E-Commerce Retail Market Trends: Fraud and Risk Mitigation

1. E-Commerce Retail Market Trends:Fraud and Risk Mitigation Keep Pace and Reduce Operating Expenses by Automating Back-End Manual Order Review Processes DRF EU Fraud Round Table April 26, 2006

2. Evolution of a merchant’s web store • Make decision to sell on Internet • Focus IT effort on building / supporting website • Generate sales • Build back-end systems to account for sales • Realize that certain sales were fraud • Chargebacks grow until decision made to minimize risk • Purchase front-end order screening solution to identify suspicious orders • Struggle to review suspicious orders • Increase review staff • Utilize available systems to review orders or build dedicate order review platform • Limit who to sell to and what is sold • Accept/reject orders without adequate review

3. How is fraud managed? • Front-end screening tools • Commercial apps or internally developed decisioning engines to determine if an order should be accepted, rejected or subjected to further review • Dedicated fraud review staff • Typically entry level positions • Often have other responsibilities • customer service reps or fulfillment specialists • Back-end review processes • Most merchants have not developed dedicated platform to conduct review • Utilize platforms not designed for fraud review resulting in inefficient results

4. Front-end order screening is only the first step • Obtaining recommendation to “Accept / Reject or Review” from front-end decision engine is just the beginning • Rules can be created to easily identify valid customers (“accept”) and blatant fraud attempts (“reject”) • But most fraud transactions fall into the “review” bucket • Back-end manual order review procedures cannot be avoided and are often much more costly

5. Back-end order review procedures must also be considered • Fraudsters test websites daily and do their best to blend with legitimate customers • There are no “silver bullet” rules or procedures that will screen out all fraudulent or identify all valid orders • Manual order review of suspicious orders cannot be avoided • Without manual review, legitimate orders are rejected and fraudulent orders are accepted, resulting in lost profits

6. Why is manual review a great concern? • Extremely costly as transaction volumes grow • Most merchants reviewing in excess of 25% of all orders received – some review up to 1 in 3 orders • Limited IT resources available to build effective review platform • Most perform review with inefficient (highly manual) processes/procedures • Review agents look at less than 20 orders per hour on average • Most solve problem by: • Adding more staff or • Accepting / rejecting more orders without adequate review The impact of inefficient manual order review procedures goes well beyond the receipt of chargebacks

7. Impact of inefficient order review procedures Must hire more staff to cope with increasing transaction volumes Increased operating cost Must reject more suspicious orders if unable to review them – many will be good orders Increased rejection of legitimate orders Increased acceptance of fraudulent orders Or, must accept more suspicious orders if unable to review them – some may turn out to be fraud Reluctance to enter new markets or offer new products Fraud concerns will limit you ability to expand web store Consistent fraud losses and persistent fraudulent attacks When criminals are able to succeed they will continue their fraud attempts

8. Typical manual review procedures • Verification of information provided by customer • Billing and shipping information • May involve contact with customer or card issuing bank • Analysis of other order data • Billing, Shipping and IP address locations • Negative data • Time of purchase • Inconsistencies / unusual order characteristics • Order resolution • Accept or reject • Post fraud identification procedures • Update negative files • Perform link analysis

9. Effective system should automate both the front-end and back-end procedures Commercial applications available today do not addressed the entire problem • Effective fraud prevention system must: • Identify orders that should be accepted, rejected or subjected to further review (FRONT-END) • Prioritize orders that require review (FRONT-END or BACK-END) • Provide efficient order review platform (BACK-END) • Address post fraud identification procedures (BACK-END) • Merchant left on their own to develop solutions to address items 3 and 4 above

10. Technology is the answer • Businesses must make better use of technology to manage the order review and acceptance process in order to maximize the benefits of the Internet as a channel for profit growth • Business Process Management (a/k/a: workflow) applications are being deployed throughout organizations to improve user productivity • to date, none have been designed to address the specific tasks involved with online fraud prevention • The time has come for the deployment of BPM to better align fraud prevention processes, users, and information for greater efficiency and effectiveness

11. Creating a more efficient order review process Activities that should be considered when automating the process of suspicious order review • Order queue management and prioritization • Order review case management • Customer provided information validation • External data gathering and analysis • Negative file updates and link analysis • Manual review team performance monitoring • Reporting functionality • Chargebacks and collections

12. Manual Order Review Objectives • Increase efficiency • Prioritize queued orders - focus review on high risk transactions only • Provide access to all relevant order data in easy-to-use screens that display information in a consistent manner • Automate procedures typically performed manually • Increase accuracy • Reduce human error • Apply consistent analysis to all orders

13. Automation – allows agent to review more transactions per shift Prioritization – focuses agent on transactions with a greater risk of fraud + Decrease in Operating Expenses and Fraud Losses! = Benefits of improved back-end procedures • Increase revenues • Reduce the rejection of legitimate orders due to fraud concerns • Reduce the acceptance of fraud orders that are not properly screened • Decrease operational expenses • Realize efficiencies, review more orders with same staff levels or reduce staff and department operating costs

14. Contact Information Michael J. Long Director, Fraud Solutions eFunds Retail Solutions 11921 North MoPac Expressway, Suite 400 Austin, TX 78759 Office: 512.977.5594 fax: 512.832.8901 mobile: 512.426.7652 e: Michael_Long@efunds.com www.eFunds.com