Fraud Rate Calculator
Understanding Your Fraud Rate
Fraud rate is a critical Key Performance Indicator (KPI) for e-commerce merchants, financial institutions, and payment service providers. It measures the prevalence of fraudulent activity relative to your legitimate business operations. Keeping this metric low is essential for maintaining merchant account health and avoiding excessive chargeback fees.
Why Calculate Fraud Rate?
Payment processors (like Visa, Mastercard, Stripe, or PayPal) monitor your fraud rate closely. If your rate exceeds standard industry thresholds (typically around 1% by value or volume), you may be placed in a monitoring program, incur higher processing fees, or risk account termination.
How to Calculate Fraud Rate
There are two primary ways to calculate fraud rate, and both are important for a holistic view of your risk profile:
1. Fraud Rate by Volume (Frequency)
This metric determines the percentage of your total transactions that are fraudulent, regardless of the dollar amount. It is calculated as:
(Number of Fraudulent Transactions / Total Number of Transactions) × 100
Example: If you process 1,000 transactions and 10 are fraudulent, your volume fraud rate is 1%.
2. Fraud Rate by Value (Revenue Impact)
This metric measures the financial impact of fraud relative to your total revenue. It is often the primary metric used by card networks. It is calculated as:
(Total Value of Fraud / Total Sales Volume) × 100
Example: If your total sales are $100,000 and you lose $500 to fraud, your value fraud rate is 0.5%.
Interpreting the Results
- Under 0.5%: Generally considered healthy for most e-commerce sectors.
- 0.5% to 0.9%: Moderate risk. You should review your fraud filters and verification tools (CVV, AVS, 3D Secure).
- Above 1.0%: Critical risk. Most payment processors classify this as excessive. Immediate action is required to prevent account closure.