Authentication and Validation Cost Benefit Analysis
After talking about the strategic approach of fraud prevention and the tactical concerns, we promised visualization. We will do 2 CBA’s for comparison using the factors previously described. Let’s use one more traditional “authentication only” model as our control scenario. Our control scenario doesn’t really see the value in a fraud model. Inductively the risk officer believes that the added cost of adding and maintaining an accurate model outweighs any benefit and can’t possibly prevent as much fraud as a “authenticate all reason code” model. The experimental model will introduce a fraud model as a segmentation tool and synthetic fraud prevention measure. We won’t use actual pricing and cost because this is primarily a visualization effort and real numbers are a sales and pricing discussion.
As we discussed in the strategic approach, optimizing is a matter of collecting good analytics and working with a team trained in business intelligence to find the “bottom of the curve” or the place where you are mitigating risks most effectively. Ultimately it boils down to the classic revenue vs. cost but there will be considerable tweaking to get as close as possible. The effectiveness will be measured just like everything else – bottom line profit.
Note that in our comparison we are estimating a 15% difference based on customers that would have been profitable but are unwilling to be checked or answer the excessive questions. This simplifies the levers we discussed around “walking away” from the process.
|Fraud Analyst||$2 per manual review – $30/Hour/Person – 1 review every 5 minutes – 15 review per hour|
|Validation Tool||$1 per manual review|
|Prevention Tool||$.15 per transaction|
|Transaction Value||$100 per month|
|Fraud Analyst||10,000 * 30% = 3,000 * $1 = $3,000|
|Validation Tool||3,000* $1 = $3,000|
|Fraud Cost||$25 * 20% *7,000 = $35,000|
|Total Cost||$3,000 + $3,000 + $35,000 = $41,000|
|Transaction Value||$100 per month * 35% book rate = $245,000|
|Profitability||$245,000 – $41,000 = $201,000|
|Fraud Analyst||10,000 * 10% = 1,000 * $2 = $2,000|
|Validation Tool||1,000* $1 = $1,000|
|Prevention Tool||$.15 * 10,000 = $1500|
|Fraud Cost||$25 * 20% * 9,000 = $45,000|
|Total Cost||$2,000 + $1,000 + $1,500 + $67,500 = $72,000|
|Transaction Value||$100 per month * 50% book rate = $315,000|
|Profitability||$315,000 – $72,000 = $244,000|
Here is what should jump out at you – Streamlining your process eliminates analyst cost and keeps more profitable customers from leaving out of annoyance. The increased cost of the model is outweighed by the analyst savings and the transaction value. This is assuming that ID Authentication alone is able to keep up with a graduated fraud policy from a fraud loss perspective.
This fraud Profit Optimization Point is not limited to traditional retail channels, banks, and telecommunications. Any B2C company doing business over the internet needs to be concerned about who is buying its products and securing its acquisition process both effectively AND efficiently.