What is Fraud Scoring? Use Cases and Fraud Prevention Tips

A prevention and detection tool is designed around fraud scores to indicate how high or low fraud risks are. These risk detection solutions allow financial institutions and other businesses to ascertain if the parties they are dealing with are genuine or not.

What is fraud scoring

Since financial transactions between such parties are a complex process, there is a high probability of fraud.

When it comes to e-commerce, for example, there are particular data indicators, such as IP address or shipping preferences, that stay consistent across purchases. When an order deviates significantly from the established buying pattern, merchants pay attention because it might indicate fraud.

That’s why it’s critical to understand and control how this process works to impact unexpected financial losses and security positively.

We explore how fraud scoring works and how businesses can utilize this measure in various industries.

What is a Fraud Score?

Fraud scoring will allot scores to a user based on their activity. A fraud score is a numerical rating or score assigned to a transaction or customer based on various risk factors and indicators.

This tool calculates fraud scores depending on the underlying rules defining user activity as low, medium, high, or very high risk. The higher the fraud score, the greater the suspicion of fraud, prompting merchants to take appropriate actions like investigating further or declining the transaction.

These user activities can be a transaction or login, and the rules check for the following parameters include the following information:

  1. Full name (shows whether this name was used recently in any fraudulent transactions)
  2. Address (e.g., customer’s address recently used for criminal activity)
  3. Phone number risk scoring (shows in case this phone number is virtual, toll-free, or real, and detects in case it was used recently in criminal activity)
  4. IP Address (shows if this IP address was used in criminal activity)
  5. Device fingerprint (shows if this device has been recently used in criminal activity)
  6. Payment details (this metric shows if the payment card details were recently sold in the black market or in case they were used for criminal activity)
Illustration of three people getting different fraud scores based on various factors.

The vendors are assessed using the following metrics:

  • Email (e.g., when this email was created? What type of this email address, free or business? How many security features does this email address provider have?)
  • Security features
  • Timestamp
  • Type

In general, each of these data points contains numerous details. For instance, an email address might be listed on known blacklists, and an IP address could be associated with known Tor nodes or specific locations. Additionally, it’s essential to highlight that the IP fraud score is a distinct type of fraud score.

What is a Fraud Scoring Model?

A fraud scoring model is a statistical system that assesses the risk of fraud in a transaction or customer by analyzing various data points and assigning a numerical score. The model helps businesses make smart decisions on whether to accept, review, or reject a transaction based on the likelihood of it being fraudulent.

The fraud score model revolves around the risk scale from 0 through 99. The algorithm assigns a score to every transaction or event that shows its relative risk of fraud. A bank, financial institution, or business can use this scale to prioritize their reviews of different transactions depending on their risk. It allows them to execute real action depending upon the risk group to eliminate queue size and control the investigator’s review time.

The following are the three risk levels depending on the score:

  • High Risk: The “Code Red” of fraud score meters. It means the company must take immediate action against the party in question.
  • Medium Risk: The meter shows no strong indication of positive or negative outcomes. The institute has to verify the customer’s identity with quick identity verification.
  • Low Risk: The transaction has the lowest possibility of fraud and lets the proceed with an order.
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What are the Benefits of Fraud Scoring?

The American Express Digital Payments Survey in 2019 found that 27% of the sales always ended up as fraudulent transactions. Fraud scores offer sample benefits to the way any business or financial institution can implement risk detection tools in their service. They are:

  • Complete automation: Once implemented, fraud scoring can check each transaction and assign them values. Based on the value, it can approve, review or deny the transaction. In addition, the admin has the right to review each transaction and check actions on indecisive results.
  • Dynamic authentication: Fraud scores allow the user to add an extra safety layer with a trigger. If the system finds a new user risky, it can trigger an additional authentication process like a selfie ID or two-factor verification to confirm their identity.
  • Flexibility in risk mitigation: Once the company has a fraud score for a particular customer, the company has the power about how they want to manage the risk that the client poses. The company can devise a system according to various scores and implement it at once for current and future clients.

Numerous payment gateways provide integrated fraud scoring, but you can also find robust third-party fraud scoring solutions. However, it’s important to remember that businesses and industries have diverse needs. When evaluating different service providers, consider factors like customization options and the cost per score to make an informed decision.

Examples of Fraud Scoring in Different Industries

Illustration of a person using a stolen credit card and getting a very high fraud score.

iDenfy understands the need for fraud detection and scoring to reduce fraudulent transactions. The company’s new fraud scoring tool can scan databases that include black market data to produce risk scores for a potential customer. Once the system measures different customer details, it can detect fraud patterns to help businesses prevent unwelcome transactions.

Remember, while AI-powered fraud scoring tools can significantly enhance fraud detection, it’s essential to continually update and fine-tune the models to adapt to evolving fraud tactics. We can help you regularly assess the tool’s performance and stay ahead of emerging threats and safeguard your industry-specific operations effectively.

Assess the risk score of your customer. Discover more here.

Here are a few examples of how iDenfy’s fraud scoring will help different sectors:

Banking and Insurance Fraud

The banking sector has always struggled with fraud on a daily basis. It was the same story before computers arrived and grew after the world digitized. With fraud scoring, the banks can perform total digital footprint analysis so they can block customers who use stolen or fake identities. They can even cut down false account creation and prevent money laundering rings without incurring any cost on authorized users.

Apart from fighting against fraud, secure login authentication stops account takeover without hampering the user experience. Once the bank combines fraud check measures with Know Your Customer (KYC) tools, it can steer clear of regulatory fines.

Online Gaming

Using fraud scoring, online gaming platforms can offer a secure playing arena to gamers without spoiling their gaming and overall experience. The platforms can remove bad players, threats, and other attacks that will ensure more legit players keep coming in. The fraud scoring methodology allows a business to automatically detect and remove fake accounts using digital footprint analysis. It allows removing players who use fake IDs and stops multi-account conspiratorial play.

E-Commerce Fraud

E-commerce businesses can use fraud scoring to reduce chargeback overheads and increase turnover. Fraud scoring is a great doorkeeper for online stores that allows business owners to mitigate fraudulent attacks and safeguard legitimate customers.

Business owners can now prevent payments through stolen cards or other details and stop unauthorized transactions beforehand. On top of it, fraud scoring can also help businesses detect fake accounts and prevent misuse of promos and gift coupons. 

iDenfy offers an effective fraud scoring system that enables businesses and financial institutions to check their customers for signs of fraud.

Once companies have this power, they can minimize the monetary and reputation damage that fraudulent transactions cause every day.

Book a demo here, or head to our customer story archive to see our fraud prevention tools in action.

This blog post was updated on the 26th of July, 2023, to reflect the latest insights.

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