Measuring fraud impact: The KPIs that matter

KPIs that can assess the scope of your fraud problem

Fraud KPIs can help you understand which security risks you’re guarding against and identify potential areas of vulnerability. This way, you can be sure you’re implementing the right fraud prevention solutions.

Given the many types and effects of fraud, it's important to tailor fraud KPIs to the specific needs of your business. Depending on your industry and payment methods, you may prioritize different fraud metrics and prevention goals.

To start, you can use these KPIs to assess your fraud issues:

Fraud rate

Fraud rate measures the number of confirmed fraudulent incidents over a specific period of time. Breaking down different fraud rates can help assess where vulnerabilities may be.

For example, you can narrow your fraud rates by different factors, such as:

• Attempted transactions: How many fraudulent transaction attempts have been made and detected? This can help contextualize your business’ approval rates. A low approval rate, for instance, could mean your fraud prevention systems are effective at blocking suspicious transactions. A high approval rate, on the other hand, could indicate that your fraud prevention system is failing to screen suspicious payment attempts.
• Fraud types: What forms of fraud are you facing and which are the most prevalent? This can help gauge which solution you may need. Common fraud types generally include identity theft, account takeovers, carding attacks, payment card fraud, and fraudulent chargebacks.
• Severity: How much will each incident or type of incident impact your business and your customers? Classify fraud incidents by high, medium, and low severity.
• Channels: Know where fraudulent payment attempts are coming from, such as online, mobile, in app, call center, in person. You can further segment this data by device type, specific browsers, or even OS device updates.
• Customer  types: Is fraud more prevalent in specific customer cohorts? For example, you may compare new vs. existing customers or customers from certain geographic areas or age demographics.
• Timing: When is fraud most likely to occur? Analyze data by time of day, day of week, or shopping season.
• Payment  methods: Which methods have the best approval rates? Identify and promote the payment methods that have the most favorable legitimate approval rates, such as credit cards, digital wallets, or gift cards.
• Product  types: Which product categories (such as electronics) are more susceptible to fraud or lucrative for resale online? You can even drill down to the SKU level to see which products are most vulnerable to fraud.
• Transaction  amounts: What’s the average order value on your most frequent fraud attempts? Some fraud attacks are high-volume and low-ticket, while others target high-ticket items.

Dispute rate

Dispute rate measures the number of payment disputes a business receives over a period. It’s important to understand the difference between run-of-the-mill disputes and fraudulent disputes.

A customer might submit a legitimate dispute because they didn’t receive their item, the item was damaged, or the item didn’t arrive as described. Shoppers may also make a legitimate transaction and then dispute it to get their money back — perhaps because they placed an order by mistake, or a family member used their card without permission.

On the other hand, “friendly fraud,” also known as “customer abuse,” is when a customer submits a payment dispute in the form of chargeback fraud or refund fraud.³ This can occur when someone intentionally makes a purchase and then disputes it to abuse a company’s refund policy and receive products or money for free.

To better understand your dispute rate, consider measuring your:

• Disputes-to-overall-transactions ratio: How many disputes are you seeing as a percentage of overall transactions? Compare this ratio to industry benchmarks to understand the severity of the problem.
• Disputes win rate (also known as “chargeback recovery rate”): How often are you winning disputes and recovering the disputed revenue? Merchants can measure their dispute win rate or chargeback recovery rate to understand how many chargebacks were successfully processed vs. how many were challenged and won by the business. This can help merchants see how effective they are at winning back revenue lost from chargeback fraud.

KPIs that can assess how much fraud and disputes are costing you

Use fraud KPIs to measure how much fraudulent payments are costing your business. After all, the true cost of online fraud is much more than just the cost of lost goods.

To gauge total revenue loss from fraud, businesses may consider:

• Cost of goods or services: How much revenue are you losing from products that were fraudulently purchased? This includes all the costs to make, market, and ship the product.
• Cost of fraud prevention resources: How much are you spending to prevent and manage fraud? This includes the cost of people resources and technology to prevent fraud and identify security risks.
• Cost of dispute resolution resources: How much are you spending to contest payment disputes? This includes the cost of people resources and technology to process and resolve disputes.
• Average time to recover fraudulent chargeback revenue: How much time does it take to dispute chargeback fraud and recover lost funds? A long or complex recovery period could impact cash flow.
• Cost of penalties from banks: How much are you paying in chargeback rates or fees issued by financial institutions for fraudulent transactions? If you are flagged as a “risky” merchant by issuing banks because of high chargeback rates, you could be penalized.
• Customer lifetime value: How much potential profit are you missing out on by losing repeat customers to fraud concerns or frustrating checkout experiences? You may prioritize fraud management for loyal or high-value customer segments.
• Fraud to sales ratio: What is the number of fraudulent transactions you process divided your total number of sales? This number should ideally be less than 1%, but it can fluctuate depending on your industry

KPIs to help determine the sweet spot between fraud management and friction for your customers

Fraud protections are important, but they can also slow down the checkout process and frustrate customers — and no one wants to decline a good transaction from a legitimate shopper.

Businesses may consider allowing for more authorizations and risk incurring potential losses to avoid this friction. Your business and customers have a unique risk tolerance that should be monitored and adjusted as your priorities evolve.

Use these fraud detection metrics to help strike that delicate balance between managing risk and delivering satisfactory customer experiences:

Approval vs. decline ratio

If too many payments are being approved, how can you better filter fraudulent transactions? If too many payments are being declined, how can you streamline approvals? Avoid turning good customers away by understanding your approval vs. decline ratio and deciding what your business’ ideal ratio should be according to your goals.

Authorization rate or transaction approval rate

How many transactions are authorized and approved in a certain period? Among these approved transactions, identify how many are legitimate and how many are fraudulent.

Total decline rate

How many transactions are declined in a certain period? You can break this down further by tracking:

• False positive rate: How many declined transactions were actually good and mistakenly flagged as fraud? A high false positive rate may result in less revenue and more customer friction.
• Precision rate: How many declined transactions were actually fraudulent? A high precision rate demonstrates that your fraud protection tools are working efficiently.
• Recall rate: How many declined transactions were reversed? Some may have been mistakenly flagged as fraudulent and then eventually approved.
• Decline rate by reason code: Why were these transactions declined? To answer this question, you need complete visibility pre- and post-authorization. Most fraud providers only provide post-authorization fraud checks and data. A unified payments and fraud solution can give you the complete picture.

Checkout latency due to fraud checks

How much is your checkout process slowed down by fraud checks? Do stricter fraud prevention parameters lead to more cart abandonment and revenue loss? Studies show that one reason customers may abandon their carts is because the checkout process is too long or complicated.³

Customer complaints related to fraud and false declines

Do customers voice their frustration about falsely declined payments or fraud concerns? This could affect their relationship with your business.

Response time

How long does it take your business to resolve an incident of fraud? If and when incidents of fraud do occur, you’ll need the tools to quickly identify and address them.

Employee preparedness

How confident are employees in their ability to identify and address incidents of fraud?⁵ They should be properly and frequently trained on fraud prevention and resolution tactics.

Implementing KPIs

Merchants should continuously monitor fraud KPIs in real time to spot risks early on and prevent fraudulent activities.

These tactics may help:

Create a top-line performance scorecard

Pick the most important KPIs for your business to report on. The fewer, the better, and be sure they’re aligned with your overall business goals. Also, determine your reporting period (i.e., quarterly, annually, monthly).

Decide which secondary KPIs are most important and start a document for tracking them

These more granular KPIs will help you diagnose risk issues and create strategic plans to address them.

For each KPI, set targets that align with your priorities and risk tolerance

Use competitive benchmarks or internal baselines to help guide your targets.

Invest in advanced fraud protection and reporting tools

Choose a fraud provider that can help:

• Diagnose problems, identify trends, and benchmark results against businesses like yours.
• Gain a clear view of your whole transaction lifecycle. Pre- and post-authorization data can help you better understand why payments are declined.
• Implement adaptive technologies that change according to the latest fraud trends and global data.
• Leverage a high-quality, large set of real-time consumer and merchant data.
• Access solutions that are customized to your business goals, customer behaviors, and risk assessments.

Risk solutions to help you meet your goals

PayPal can help merchants fight criminal fraud, resolve friendly fraud disputes, and navigate the evolving payments landscape with multiple fraud and disputes solutions:

• Fraud Protection Advanced is an enterprise fraud prevention solution that provides businesses with machine learning-based insights and tools that allow for expert human review and control. Customize the solution to your business’ needs by choosing your risk tolerance and creating your own filters and block lists. Use automation to instantly approve, decline, and flag transactions based on those filters, and access a control panel of advanced reports to continuously track and optimize your fraud metrics.
• Chargeback Protection is for businesses who prefer to outsource their fraud management. It is a full fraud prevention tool that reimburses merchants for any and all eligible chargebacks that get through.
• Dispute Automation helps large businesses automatically respond to disputes to save time and resources, and optimize chances of winning. And businesses only pay for the disputes they win.

PayPal uses machine learning, predictive algorithms, and granular data analysis to help legitimate transactions go through at a higher rate, so you can avoid friction for good customers at checkout. The platform pulls from 10+ billion digital identifiers⁴ and $1.5 trillion in total annual payment volume⁵ to help you identify fraud patterns and proactively address fraud incidents before they occur.

Help fight fraud with PayPal

As fraud becomes more complex, so does fighting it. That’s why merchants must proactively measure and optimize the effectiveness of their solutions with fraud prevention KPIs. Only then can they make informed, data-backed decisions to reduce fraud rates and improve customer experiences at checkout.

PayPal offers a suite of fraud protection tools and resources to help businesses assess their fraud problems, set attainable goals, and find the right solutions for their needs.

Learn more about how to manage fraud and disputes with PayPal or schedule a free consultation with a risk expert.