Fraud continues to become more complex as new buying methods and technologies emerge — with potential security risks threatening businesses at every turn. Therefore it’s essential for merchants to actively track fraud key performance indicators (KPIs) and measure the impact of their risk solutions.
Approximately 65% of organizations experienced fraud attacks or attempts, according to a survey underwritten by J.P. Morgan.1 And they’re paying the price: Merchants lost $38 billion to online payment fraud in 2023 — and that number is expected to reach $91 billion by 2028.2
By tracking fraud KPIs, merchants can better assess potential security risks and set actionable goals to achieve lower fraud rates or losses
In this guide, learn more about how to measure fraud prevention KPIs, stay on top of current fraud trends, and safeguard your business with PayPal’s payments risk solutions.
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 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:
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:
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:
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:
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.
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.
How many transactions are declined in a certain period? You can break this down further by tracking:
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
Do customers voice their frustration about falsely declined payments or fraud concerns? This could affect their relationship with your business.
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.
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.
Merchants should continuously monitor fraud KPIs in real time to spot risks early on and prevent fraudulent activities.
These tactics may help:
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).
These more granular KPIs will help you diagnose risk issues and create strategic plans to address them.
Use competitive benchmarks or internal baselines to help guide your targets.
Choose a fraud provider that can help:
PayPal can help merchants fight criminal fraud, resolve friendly fraud disputes, and navigate the evolving payments landscape with multiple fraud and disputes solutions:
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.
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.
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