A Fraud Score is an informational tool that helps you gauge the risk involved with orders before processing. This is done by identifying traits and historical trends associated with suspicious behavior and fraudulent orders. This process is commonly used across businesses, as they try to detect fraud in their transactions to avoid major profit losses.
Fraud detection is applied to many industries like banking, insurance, and e-commerce. With so much at stake and so many variables changing, it’s vital to have a real-time monitoring system for fraud.
What is a Fraud Score?
A fraud score is a number that answers the question, “How likely is this person to be a fraudster?” Fraud scoring assigns a value to how risky a user’s action is. The fraud scores are calculated using rules that add or subtract points based on the known data points about a user.
The Score Model provides a risk score of 1-99 for every event or transaction. In short, this score indicates the relative risk of fraud. Based on the score, each event is segmented into one of 5 risk levels:
- Very Low Risk (0 – 9): Lowest possibility of fraud.
- Low Risk (10 – 49): Low possibility of fraud, but may include false negatives (risk).
- Medium Risk (50 – 69): No strong indication of positive or negative outcome.
- High Risk (70 – 89): High possibility of fraud, but may include false positives.
- Very High Risk (90 – 99): Highest possibility of fraud.
For instance, the user action may be a signup, login, or card payment. Known data points include the user’s IP address, email address, or device configuration. In fact, there are dozens of different data points within each of these. An email address can appear on known blacklists, for example. An IP address, for instance, can be tied to known Tor nodes or locales. In fact, note that an IP fraud score is its own specific kind of fraud score.
Using this method, clients are able to prioritize reviews of transactions based on risk. Thus, businesses can take real action based on risk groups to reduce queue size and optimize investigator or review agents’ time.
How Does Fraud Scoring Work?
Fraud scoring works by identifying certain traits and sometimes looking at historical trends that come with suspicious or fraudulent behaviors. For fraud scoring to work, a user must have versatile fraud prevention software that can look at user data. That data is fed through risk rules, which allow to calculate how dangerous an action is.
For example, a new user registration from someone with a high-risk ID, or a credit card that appeared on a blacklist before, is likely to be blocked, or at least forwarded for manual review by a human.
The key is that fraud scoring should allow users to automatically approve, reject, or review certain actions. In that sense, it is similar to a credit score check, where a credit bureau assesses the financial risk posed by a user’s action (taking out a loan or opening a new account).
Here’s how it works:
- A user attempts an action.
- The fraud prevention system examines what we know about the user – data either submitted (e.g. a phone number) or gathered by the system (e.g. an IP address or device configuration).
- SEON’s data enrichment process allows us to find even more information.
- All the above are fed into the fraud scoring engine.
- Fraud rules are applied, giving positive or negative scores to each of these.
- The score is calculated and the full reasoning becomes available (if the solution is whitebox).
- Any predefined actions are applied, depending on the score:
- approve
- deny
- forward for manual review
How to Get Started with Fraud Scoring
Fraud scoring varies greatly from one anti-fraud tool to the next. Hence, it helps to have an understanding of the basics before you choose your solution.
Understand Where the Fraud Rules Come From
The rules that help calculate a fraud score can be:
- pre-set by the provider and/or tailored to your industry
- created manually
- suggested by AI based on historical data
However, when it comes to fraud rules, there is no one-size-fits-all approach. One rule might work great to catch fraudsters on a crypto exchange but fail with iGaming operators. This is why it is extremely important to test the rules in a true business environment, based on your historical data.
In the case of AI-powered machine learning rules, you also want to be able to understand exactly what the tool is suggesting. This is why white-box systems are important.
Consider Whitebox vs. Blackbox Fraud Scoring
Some engines offer full transparency into their inner workings; others tend to make it harder to guess what the algorithms do. However, white-box systems are always superior as they are transparent and allow you to:
- Understand what each rule does. For instance, looking at how many login attempts are considered suspicious within a set time range.
- Balance the weight of each rule: You need to test how important each rule is, especially when you use dozens of them at once.
- Adjust your risk thresholds: You might want control over what is considered a risky score versus a safe one. Make sure the fraud prevention tool doesn’t lock you into its own black box settings there.
Test the Rules for Accuracy
One key element of fraud scores is that their precision is only as good as the data used to calculate them. This is why fraud prevention systems should not only collect as much data as possible but also enrich it.
The core concept is that it helps:
- validate the quality of the data you get
- link the data to external data sources, so you get more information about the user than what they submit through the fields
- reduce the amount of data the user needs to submit so that you can speed up their customer journey
Advantages of Fraud Scoring
Dynamic authentication
Even if the risk numbers point to the need for manual review, users can still add another layer of safety with triggers. Let’s say someone signs up to your platform, but their transaction data signals they might be a risky user. Your risk prevention system could trigger additional authentication such as 2FA, which can confirm their identity, and deter potential fraudsters.
They allow automation
Instead of manually reviewing every purchase, you can let the system assign a value to each action, and approve or deny it based on the results. You can also review actions where the results are indecisive for certain transactions.
Better flexibility
Balancing the numbers yourself lets you decide how you want to mitigate risk. This could be based on seasonality, or for specific items, such as high-value goods or low-value digital downloads. Just keep in mind that not all fraud prevention tools let you adjust the thresholds yourself
Reduced friction and customer churn
When you automate reviews with risk scores, you create a smoother customer journey. For instance, Amazon doesn’t ask for a credit card CVV to speed up the payment process. You can reduce the number of steps between your user and their payment, as long as only risky behavior is reviewed.
Better user experience
With a fraud scoring system in place, it can help provide a better UX overall for all customers, whether they’re genuine customers or not. A smoother customer journey is always beneficial, especially with 70% of online businesses failing due to bad usability of the site.
Providing a better user experience for your customers is going to help encourage people to come back. For a lot of businesses nowadays, it’s much harder to retain customers than it is trying to find them.
Scaling
Fraud scores will let your store process many more transactions, more quickly. This helps you focus on growing your business with complete peace of mind, while risk management is taken care of in the background.
Are there disadvantages to fraud scoring?
Whilst fraud scoring may seem like a great solution to your fraud worries, it’s not going to be entirely effective. There may be some that slip through the net or you may encounter genuine customers that have been caught up in the scoring system by error.
Some fraud scoring tools are more efficient than others, which is why you should consider comparing them when looking for one as a business. You want there to be enough flexibility in the rules you set when scoring certain user actions.
Who Needs To Use IP Fraud Score?
IP fraud score is a tool that can be useful for different kinds of businesses and organizations that engage in online transactions. Here are some examples of who might benefit from using IP fraud scores:
E-commerce businesses: Online retailers and other e-commerce businesses often process a high volume of transactions and are, therefore, at greater risk of fraud. By using the IP fraud score, these businesses can quickly identify potentially fraudulent activity and take action to protect themselves and their customers.
Financial institutions: Banks, credit unions, and other different financial institutions also process a large number of transactions and are a common target for fraudsters. IP fraud score can help these institutions identify potentially fraudulent activity and take steps to prevent it.
Payment processors: Companies that facilitate online payments, such as PayPal and Stripe, can benefit from using IP fraud scores to assess the risk associated with each transaction and prevent fraudulent activity.
Online marketplaces: Online marketplaces such as eBay or Amazon often have large numbers of sellers and buyers using their platforms. IP fraud score can help these marketplaces identify suspicious activity and prevent fraud from occurring.
Any business that processes online transactions: Any business that processes online transactions can benefit from using an IP fraud score to assess the risk of fraud associated with each transaction. This can help businesses prevent financial losses and protect their reputation.
Ultimately, any business that wants to protect itself and its customers from the risk of fraud associated with online transactions can benefit from using an IP fraud score as part of its fraud prevention strategy.
What Types of Fraud Can Fraud Scores Detect?
A Fraud Score can detect a variety of fraudulent activities, such as identity theft, account takeover, payment fraud, and more. Fraud scores can assist businesses in identifying potentially fraudulent behavior and taking necessary action by analyzing data points linked with each transaction.
These include the location of the IP address and the frequency of transactions.
How Accurate is the IP Fraud Score?
The IP fraud score’s accuracy can change depending on the instrument or algorithm being utilized. Many IP fraud score suppliers, frequently in the 90–95% range, assert high levels of accuracy, nevertheless. To create the greatest possible defense against fraud, it is critical to remember that the IP fraud score is just one tool for identifying and preventing fraud.
Hence, it should be used in concert with other fraud prevention techniques.
Who Can Use Fraud Scores?
Businesses of all sizes that conduct online transactions can benefit from an IP fraud score. Small firms can gain by employing IP fraud score as part of an all-encompassing fraud protection approach, even though larger businesses may have more complicated fraud prevention demands.
Recommended Articles
- Threat Detection: What It Is, Tools & Best Practices
- WEBDAM: Features, Reviews, Pricing & Alternatives
- Data Profiling: What It Is, Tools & Best Practices
- OKTOPOST: Review, Features, Pricing & Competitors
- Jira Align Reviews 2023: Features, Products, Pros And Cons
- Greenhouse Onboarding Reviews: Features, Pricing and Alternatives in 2023
References
