ROI on Authentication and Identification
“I don’t want to let fraud in, but marketing and operations are demanding an 85% automation rate.” Sound familiar? Risk officers often talk to our analytics professionals about the seeming paradox between fraud prevention, new customer acquisition, and back-office efficiency. In order to provide a path forward, our analytics team challenges potential clients to walk us through the data so we can see how best to turn fraud into a more cost neutral concern. Risk managers are increasingly challenged to provide key metrics around losses due to identity fraud.
Mercator Advisory Group’s 2008 fraud report estimated that 1.2 percent of a credit issuer’s expense can be attributed due to fraud related “credit losses.” They further suggest that this figure would be up to 16 times higher if the true fraud-related losses could be extracted from the overall credit losses. When trying to justify the necessary fraud prevention expenses to solve the paradox, risk managers need to get to the actual fraud loss figure.
Credit loss and identity fraud represent two distinct types of write-offs and are truly apples and oranges. Preventing credit loss is bread and butter risk policy; determining a person’s credit worthiness by leveraging historical facts to predict future behavior. Identity and synthetic fraud can’t be predicted the same way. Mining these marked fraud losses can allow an analytics team to determine the root causes of fraud losses and develop a plan of attack. The plan of attack will be a balanced approach designed to bring a policy as close as possible to its fraud Profit Optimization Point (POP). The concept of POP was presented by J. Michael Bradley in an article titled “When it pays to accept more fraud.”
The concept of a fraud POP is to maximize revenue while minimizing fraud losses and the costs of detecting fraud. By making this an optimization problem and quantifying the current situation, skilled analysts can make quick work out of the previously troublesome battle between marketing, operations, and risk.
High level strategic prognostications are perfectly nice for an academic discussion, but let’s discuss the calculations at a tactical level. Stay tuned for information that will approach the theory and practice of POP in tackling fraud losses and effectively measuring ROI.
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