K armaloop is a company that prides itself on being young and hip, selling the latest street fashion and accessories from a website that calls out the world as being populated by the “cookie cutter clones the evil forces of McFashion spread.”
It’s a company in which the CEO lists his cell phone number on the website, one that started in the founder’s parents’ basement before moving to a dilapidated piano factory and finally to offices in Boston, New York and Los Angeles.
But it’s also a company that, five years ago, had a chargeback rate between 2-3 percent. And that wasn’t cool. In the card-processing world, rates of more than 1 percent cause alarm.
It was bad enough that the Boston-based company had to pay out losses from fraud and disputed orders. But the chargeback rates were so high that the company was feeling pressure from Visa and MasterCard – threats of fines, or even revoking the ability for the company to accept those credit cards for payment.
Something had to be done.
The company’s trajectory – Karmaloop is on track for 12 straight years of double-digit growth – also contributed to the chargeback problems, as did the nature of its customers. Its young, hip base is one that can be rife with “friendly fraud,” fraud in which cardholders know the person making the purchase, but did not authorize use of their card.
In Karmaloop’s case, the customer base includes a lot of teenagers who make unauthorized purchases with their parents’ credit cards. While Karmaloop is primarily an online retailer, orders also come in by phone, e-mail, Amazon and eBay. Once parents received bills, they’d either contact Karmaloop directly or call their card issuer to dispute the charge.
Even when Karmaloop could prove that someone in the cardholder’s household made the purchases and received the goods, it was a long, expensive process. The company employed a large staff to review each order, flag those transactions that looked questionable, investigate the source of the order and finally approve or deny all orders.
Today, much of that initial review is handled by ReD Shield. The software, from fraud specialists ReD and implemented by Karmaloop in 2008, reviews transactions and flags potentially risky orders – about 15 percent of all transactions. It also notes what aspect of the transaction should be investigated — things like shipping and billing addresses that don’t match.
ReD trained Karmaloop staff on indicators of fraudulent transactions.
“Before, we had a three-page list we had to use to check every transaction,” says Bounthay Khammanyvong, vice president of Karmaloop operations. That was tricky since Karmaloop represents eight branded sites, with more than two million orders annually on the Karmaloop site alone. The three-page checklist meant reviews were a time-consuming and expensive process, and the sheer amount of orders meant it was easy to miss suspicious markers.
“Now we have two or three things to look at,” Khammanyvong says, “and we only need to spend a minute or two on every transaction.”
A global solution
Karmaloop sends all of its orders to ReD, which responds to each pending order with a recommendation to authorize or investigate. Karmaloop can access analysis data via a web browser.
Khammanyvong says Karmaloop looked at several fraud prevention systems before deciding on ReD Shield, but didn’t find “anyone that has a system as robust and capable as this one.” Another plus: ReD Shield understands the issues associated with both U.S. and international fraud and can handle multiple platforms and systems integration.
Tammy Irish, vice president of relationship management for ReD, says the solution is being used by 400 customers globally, including traditional retailers and providers of digital content and services. Many, including Karmaloop, are using ReD Shield to enable overseas selling. ReD “tweaks the risk to meet each client’s needs,” Irish says. “Sales in some countries … need more review than others.”
The solution is offered as an outsourced service or as licensed software. In the latter, retailers manage the actual evaluation of transactions themselves. The outsourced approach, however, allowed Karmaloop to avoid making a capital investment in the system.
More ‘good’ transactions
ReD Shield combines neural technology with a proprietary database of confirmed fraud data, merchant-specific velocity and rules to provide a real-time assessment. It delivers a decision in 400 milliseconds — before the customer has finished clicking the submit order button.
Using ReD Shield has reduced Karmaloop’s chargeback level from more than 2 percent to 0.11 percent – and delivered other benefits, as well. Karmaloop has reduced the labor behind transaction investigations by 83 percent, and, perhaps most importantly, ReD Shield has allowed the company to accept more good transactions.
Karmaloop was previously cancelling 8-9 percent of its orders due to fraud concerns. Today, it’s cancelling only about 3 percent. “That is a good place to be,” Khammanyvong says. “We are a $200 million company, and that extra 5 percent or 6 percent in approved sales more than pays for the cost of the fraud protection.”