DRF EU Fraud Round Table April 26, 2006

E-Commerce Retail Market Trends:Fraud and Risk Mitigation

Keep Pace and Reduce Operating Expenses by Automating Back-End Manual Order Review Processes

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Evolution of a merchant’s web store

Make decision to sell on Internet Focus IT effort on building / supporting website Generate sales Build back-end systems to account for sales

Realize that certain sales were fraud Chargebacks grow until decision made to minimize risk Purchase front-end order screening solution to identify suspicious orders

Struggle to review suspicious orders Increase review staff Utilize available systems to review orders or build dedicate order review

platform Limit who to sell to and what is sold Accept/reject orders without adequate review

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How is fraud managed?

Front-end screening tools Commercial apps or internally developed decisioning engines to

determine if an order should be accepted, rejected or subjected to further review

Dedicated fraud review staff Typically entry level positions Often have other responsibilities

customer service reps or fulfillment specialists Back-end review processes

Most merchants have not developed dedicated platform to conduct review

Utilize platforms not designed for fraud review resulting in inefficient results

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Front-end order screening is only the first step

Obtaining recommendation to “Accept / Reject or Review” from front-end decision engine is just the beginning

Rules can be created to easily identify valid customers (“accept”) and blatant fraud attempts (“reject”)

But most fraud transactions fall into the “review” bucket

Back-end manual order review procedures cannot be avoided and are often much more costly

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Back-end order review procedures must also be considered

Fraudsters test websites daily and do their best to blend with legitimate customers

There are no “silver bullet” rules or procedures that will screen out all fraudulent or identify all valid orders

Manual order review of suspicious orders cannot be avoided

Without manual review, legitimate orders are rejected and fraudulent orders are accepted, resulting in lost profits

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Why is manual review a great concern?

Extremely costly as transaction volumes grow Most merchants reviewing in excess of 25% of all orders received –

some review up to 1 in 3 orders

Limited IT resources available to build effective review platform

Most perform review with inefficient (highly manual) processes/procedures

Review agents look at less than 20 orders per hour on average

Most solve problem by: Adding more staff or Accepting / rejecting more orders without adequate review

The impact of inefficient manual order review procedures goes well beyond the receipt of chargebacks

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Impact of inefficient order review procedures

Increased rejection of legitimate orders

Must reject more suspicious orders if unable to review them – many will be good orders

Increased operating cost

Must hire more staff to cope with increasing transaction volumes

Increased acceptance of fraudulent orders

Or, must accept more suspicious orders if unable to review them – some may turn out to be fraud

Reluctance to enter new markets or offer new products

Fraud concerns will limit you ability to expand web store

Consistent fraud losses and persistent fraudulent attacks

When criminals are able to succeed they will continue their fraud attempts

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Typical manual review procedures

Verification of information provided by customer Billing and shipping information May involve contact with customer or card issuing bank

Analysis of other order data Billing, Shipping and IP address locations Negative data Time of purchase Inconsistencies / unusual order characteristics

Order resolution Accept or reject

Post fraud identification procedures Update negative files Perform link analysis

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Effective system should automate both the front-end and back-end procedures

Effective fraud prevention system must:1. Identify orders that should be accepted, rejected or subjected to

further review (FRONT-END)2. Prioritize orders that require review (FRONT-END or BACK-END)3. Provide efficient order review platform (BACK-END)4. Address post fraud identification procedures (BACK-END)

Merchant left on their own to develop solutions to address items 3 and 4 above

Commercial applications available today do not addressed the entire problem

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Technology is the answer

Businesses must make better use of technology to manage the order review and acceptance process in order to maximize the benefits of the Internet as a channel for profit growth

Business Process Management (a/k/a: workflow) applications are being deployed throughout organizations to improve user productivity

to date, none have been designed to address the specific tasks involved with online fraud prevention

The time has come for the deployment of BPM to better align fraud prevention processes, users, and information for greater efficiency and effectiveness

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Creating a more efficient order review process

Order queue management and prioritization Order review case management Customer provided information validation

External data gathering and analysis Negative file updates and link analysis Manual review team performance monitoring Reporting functionality Chargebacks and collections

Activities that should be considered when automating the process of suspicious order review

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Manual Order Review Objectives

Increase efficiency Prioritize queued orders - focus review on high risk transactions only

Provide access to all relevant order data in easy-to-use screens that display information in a consistent manner

Automate procedures typically performed manually

Increase accuracy Reduce human error Apply consistent analysis to all orders

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Benefits of improved back-end procedures

Increase revenues Reduce the rejection of legitimate orders due to fraud

concerns Reduce the acceptance of fraud orders that are not

properly screened

Decrease operational expenses Realize efficiencies, review more orders with same staff

levels or reduce staff and department operating costs

Automation – allows agent to review more transactions per shift

Prioritization – focuses agent on transactions with a greater risk of fraud+

= Decrease in Operating Expenses and Fraud Losses!

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Contact Information

Michael J. LongDirector, Fraud SolutionseFunds Retail Solutions11921 North MoPac Expressway, Suite 400Austin, TX 78759

Office: 512.977.5594fax: 512.832.8901mobile: 512.426.7652

e: Michael_Long@efunds.com www.eFunds.com