Risk Management Case Study

1. Risk Management Case Study

2. agenda • Firm Overview • Case Study – Risk Management • Q&A

3. Sonik Consulting Group • Management / IT Consulting • Active since March 1999; based in Vancouver, BC • 3 full-time employees • Client Track record includes

4. Discussion Framework Client / Project Overview Project Objectives The Challenge The Environment The Solution Key Learnings case study

5. The Client Client is a private, services-based firm; one of the main incumbents in its industry ~ $50 M in annual revenue; 6 main product lines Key business drivers: client looking to expand into a service bureau model, processing transactions for other service-based companies increase existing product line revenue by accepting ‘riskier’ transactions Project Structure Project roles Sponsor: CEO Client team: CFO, Controller, LOB manager, Product Manager, Development Team Lead. Sonik - PM and Business Analyst roles case study

6. Some Definitions Merchant Accounts Chargebacks / thresholds First-time customer Negative data ‘Friendly fraud’ Card not present transactions The Objectives Improve fraud detection across all product offerings Support the development / expansion and management of new product areas (Internet, self-service, pay-per-call) Reduce call center costs by optimizing business processes, reducing unnecessary traffic Retain all merchant accounts case study

7. The Challenge Assess risk associated to a credit card transaction (real-time basis) Optimize credit card chargeback thresholds by merchant account based on this risk assessment case study

8. The Environment Sales Channels project focus on IVR and Live Agent Payment Methods project focus on credit cards case study Sales channels Web IVR Live Agent (Call Centre) Payment methods Bill-to-phone Online Debit Cheque Credit Card Money Order

9. The Environment Vantive CRM profiling, transaction history Acxiom ANI verification Equifax ePORT address verification PaylinX payment gateway case study Before State

10. Some Definitions ‘Risk Management’ Treatment Transaction Limits Verified by VISA Address Verification Service AVS Card verification CVC2/CVV2 case study Risk Management Architecture

11. The Solution Project Charter Capture the strategic long term vision and short term goals. Interviews / workshops with key stakeholders, managers, employees Determine objectives / targets Evaluate / determine strategies, tactics case study

12. The Solution Vendor Selections Conducted Vendor Selections for: Risk Scoring services Risk Management platform Assessed 20+ vendor solutions case study

13. The Solution Process Re-design Identified key business processes and reporting needs Identified areas of opportunity (areas where current business rules too restrictive) New process design to allow processing of transactions that would have normally been either denied or sent to the Call Centre -- based partly on ‘risk score’ as well as internal rules (minimize costs and improve order conversion) case study Sonik Process Swimlane Methodology

14. The Solution Phased Development Phased approach based on business priorities and building block approach Risk Scoring Payment gateways Automated Transaction / Merchant Account Routing case study Phase 1 Risk Management Architecture

15. The Solution Risk Scoring Analysis Conducted test run on 1 month of credit card transaction using 3rd party risk scoring engine Determined internal thresholds to either ‘accept’ or ‘reject’ a transaction based on its score Cross-referenced to internal business rules to determine correct score threshold Cross-referenced score thresholds to actual chargeback data collected over a 3-month period case study Score Threshold Analysis - Next Page

16. case study Score Threshold Analysis

17. The Results Process: Re-organized internal fraud check sequence (pre-authorizations conducted only after transaction approved internally) added additional fraud check process involving 3rd party risk scoring vendor Merchant Account Reports track chargebacks down to the indivudual transaction level (by product line, cc issuer, merchant account) The Results Risk Scoring Interface Developed, tested and implemented interface to 3rd party risk scoring engine; launched May 28, 2002. Effect on Processed Transactions Early indications show more transactions being processed overall, which will have a net positive effect to revenue Follow-up review regarding chargeback since launch (set for 8 weeks post-launch) case study

18. The Results Next Steps Tracking stats daily over next 3 months to watch chargebacks Phase 2 to proceed within 6 – 8 months (complete Risk Management system) case study Risk Management Architecture

19. Web Related Items Use of negative/blocking databases for CC, Addresses, Phone, IP, & Email. Positive databases for "good" customers Geographic location checks Threshold checks - Email, IP, CC, etc Use of the new which provides chargeback protection. Key Learnings Trusted 3rd Party information Timeliness of chargeback information varies greatly Hurdles faced when prompting for CVV/CVN Real-time transaction processing based on configurable business rules Need dedicated in-house risk management analysts for daily operations case study

20. Q&A www.sonikgroup.com