- Reduce fraud losses, increase profits: how fraud prevention functions as a profit center
Reduce fraud losses, increase profits: how fraud prevention functions as a profit center
In today's ever-evolving business landscape, successful fraud prevention strategies are not just about averting potential losses. They are equally about unlocking potential gains. This article delves into the crucial role that fraud prevention plays behind the scenes, not just as a protective shield, but a significant contributor to a company's profitability.
In the intricate landscape of modern business, fraud prevention has emerged not merely as a protective strategy, but also as a crucial contributor to profitability. This post delves into the often overlooked reality of fraud prevention as a profit center. From improving customer retention to optimizing marketing budgets, we explore how effective fraud management can be a driver of financial growth and stability.
Fraud detection and prevention is undervalued
By 2027, Juniper Research predicts that global cumulative online fraud losses since 2023 will add up to $343 billion for merchants. On average, eCommerce businesses lost $48 billion to fraud each year. There’s serious money being lost each quarter to fraud and abuse, but despite this, fraud teams don’t always get the budget or resources they need to work most effectively.
Fraud prevention doesn’t contribute to revenue in the same obvious way that marketing, sales, or product development do, but it clearly boosts the company’s bottom line. Every dollar that fraud prevention stops from going into a bad actor’s pocket has a direct impact on the bottom line. Fraud prevention is a profit center, and like other profit centers, it should be given healthy consideration for investment.
Why fraud prevention is a profit center
So, how exactly does fraud detection and prevention expand the company’s profit margins? There are some more obvious ways, and some that are less obvious. Let’s take a look at a few different ways fraud fighters are helping their company stakeholders hit key metrics.
1. Reduction in fraud losses
This is the most straightforward way that fraud teams contribute to profitability—by minimizing losses due to fraud. This alone can have a profound impact on the bottom line. According to Signifyd, as of 2022, for every $100 of fraudulent orders they service, eCommerce platforms lose $207. But eCommerce companies aren’t the only ones affected, of course.
In the food and grocery delivery industry, for example, promotion abuse and refund abuse are taking larger and larger bites out of profits as time goes on. A pair of men in Florida recently made headlines for scamming over $1 million dollars out of UberEats, but they’re far from the only scammers taking advantage of food platforms for a free meal ticket.
Fraud prevention is a profit center because fraud is a loss center. Fraud is costly to any type of business it affects, and it’s only getting more expensive as time goes on.
2. Improved retention (customers not lost due to fraud)
Cold, hard cash isn’t the only thing that fraudsters cost companies. Anyone who’s ever been scammed or even encountered a scammer on a marketplace platform or other P2P app knows that it’s hard to trust the platform the same way after that happens, even if they respond well to any complaints.
In our online ecosystem, platforms like social media, dating apps, and marketplaces depend heavily on user trust. For example, if you can’t trust that anyone on a dating app is who they say they are, there’s not much point in swiping, is there? The same logic applies to marketplaces. If you’re not confident that any given transaction is what it seems to be, you’re much less likely to transact, period.
The Trust & Safety impact of fraud is perhaps most obvious on these types of platforms, but they’re far from the only ones affected. Account takeover is an example of a huge fraud problem that can affect practically any user-facing online business, from online banking to food delivery to social media. The stress and work of reclaiming an account after a fraudster takes it over is something no one wants to go through, and the user will always associate that experience with your platform. What’s more, that reputational damage doesn’t even include the money it cost you to investigate and remedy the issue.
These sorts of issues can stop users from wanting to come back to your platform, and they might also tell their friends or post online warning others to stay away. Effective fraud prevention keeps these negative experiences to a minimum and creates a safe, trustworthy environment that cultivates repeat customers.
3. More effective use of marketing and other budgets
Fraud prevention and other profit-generating spheres of the business don’t operate in silos, or at least, they shouldn’t. For example, one of the profit-boosting benefits of good fraud detection and prevention is its ability to maximize marketing efforts and the efficiency of customer acquisition budgets.
Take promotion abuse as an example. Promotion abuse happens when someone takes advantage of promotions that are meant to draw in new users or increase conversions with returning users. This might look like someone creating dozens of accounts to take advantage of a hefty new user promo, or it might look like a returning customer using promo codes across dozens of devices to claim a promotion multiple times (or using app cloners to run multiple instances of the app and do the same). Verticals like food delivery in particular struggle with promo abuse, but it can affect any user-facing platforms that run promotions like these.
Promo abuse hurts new user acquisition efforts and leads to marketing budgets being used inefficiently to drum up new business, since some (and at times, most) of the money is going to fraudsters instead of genuine new leads. As an example, the fraud prevention team at one North American food delivery company told us they estimated that around 90% of the budget for one of their promotional campaigns went to fraudsters instead of legitimate customers. If measures are put in place to prevent promo abuse, more of that marketing money can go towards its intended purpose, which is ultimately to generate more revenue by drawing in new users and rewarding the loyalty of returning customers.
Another side effect of good fraud prevention strategy is that the money that doesn’t go to fraudsters in the first place can instead be reinvested into other profit-generating areas like sales, marketing, and product development.
How fraud teams can advocate for the ROI of fraud prevention
Stakeholders don’t always have visibility into the fraud prevention team’s daily wins and losses in the way that fraud prevention team members themselves do. It’s up to fraud team leaders to advocate for their work and position it so that the company sees your value clearly.
1. Participate in proof-of-value and proof-of-concept trials
The solutions and tools they leverage are a large part of a fraud department’s success, and also tend to be one of the best places for internal investments to go. That said, the efficacy of a given solution (and whether it’s worth the cost) isn’t always obvious from first conversations with vendors.
Without any proof that good ROI is possible, it’s much harder to convince higher-ups to buy into the newest signals. Participating in proof-of-value and proof-of-concept processes can give you the evidence you need to make a data-backed case for how much a particular fraud solution can improve your fraud losses and, ultimately, your profits.
2. Come prepared with numbers and data
Speaking of evidence you need, numbers are your best friend when it comes to making a compelling case for fraud prevention’s ROI.
The exact benefits of fraud prevention can sometimes be hard to quantify—after all, how do you prepare a report on how much money you might’ve lost but didn’t because fraud detection intervened?—but there are still metrics you can point to, such as reduction in fraudulent transactions, money spent investigating and restoring victimized user accounts, chargeback rates, reports from users, how many signups or transactions were rejected for high risk scores, and so on.
When implementing new solutions or strategies for the first time, you can also draw comparisons between the before and after of the company’s fraud losses, which should give an idea of how much money is being saved.
The strategic implementation of fraud prevention measures is more than just a safeguard - it's a profit center. It helps you minimize substantial monetary losses, foster customer loyalty, and optimize the use of marketing budgets.
Fraud vs. anti-fraud is a bit of a zero-sum game: every dollar that fraudsters steal is a dollar that their victims can’t use. It’s clear that fraud is a profit center for fraudsters, but what stakeholders might not realize is that fraud prevention is a profit center for the companies fraudsters target. By incorporating data, evaluating the best signals, and participating in POVs and POCs, fraud teams can make a good argument for the ROI of their department and get the funding they need to make sure their platform’s pockets stay closed to the hands of bad actors.