Fraud Fundamentals
TL;DR
- Pick tools and write rules later. First understand what's driving every fraud decision you make
- Two pages here: Economics of Fraud for what fraud really costs, and Risk Appetite for how tight to set the rules
- The core trade-off never changes. Block more fraud or block fewer good customers. You don't get both
- Read this before you spend money on a fraud tool
Pick tools and write rules later. First understand what's driving every fraud decision you'll make. These two pages cover the why.
What You'll Learn
| Page | What It Covers | Read This If... |
|---|---|---|
| Economics of Fraud | The true cost of fraud (direct losses, false positives, operational costs, customer impact) | You need to justify fraud prevention spend or understand why blocking too much is also expensive |
| Risk Appetite | How to balance fraud loss tolerance, customer friction, conversion targets, and regulatory requirements | You're deciding how aggressive your fraud rules should be or where to set your score thresholds |
The Core Trade-off
Every fraud decision is the same trade-off. Block more fraud or block fewer good customers. Tighten your rules and you catch more fraud. You also reject more real sales. Loosen them and you approve more revenue and eat more losses.
The right balance depends on your business. A $5 digital good isn't a $500 physical product. A business at a 0.1% fraud rate doesn't choose like one at 1.5%.
These two pages get you there:
- Start with Economics and learn what fraud actually costs. It's more than the transaction amount.
- Then read Risk Appetite and set your thresholds against your own business model.
Key Principles
- Not all fraud is created equal - first-party abuse and third-party fraud need different responses.
- Prevention has costs too - false positives cost you revenue and customers. See Economics.
- Speed matters - early detection limits losses, so read the Detection Framework.
- Data is your weapon - invest in device fingerprinting, velocity rules, and evidence collection.
- 3DS is your friend - 3D Secure shifts liability for stolen card fraud to the issuer.
Related Topics
- Fraud Types - Taxonomy of fraud patterns
- Detection Methods - How to identify fraud
- Prevention Strategies - How to stop fraud before it happens
- Chargebacks - When fraud becomes disputes
- Fraud Metrics - Measuring fraud performance
- Network Programs - Threshold consequences
- 3D Secure - Authentication trade-offs
- Rules vs ML - Detection approaches
- Benchmarks - Industry comparisons