makes to acquire that order goes to waste. Whereas every order that is not declined has a margin impact higher than average because merchants only need to consider the marginal costs of that order.

To minimize these losses, businesses must invest in fraud protection solutions — and this means incurring capital expenses, which isn’t always appealing to CFOs.

When merchants select in-house fraud prevention solutions, they must expend funds on hardware and software. Plus, they also face the increased operating costs associated with the additional personnel, maintenance and support contracts required of an in-house solution.

In contrast, merchants adopting comprehensive managed services solutions generally don’t see these same expenses. Their capital expenses and general operating costs for fraud prevention are virtually eliminated; however, they do incur the costs of the managed services solution itself.

How Implementing a Comprehensive Fraud Prevention Solution Can Increase Profits

When e-commerce businesses fall victim to fraud and see the effect it has on direct costs, direct losses and revenue losses, they realize investing in a customized, comprehensive fraud protection solution is actually a fiscally sound investment.

In fact, a comprehensive solution can help businesses maximize their ROI by returning more than the expected reduction in fraud losses. Don’t underestimate the other financial benefits a comprehensive fraud protection solution can offer, such as:

• Improving customer loyalty by increasing real-time communication, approving only legitimate transactions and protecting sensitive information.
• Reducing fraud costs on all levels, like legal costs, personnel costs for researching and defending against false declines, and reputational damage.
• Enhancing operational efficiency by streamlining transaction approvals, eliminating the need for establishing fraud management SOPs, and eliminating the costs associated with getting an in-house program up and running.
• Realizing improved financial performance when compared with other types of spending, such as advertising or training staff.
• Improving cost predictability and forecasting because the price is fixed per transaction and will vary proportionately with demand. On the other hand, in-house costs don’t always follow the same ratio, especially when demand fluctuates.

What merchants must remember, however, is that not all fraud protection solutions are created equal. It’s important to evaluate the options available and choose one that aligns with their goals, includes the features they need and ultimately improves profitability.

Some features to look for when selecting a fraud protection solution include:

• Advanced fraud screening technologies: Integrating multiple technologies into a single platform that screens every online transaction can reduce fraud and loss.
• Human analytics and machine learning: A combination of big data analytics, statistical intelligence and human expertise offers a precise balance of fraud protection and maximized sales.
• Dedicated outsourced teams: Outsourced credit card fraud management teams provide a valuable perspective and the dedicated resources to keep current on evolving fraud patterns.
• Chargeback guarantee: A 100% guarantee protects the merchant in case a chargeback slips through the fraud prevention solution.

Balancing Expenses for Improved Fraud Prevention Efforts

Fraud doesn’t have to be an inevitable cost of doing business. And businesses don’t need to figure out credit card fraud protection on their own. They can – and should – draw on the knowledge of experts for guidance when it comes time to implement a fraud protection solution.

When your business is ready to consult with trusted credit card fraud expert, contact ClearSale. Our analysts can help you integrate a fraud protection solution into your e-commerce environment that will help you balance revenue loss, direct loss and direct costs with improvements to approval rates, chargeback ratios and fraud prevention.