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1 MAC is an organiza-on comprised of members from Banks, Acquirers, ISOs, Card Associa-ons, Law Enforcement and others involved in risk management and compliance of the electronic payment processing industry. The purpose of MAC is to educate members in the electronic payment industries regarding the compliance with electronic payments regula-ons along with the detec-on, preven-on and prosecu-on of those involved in electronic payment fraud. In the context of fulfilling MAC s ongoing educa-onal obliga-ons to its members, this webinar is being presented by the MAC Educa-on CommiJee in support of the MAC mission regarding the exchange of informa-on and con-nuous educa-on of its members. Webinar sponsored by:

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4 FRAUD HURTS BUSINESS I don t have a fraud problem. There are two types of business: 1. Those that have been hit by fraud. 2. Those that will be hit by fraud.

5 FRAUD HURTS BUSINESS Cost of Fraud Merchants deploying more tools to try to compete with the increasing fraud threat. More tools, complexity, increased cost Over 50% of all charge backs are the direct results of fraud Refunds can be equal to or greater than cost of charge backs Average order rejection rate in U.S. is 2.4%, 7.8% internationally Management, reviews and escalation of suspect transactions cost make up nearly 70% of fraud prevention Customer satisfaction, conversion and brand reputation, Aberdeen Group

6 FRAUD HURTS BUSINESS Problem Merchants are trying to keep up with fraud to protect their bottom-line and their customers Merchants use up to 8 fraud prevention/detection tools Manual review of suspect transactions is costly and time-consuming Most of the time merchants don t realize they are being attacked by fraudsters until they get their chargeback report which can be days trailing transactions Increases in ecommerce are driving increased fraudulent activity Fraudsters move fast and hone in on vulnerable opportunities Most merchants are not fraud experts

7 TYPES OF FRAUD

8 TYPES OF FRAUD CATCH ME IF YOU CAN BY KEVIN POULSEN MAX BUTLER had an audacious plan to rule the black market in stolen credit cards. But angry hackers and pesky Feds had other ideas. MRC 2011 Annual e- Commerce Payments and Risk Conference THE HEAT in Max Butler s safe house was nearly unbearable. It was the equip-

9 TYPES OF FRAUD How a Remote Town in Romania Has Become Cybercrime Central MRC 2011 Annual e- Commerce Payments and Risk Conference

10 TYPES OF FRAUD

11 TYPES OF FRAUD Botnets Malware Trojans Phishing/SPAM Criminal Networks PPD Mobile Social Data Breaches Affiliate ID Theft Payment Account Takeover Account Origination Virtual Currency????

12 TOP 5 Top 5 Fraud Problems That are Costing Merchants 1. Chargeback Hell 2. Rejection Rates 3. Affiliate Fraud 4. Conversion Rates & Abandonment 5. Growing Pains, Expanding into New

13 CHARGEBACK HELL What is Chargeback Hell? The surprise chargeback report Not being able to determine why you re getting the chargeback Knowing why you get the chargeback but not being able to do anything about it No/ineffective system in place to stop or reduce chargebacks and manage fraud A personal invitation to the Excessive Chargeback Club

14 Case Study BustedTees.com Situa3on High chargeback rate, 2%+ Growth slowed due to fraud Internal system was not reducing risk Manual reviews reduced sales conversion LiGle internal info of customers

15 Case Study BustedTees.com Solu3on Implemented complete fraud management plaiorm in less than two weeks Monitored and customized over six weeks Customized rules, reporlng and business strategies Enacted new taclcs

16 Case Study BustedTees.com Results Reduced chargebacks to lowest level ever, under.25% Reduced manual reviews and Lme for manual reviews Increased areas of opportunity, expanded into new markets Saw as much as a 30% - 40% increase in sales

17 Case Study BustedTees.com Results so much data that 90% of the Lme a review just takes 30 seconds, he says. In short, we spend half as much Lme as we used to on manual reviews. We added 30 high risk markets we used to avoid due to fraud concerns. Now we are gezng lots of sales from those markets, but no higher fraud. BustedTees also has been able to use the data it gets from fraud management in other ways. For example, it was able to easily see that it had more German customers than it thought. So it deployed a German language promo on its home page, which helped increase conversion rates 25%. We re also experimenlng with geo- targeted ads to increase ad efficiency, Schwartz says. Our business has grown 40% to 50% and Kount has been a big factor in that growth.

18 Case Study BustedTees.com Results Fraud was coslng us hundreds of thousands of dollars a year, lost revenues, stolen merchandise and chargeback fines, Schwartz says. Acer implemenlng our fraud solulon we ve turned that around to the point that we are now generalng more revenue because we can capitalize on opportuniles we used to see as too risky. Adam Schwartz, GM, BustedTees

19 Merchants are not fraud experts How can I reduce my fraud exposure? Do fraud programs negatively effect sales? Where should my chargeback rate be? How well is my fraud strategy working? Will my current attempts to manage fraud scale? What about international expansion? Affiliate programs seem too risky

20 Recognizing Symptoms of Fraud Chargeback rate above.5% or 50 basis points Return rate higher than 1% RejecLon rate higher than 1% Abandonment acer submiged transaclon High affiliate turnover Manual reviews above 10% Too many rules for catching fraud

21 FRAUD STRATEGY Detection Strategy

22 FRAUD STRATEGY Business Strategy

23 FRAUD STRATEGY Operations Strategy

24 FRAUD DETECTION New / Dynamic Fraud Performance Criteria Speed and flexibility Perform comprehensive fraud control checks Interlock across a range of customer interaclons

25 Fraud Problems Affiliate- generated quality leads/sales (or lack thereof) System- gaming, card teslng Organized systemalc site infiltralon Friendly fraud Average chargeback rate Fines for entering Visa and MasterCard charge back monitoring and RIS programs Acquirer and Amex reserves

26 Typical Remedies Turn off affiliate markelng Turn off IP- addresses on a conlnent- wide basis Suppress or constrain global expansion Create mullple merchant accounts to hide chargebacks Try to build custom fraud screening or deploy minimal fraud tools (CVV, AVS) in- house. Cross fingers

27 Case Study CDBaby Situation World s largest online distributor of independent music - Helps arlst sell to itunes, Amazon and Facebook Paying out 75% commissions Over $200 million in commissions paid Fraudulent arlsts & affiliates Charge backs/fraud 2.5%+, $26,000 lost in one month ReputaLon at stake with some partner brands

28 Case Study CDBaby Situation 1 Fraudster posing as an arlst post music for sale on CDBaby.com

29 Case Study CDBaby Situation 1 Fraudster posing as an arlst post music for sale on CDBaby.com 2 Fraudster joins CDBaby affiliate program, receives 75% commission

30 Case Study CDBaby Situation 1 Fraudster posing as an arlst post music for sale on CDBaby.com 2 3 Fraudster joins CDBaby affiliate program, receives 75% commission Using stolen credit informalon, Fraudster purchases music from affiliate (Fraudster)

31 1 Case Study CDBaby Situation 4 Fraudster posing as an arlst post music for sale on CDBaby.com 2 3 Pays royalty to arlst Pays commission to affiliate (75%) Pays fines, chargebacks Fraudster joins CDBaby affiliate program, receives 75% commission Kount Inc All Rights Reserved Using stolen credit informalon, Fraudster purchases music from affiliate (Fraudster)

32 Case Study CDBaby Result Reduced fraud by 96% Results in less than 30 days Fraud losses average $850/mo. NO loss in revenue Enhanced markelng opportuniles Great relalonship with itunes

33 Get Out of Chargeback Hell! Recognize the symptoms of fraud Understand what s happening Understand the causes Implement a complete solulon

34 Summary Several data points can help determine fraud Managing fraud requires a complete strategy, not more tools Fraud management should not be inhibilng your ability to sell more - It should allow you to expand into new markets and channels with increased confidence - Fraud management doesn t need to be a cost center

35 Thank You to our Sponsor Contact Info: Don Bush VP, Marke3ng Kount Q & A