Online fraud is still a big problem and as long as the number of online shoppers continues to grow, so will the

number of fraud cases. According to the European Central Bank there were 7.9 million cases of fraud with a value

of 1.16 billion euros in 2011 of which 56% took place in e-commerce.

European Merchant Services organizes the EMS RISK EVENT annually for retailers who are active in e-commerce

and multichannel. It is an excellent opportunity to increase your knowledge in the field of online fraud, risk

management and advanced fraud prevention and detection tools. We help you to stay ahead of online fraudsters

and to protect your online business by sharing the knowledge and experience of our fraud and risk experts, our

customers and our partners.

Do you want to attend next year’s EMS RISK EVENT?

Please contact the EMS Marketing Department at T +31 20 660 3054 or send an email to

marketing@emscard.com. For more information visit www.emscard.com/riskevent

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Understanding the impact of your fraud strategy

Kieran Mongey

Senior Fraud Consultant, EMEA

24th September 2013

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What we are going to address

• Understanding drivers behind the business case for your fraud strategy

• What are the most effective strategies we should be adopting?

• How can we safely embrace new market opportunities – US Cards example?

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First, a word about ReD

Specialist provider of fraud prevention and payment services

to card issuers, acquirers, merchants, switches and processors worldwide

• Services are agnostic of payment type, payment channel and currency

• Provided as managed services, hosted services or installed software

• Tailored, by expert analysts, to the needs of individual customers

• More than 300 large, blue-chip customers, on six continents

• Hundreds of additional merchants connected through Payment Service Providers

• Proprietary technology and databases; patented neural network technologies

• Privately owned, debt free, profitable and high growth

Trusted by the world’s biggest brands – and by global and regional partners

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The Business Case

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Understanding Profit & Loss in your own business

How is managing fraud different in each sector?

• Retail – Furniture & Homeware

• Retail – Electronics

• Telco – Top Up

• Telco – Contract (with Handset)

• Insurance – Car

• Gaming

• Credit Risk

• Travel

• Financial Services

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Revenue – Costs = Profit

Revenue considerations

• Competitors

• 3DSecure

• Payment Methods (cost per txn)

• Payment Methods (fraud)

• Payment Methods (new customers)

• International card acceptance

• International business expansion

• Saturation point - Products

• Fulfilment risk

• Marketing strategies

• Customer Service ethos

• Product Margin

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Costs to consider

• Manual Review FTE

• Manual Review (other)

• Chargeback Processing

• Fraud Vendor Costs

• Cash Management / Finance

• Customer Service alignment

• Fulfilment monitoring

• IT roadmap

• IT systems capacity

• Head Office Time / Head Count / Consultancy

• Audit (Internal)

• Acquiring Interchange (3DS)

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Business decisions – how do they impact your fraud team?

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Fraud

Team

Systems API

Marketing

Fulfilment

Budget & Finance

Product assortment

Acquiring/

PSP process functionality

Cost centre or revenue centre?

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Decline Rate- Fraud- False positives

Manual Review Rate- Staff- Other costs

New Channels- Cards- Fulfilment- IP

-40

-20

0

20

40

60

80

1 2 3 4 5 6 7 8 9 10 11 12

Net Contribution

Net Contribution

Best Practice Fraud Strategies

12

People and process supporting technology

13

Data

Analysis

Reporting

Education

Rules

Profiling – why is it so critical? (both positive & negative)

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Consumers are continuously presented with offers to spend more money

Banks, Insurers & Retailers are great at it – all driven through marketing and customer profiling

Card number

Amount

Purchase velocities

Billing / shipping details

Email

CV2 AVS

Historically

Standard profiles / data

Low chargebacks orlow insults – not both

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Profile data

Card number

Amount

Purchase velocities

Billing / shipping details

Email

CV2 AVS

Payment details / 3DS responses

Shopper history

Global negative lists / merchant specific positive lists

Unlimited bespoke data field functionality

Product / delivery / customer details

Today

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Profile segmentation

Same day/next daydelivery

Click & collect

International

Marketing segments

PayPal / alternative paymentsNon registered / registered

High risk technology

Aligned to customer service proposition

3D secure status

Mobile payments

Call centre sales

Risk strategies aligned to business requirements

Today

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Turning data into rules

Data

Analysis

Reporting

Education

Rules

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Industry standard merchant KPIs are improving

Prior to Collaboration Today

FRAUD EXPOSURE REDUCED BY

41DAYS

1. Chargeback received from Acquirer 40 days

• 72% within 30 Days of Transaction Date

2. Reporting developed 2 days

3. Screening Database Population 1 day

4. Analysis of data 2 days

5. Education / Present findings 1 day

6. Rule changes 2 hours

TOTAL 46 days

1. Fraud data received from Acquirer 3 days

• 72% within 3 Days of Transaction Date

2. Reporting developed - BI 15 minutes

3. Screening Database Population 5 minutes

4. Analysis of data 2 hours

5. Education / Present findings 1 day

6. Rule changes 2 hours

TOTAL Under 5 days

Data

Analysis

Reporting

Education

Rules Data

Analysis

Reporting

Education

Rules

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Fraud affects all players in the payments chain – what are the issues?

CardholderMerchant

IssuerAcquirer

• Security and confidence• Speed (to enable faster delivery)• Positive customer experience

• Reduced fraud and chargebacks• Reduced costs of managing fraud• Protection for genuine customers, to enable sales• Speed (to enable faster delivery)

• Support for merchants in tackling fraud• Fraud prevention re-sell opportunities• Control of merchant fraud

• Reduced fraud losses and control of chargebacks• Faster fraud detection for improved cardholder experience• Robust, scalable fraud prevention solutions to support growth

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ReD Fraud XchangeTM

Data – fast detection leads to minimal exposure

Key negative data points to be tapping into:

• Negative Databases• 500,000 distinct data fields loaded in June 2013

• Fraudulent card, email, phone, address, IP, Device and generic customer data fields – therefore detects ‘LIVE’ data elements

• Fully automated processing ensures efficiencies in loading data quickly and therefore value of ‘current’ fraud detected

• Data feeds from Underground Online Fraud Lists• Automated Merchant chargeback files• Click & Block declines• Work with Acquirers & PSPs to leverage their intelligence• Internal databases – marketing / operations / fulfilment

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Data – not just Chargeback monitoring

• Related Fraud, Confirmed Fraud & Chargeback Analytics

• Fraud / Data Flags – Profile Building• Data can be marked in accordance with business objectives – not just fraud

• Marketing / New Business / New Markets• Products• Payment Types

• Proactive Fraud Alerts

• Rule Effectiveness Reporting ensures efficiencies are maintained

• Continuous enrichment of data as retailers grow and new fraud trends emerge. What you see as fraud today will not be the MO or trend tomorrow – but it still needs to be stopped!

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Extracting intelligent data

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• Self-service Business Intelligence portal and Operational portal• real-time and near-real-time access to transaction data• proactive fraud alerts

Intelligence into effective & quantifiable rules

Rule Functionality1. Silent Rules – profiling & understand rule impacts pre deployment

2. Click & Block - instant Blacklisting / Whitelisting stopping / accepting immediately

3. Hard / Soft Rules – prioritise rules according to impact & risk appetite

4. Auto analyst rules – reduce volumes in review queues during peak times

5. Auto pilot rules – create subset rules for a defined duration from certain rules

6. Sub-client rules – aligned to how the rule strategy in segmented / KPIs / available data

7. Bespoke rules – commonly building multi-layered rules (5 data combinations)

8. Tumbling & Swapping / Velocity – detects auto-generating cards and emails

Rule Maintenance1. Rule Effectiveness Reporting – ability to constantly monitor and substantiate

performance of rules / modify accordingly

2. Rule Manager – rules can be changed through an easy to use Interface OR through working with your risk analyst

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Rules aligned to sales strategies

Fraud strategies aligned to marketing campaigns to deliver ROI

DENY MORE THAN 4 CARDS PER IP IN 3 DAYS NOT IN EXCLUSIONS LIST

TOTAL HITS IN LAST 30 DAYS 158TOTAL FRAUD IN LAST 30 DAYS 28FRAUD RATE 17.7%

MARKETING CAMPAIGN TO UNIVERSITIES LATE SEPTEMBER

TOTAL HITS IN 3 DAYS 419TOTAL FRAUD IN 3 DAYS 7FRAUD RATE 1.7%

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The devil is in the detail

Related fraud

volumes

International delivery

reject rates

Mobile payment revenue

3D Secure drop out

Marketing campaign success rates

Positive list performance

Foreign card

acceptance

Call centre overheads

Challenged and released

revenue

Continuous performance improvement delivering ROI

The US Opportunity

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The opportunity

• US ecommerce estimated to reach $278.9 billion by 2015 (Forrester)

• 2.84 million tourists visited the UK from the USA in 2012

• These tourists spent £2.4 billion (almost £1 billion more than any other country)

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$ 280bn

The size of the problem

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0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20% 1,40% 1,60%

USA

Australia

France

Canada

Brazil

Netherlands

UK

Germany

Italy

Spain

Norway

Denmark

Saudi Arabia

Belgium

Switzerland

Sweden

UAE

Japan

Portugal

Russian Federation

Attempted Fraud Rate (by value)by card issuing country

Source: ReD European customers, January – June 2013

What makes accepting US cards so difficult?

Problems

• Fraud is high compared to the genuine volume

• Scheme fines and blocks

• Business decision to block transactions

• European fraudsters are buying US cards, and monetising through European retailers

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Causes

• Genuine volume is low

• Business decision to accept US cards leading to increased fraud

• Fraudsters prefer to use US cards – costs less

What is driving European fraudsters toward US cards?

• Compromised US credit cards are cheaper to buy

• $10 compared to $50 (Federal Court Case in the US)

• supply and demand - the market is flooded with cards from the US

• Lower US security - cards are easier to compromise and use

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USA Card Country and Time on File <14

Ship Country

Accepted TXN

Confirmed Fraud

Confirmed Fraud Rate

Related Fraud

Related Fraud Rate

UK 1849 624 34% 1470 80%

Spain 37 24 65% 30 81%

USA 741 11 1% 20 3%

Italy 22 5 23% 15 68%

Turkey 7 4 57% 6 86%

Macedonia 40 4 10% 40 100%

Others 90 3 3% 22 24%

Total 2786 675 24% 1603 58%

Case study – large European airline

Problem

• Denying all US (and Canadian) cards through internal fraud rules, due to scheme requirements

Solution

• Worked with ReD to create a targeted rule strategy to release US transactions

Results

• Released transactions worth €2.7m in the first 3 months with a chargeback rate of 0.1%

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Case study – growing MVNO UK telco

Problem

• Declining all transactions on US cards, but during the Olympics wanted to open up market

Solution

• Targeted rules opened channel allowing low value top ups, targeting tourists and students

Result

• Now accepting c.1000 transaction per month and growing

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Case study – large UK travel company

Problem

• 90% of chargebacks coming from US cards, fined heavily by schemes

Solution

• Created tailored rules

Results

• Reduced chargeback rates from 18% to 1.2%

• US cards now account for only 26% of all chargebacks

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Solutions

implemented

to reduce fraud New solution

implemented

to reduce fraud

Time

Value of fraud

Fraud begins to rise as

fraudsters adapt

Source: Datamonitor

ReD continues to track fraudsters’ movements through reporting and business intelligence tools

Let’s monetise the US opportunity – safely!

• Use your data

• Tailor your rules

• Continuously report and monitor

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Data

Analysis

Reporting

Education

Rules

Don’t block the US revenue opportunity – it is possible to safely accept these transactions

What have we learnt?

Our fraud management checklist:

• The importance of understanding how Fraud impacts Profit outside of just the chargeback line of a P&L – thus driving appropriate fraud strategies

• Adopt best practice strategies at both a micro and macro level

• Use your fraud strategy to open up new revenue streams

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Thank you

Kieran Mongey

Senior Fraud Consultant, EMEA

kmongey@redworldwide.com

+44 (0) 7957 494 119

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