Last year, fraud costs businesses $8 billion. If your business accepts credit cards for payment, then you’re vulnerable to chargebacks caused by these fraudulent transactions. Setting up a fraud scoring system can help stop fraud before it starts, and save you time and money down the road.

Fraud scoring is a set of operating procedures and technologies that are implemented to identify suspicious transactions. If a purchase looks like it may be fraudulent, the system can detect it and either reject it altogether, or request additional authentication before the transaction is processed.

Good fraud scoring systems will measure the risk of the transaction by gathering and analyzing relevant information about the purchaser, including: the amount of the purchase, the IP address from which the transaction was made, the email address of the purchaser (free emails may be particularly worrisome), where the purchase is being made from, when the order is placed and what shipping options the purchaser is using.

After your fraud scoring system is setup, it’s important to tweak it as needed. Fraud is more prevalent in some businesses than others and you’ll need to adjust your system accordingly. Ideally, this is done through a fraud score, which takes a broad range of indicators and creates a single metric by which to judge the riskiness of a transaction.

The prospect of setting up a custom fraud scoring solution can be daunting, to say the least. Fortunately, there are many off the shelf solutions, like MaxMind, which are far more cost effective for small businesses.

Algorithms can be extremely useful for identifying suspicious purchases, but you should always use your own common sense. As brilliant as fraud scoring systems are, they are not fool proof. Combine the intelligence the fraud score provides with your own judgement for best results.