What does the fraud ratio represent?

The fraud ratio is a critical measure used to assess the level of fraudulent activity within a business's transaction processing system. Specifically, it represents the ratio of fraudulent transactions to the total number of sales transactions, expressed as a percentage. This metric is essential for understanding the effectiveness of fraud prevention strategies and for managing risk within a payment system.

When calculating the fraud ratio, businesses take the number of transactions identified as fraudulent and divide it by the total number of transactions processed during a specific time frame. This provides insights into the prevalence of fraud relative to overall sales activity, enabling organizations to benchmark their performance against industry standards or historical data.

Understanding this ratio allows businesses to identify trends and make informed decisions regarding resource allocation for fraud detection measures, thereby enhancing their overall security and reducing financial losses due to fraud.